Find Articles
Next generation demand planning
A strategic approach to profitability explained by Infor's Andrew Kinder, director, product marketing SCM
A decade ago, thanks to the increase in computing power, companies began to improve the efficiency of their supply chain by identifying trends in data. The concept of Demand Planning and Forecasting enabled retailers, distributors, and manufacturers to accurately forecast the demand for a particular product during a given time period. Retailers could tell manufacturers (and often the other way around) who could then tell suppliers how much of a product was required to meet anticipated demand. This improved service levels, while reducing unused inventory and ensured stock was kept to a minimum.
This was fine ten years ago, when margins were healthier and the pressure of competition from half way around the globe was not as intense. Times have changed and competition is heating up. Pricing pressures are now eroding margins and companies are looking for efficiencies throughout their organisations. Many enterprising companies have turned to their supply chain to help drive these efficiencies and are adopting the next phase of Demand Planning - more properly described as Demand Management - one that integrates multiple business processes and disciplines to provide a more complete picture of demand and its impact on the business. The shift in philosophy to Next Generation Demand Planning is about understanding the implications of demand and actively managing it in line with supply options to ensure company goals are met and customer service never falters.
When a company understands its customer's demand, it can plan accordingly. Today's sophisticated demand planning software takes into account buying behavior, seasonality, locality, and most every other factor to provide a highly accurate forecast of demand. This isn't enough though. Now, with this data in hand, companies must assess the revenue and profit expectations of the predicted demand and compare it to their own internal fiscal targets. In other words, they need to consider whether the revenue and margin forecast is actually enough for the business and if not, what are they going to do about it? Linking these two very vital steps has been recognised by many large enterprises but is often overlooked by mid-size companies.
Take this scenario: A company produces golf clubs and the demand planning and forecasting model tells them to expect to sell 10,000 units in total next quarter across their range of clubs and accessories. In the old model, the company would contact suppliers, ramp up manufacturing, and the supply chain would be put in motion to produce all the required units to achieve the 10,000 target. However, once they assess the impact of the expected revenue from this demand mix with their internal targets, they realise that they need to sell 11,000 units to achieve the margins expected of the business.
There is now a fork in the road and one which was never exposed by the initial concept of sales and operations planning, where the goal was demand-supply matching, rather than challenging the demand forecast and doing something about it. This activity has come to be known as "demand shaping".
By integrating sales and marketing into the process, companies are now able recognise the need to manipulate demand to achieve internal targets. With an understanding of how many more units must be sold, sales and marketing can develop campaigns and promotions to influence buyer behavior. Of course this too comes with a cost - the cost of the campaign itself and the reduced margins that may flow from 'two-for-one' offers and the like. And this is where the second part of Next Generation Demand Planning comes into play - "Supply Optimisation".
Is the revenue gained from those additional 1000 units sufficient to overcome the increased costs? To answer this, several factors now enter the picture. First, how much will the extra material cost? Will the increased production mean laying on additional expensive over-time or weekend shifts? In some cases, increases in production may mean sourcing from new suppliers at different costs. Supply optimisation technologies compare all supply options and their associated costs and assess in an instant the optimal break-point between the costs of influencing demand and the costs of supply against that demand.
Combining these factors, companies are able to make strategic decisions on the best way to proceed, whereas in the previous way of thinking a company would see demand at 10,000 and aim for that without an understanding of the consequences to the bottom line. Now, with a focus on this new methodology, organisations can see the real target, develop a plan to achieve that and factor in all of the associated costs before making a decision.
In the increasingly growing global economy, successful companies are those that take a strategic view of their supply chain, realise the wealth of information that can be gleaned from it and use the data wisely. Advanced supply chain solutions utilising complex algorithms are more capable of understanding the complexities and seasonality of products, and adapting to the daily changes that help a business run more smoothly. With this next generation approach, companies now have a complete picture of how demand impacts their business and, more importantly, how the business can impact demand.
Tell us your news:
If you have industry related software news that you would like to have published, please use this submission service to have your news considered for publication
