Many processes dictate how inventory-based businesses operate, and to optimize operations and maximize profitability leaders must understand them and accurately deploy them. Two common processes that are found in this space are demand planning and supply planning. While these terms might sound similar, they’re quite different processes, which act as two sides of the same coin.
Here’s everything you need to know about demand planning vs. supply planning, including what makes these processes unique, and tips for successfully deploying them in your organization.
While the terms demand planning and supply planning are sometimes used interchangeably, they’re two distinct processes, both of which are critical to the way an inventory-based business functions. Demand planning is the process of predicting and anticipating the optimal amount of inventory that will be needed in the future to meet expected customer demand. Supply planning is the process of taking the data from demand planning and putting it to work, figuring out how to actualize the expected inventory needs.
Demand planning and supply planning are both essential processes, and when they’re successfully used, they help businesses ensure they always have the right amount of inventory on hand while reducing waste and excessive costs.
This is the case for several reasons. Firstly, holding excessive inventory can be expensive. Data shows us that the rental cost for US warehouses has soared, particularly since 2021. When excessive stock is being held, this can also lead to higher warehouse prices. Further research shows us that waste in the supply chain is costly, with an average 8% of stock perishing or being discarded every year.
Aside from avoiding excessive inventory, demand planning and supply planning are also useful for ensuring that a business always has enough stock on hand to meet customer demand. This is done through demand forecasting, which takes historical data and special events into account (such as discounts). These advanced forecasting algorithms also incorporate data related to consumer demand. After the forecasts are created, decision-makers can then use supply planning processes to procure inventory and meet the needs of those forecasts, working with the budget and logistics.
If the proper amount of inventory is not stocked, there can be issues for organizations and customers. For example, customers who experience stockouts or delays might be dissatisfied with their service. Surveys reveal that customers prioritize delivery reliability and speed as top factors when deciding if they remain loyal to a brand. Additionally, if customers are dissatisfied due to inventory issues, a brand’s image could be damaged, leading to dips in consumer trust.
To help you understand the nuances of demand planning vs. supply planning, we’re going to break down each one specifically. As we mentioned, demand planning can be defined as the process of forecasting and managing customer demand for a product or service over a specified period. The primary purpose is to anticipate future demand patterns accurately, allowing organizations to align their production, inventory, and distribution strategies accordingly.
Some hallmark elements of demand planning and factors influence it. Demand planning is typically done by creating comprehensive demand forecasts, which use advanced algorithms and data to predict future needs. What type of data do demand forecasts take into consideration? The answer includes historical data, special events (such as promotions, new customers, and even natural disasters), as well as current market trends. Other data might include customer preferences and habits, as well as seasonal variations (such as holidays).
There are also several techniques and methods used in demand planning. Various forecasting models are used for forecasting sales, including quantitative models, qualitative approaches, and market research and trend analysis. Advanced inventory analytics tools are also typically used, because these robust algorithms can process vast amounts of data, identify patterns, and generate more accurate predictions, especially in dynamic markets.
Now that you understand how demand planning works, let’s shift over to supply planning. After you finish the demand forecasts and you have all of the information about what your future inventory needs will be, supply planning comes next. It’s the process of coordinating resources to meet anticipated demand. Supply planning involves a meticulous assessment of production capabilities, inventory levels, and the logistics needed to ensure that products are available when and where they are needed. It serves as the bridge between demand forecasts and the operational realities of production and distribution.
Some of the typical elements of supply planning include understanding production capabilities. Decision-makers might need to assess things such as the capacity of distributors and manufacturers, the availability of raw materials, and the efficiency of production processes. Inventory levels are also important to take into account. Balancing the need to prevent stockouts while avoiding excess inventory is a delicate process that requires continuous monitoring and adjustment.
Another key element of supply planning is understanding lead times, and how to reduce them. This might involve calculating the time it takes to ship and receive inventory, and can be impacted by the global supply chain as a whole. Supplier relations also play a role in supply planning. Reliable and collaborative partnerships with suppliers can mitigate risks related to material shortages, production delays, and unexpected disruptions.
The key techniques and methods used for supply planning include inventory optimization, which helps businesses strike the right balance between maintaining sufficient stock levels and avoiding excess inventory. This involves factoring in demand variability, lead times, and carrying costs to determine the optimal inventory levels. Efficient production scheduling is also crucial and ensures that manufacturing processes align with demand forecasts. Lastly, collaborating with suppliers is integral to successful supply planning. Clear communication, shared forecasts, and information exchange can help suppliers align their production with the anticipated demand, reducing the likelihood of supply chain delays.
To successfully execute both demand planning and supply planning, here are some best practices to keep in mind.
There are many ways that businesses can optimize both the demand planning and supply planning process. By using demand planning software, organizations can improve inventory efficiency and automate the forecasting process, ultimately reducing errors and improving accuracy while increasing the visibility of inventory. These forecasts can then be used to accurately inform the supply planning process.
Decision-makers should also monitor and adjust their demand planning and supply planning processes. This landscape is dynamic, and these processes should be regularly audited, reviewed, and updated.
Data and analytics tools can be powerful assets when it comes to understanding future inventory predictions, distilling key details quickly, working through large sets of data, and making educated decisions. Because of this, it’s wise to leverage advanced analytics and data tools to fuel educated decision-making. Invest in technologies that enable real-time data collection, analysis, and reporting. This empowers demand planners to make informed decisions based on accurate and up-to-date information.
Cross-functional communication and collaboration are crucial for inventory-based organizations because many different business functions need to work together harmoniously. To effectively deploy both demand planning and supply planning, take steps to foster excellent cross-functional processes in your team.
You can deploy cross-functional training to enhance understanding between teams that use or participate in demand planning and supply planning and can establish shared metrics for success which align all teams around the goals of these processes. Additionally, consider implementing communication channels and holding regular meetings between employees involved in these processes. Open communication enables the sharing of insights, findings, challenges, and opportunities, and can help organizations ultimately elevate their inventory operations.
While we’ve touched on inventory-based technology previously, its importance is not to be understated. Invest in advanced forecasting tools that leverage warehouse automation, artificial intelligence, and advanced algorithms to analyze large datasets, identify patterns, provide more accurate demand forecasts, and facilitate seamless planning, enhancing the output and efficiency of your organization.
Also, consider implementing supply chain visibility platforms that offer real-time insights into your operation. These platforms enable planners to track inventory levels, monitor production progress, and identify potential bottlenecks, contributing to proactive decision-making.
Now that you understand the nuances of demand planning vs. supply planning, you can see just how important these processes are to your outcomes. By keeping the right amount of inventory in your warehouses you can reduce waste and cut costs while upholding the highest levels of customer service.
If you’re ready to overhaul the way you approach demand planning and supply planning, StockIQ is here to help. StockIQ is an advanced supply chain planning suite, aimed at helping you improve your efficiency by increasing visibility. Our advanced forecasting algorithms can take different forecast hierarchies into account, and give you speedy answers to your more pressing questions. You can also use our tools to monitor supplier performance and strategically manage replenishment planning.
Don’t wait, let StockIQ take it from here. Contact us today to get started.