Wednesday, July 22, 2009

Demand Planning: Essential to Your Success (Part 1)

If you had to pick a single process that has the largest impact on the company's plans and operations, what would it be? Better pick demand planning since it is the starting point for a lot of processes that collectively make retailers hum.

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image Demand planning consists of processes that allow a retailer to forecast demand into the future and manage it. It has the key dimensions of product, location, and time to clearly identify the projected demand. Once the projected demand is available, it is used to drive all types of functions for a retailer. Depending on what function is the projected demand expected to drive, it may be expressed in different units, such as dollars or boxes or lbs., different levels such as product categories or individual SKUs, different organizational units such as merchandising departments or regional markets. Owing to these many uses of projected demand, the process is sometimes segregated into departmental boundaries that create their own demand projections. This practice leads to poor coordination among the organizational units, produces inconsistent results, and leads to wasted opportunities in optimizing operational costs and efficiencies.

Processes Impacted by Demand Planning

There are many processes that use projected demand forecasts. They span from long-range planning processes like network design that have a horizon of a few years to execution-level processes like replenishment with immediate impact on operations. Using the time horizon as the basic context, these processes can be divided as follows.

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Long Range Planning Processes:

These processes use demand projections to plan for the supply chain flows within the network. They need aggregated demand forecasts for a longer horizon and may not have any immediate impact on the firm's operations. Examples of such processes are supply chain network design and network capacity planning. These processes help answer questions like: How much volume of product will be flowing through the supply chain network in the projected years? Where does this flow occur along the existing network routes? Are new routes required? How is the current network poised to handle this projected flow of product volumes? Do the warehouses have enough storage capability and operational resources to support the projected volume of flow of merchandise? Is there adequate transportation capacity available along all main network arteries? They are designed to evaluate the network flow capacities that will be required to support the firm's projected demand volumes. Any changes in the network have a long lead-time for implementation and require substantial capital investments: whether it consists of increasing the capacity by opening new facilities or through automation; or reducing the capacity by closing existing facilities or changing the facility locations for more optimal flows. Given these long lead-times and the need for large capital layouts, these evaluations are generally done years in advance. However, they only require aggregated projected demand in terms of number of number of cases, pallets, volume or weight of the flows expected for the projected demand. Demand projections for these processes can be directly created at these aggregated levels since they tend to be relatively more accurate over the longer horizon desired for these processes.

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Mid-range Planning Processes:

These processes use the demand projections for revenue and budget planning. They need projected demand at a more granular level than the processes above. Examples of such processes are merchandise financial planning and product portfolio planning.

These processes generally work with projected demand for product categories in dollar value of the merchandise at monthly and sometimes weekly levels. The objective of the merchandising processes is to develop the merchandise plans and create targets for revenues and profitability, and planned budgets for promotions, clearance, marketing, and procurement of the merchandise. The portfolio planning processes generally evaluate the projected profitability using the projected demand and arrive at optimal assortments (product mix) for the projected plan horizon. Demand projections for these processes are generally created at lower levels and rolled up for use in these processes.

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Short-term Execution Processes:

These processes use the demand projections for supporting immediate operations of the firm so that customer orders can be fulfilled and stores are adequately stocked with the right merchandise at the right time. There are many processes that take advantage of the short term demand projections for this purpose, such as inventory planning, purchasing, receiving, storage, store fulfillment, and inbound & outbound shipping for the warehouse. Most of these operations need very granular demand forecasts at item and facility level, often in daily or weekly buckets. Other processes that also benefit from this level of projected demand are price optimization, promotions, clearance, and seasonal product life-cycle events. Demand projections for these processes are created at lowest grain of product and location often in expanding time buckets along the horizon, for example, the forecasts may be produced on a daily basis for next 2-3 weeks, weekly basis for the next 2-3 months, and monthly basis thereafter. Supply lead-times generally affect the length and size of the time horizon of demand forecasts created for these processes.

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Demand forecasting caters to many organizational processes that are spread across the time horizon and functional boundaries. To ensure that long-term organizational plans are aligned with the short-term operational objectives and the processes across functional boundaries support each other, it is imperative that companies implement demand planning solutions that will allow them to create a single demand forecast to drive these processes. Such a forecast must use a single source of historical demand and forecasting techniques that use similar assumptions. This cross-functional alignment in plans and operations will establish process synergy, reduce plan conflicts and volatility, and create operational stability that otherwise remains elusive.

In this part 1 of this 2-part series, we presented the business processes that require forecasted demand to create plans that support everything from supply chain network capacity planning to every-day replenishment operations. These processes span across time and functional boundaries. We also presented how their requirements for projected demand differ by horizon, data granularity, and units.

We will conclude this series in part 2, where we will present how companies can break the functional silos to create a single source of demand forecasts to support their plans for different processes and ensure functional alignment as well as operational stability as a result. This requires careful planning and the right tools and we will discuss both these requirements in detail in our series concluding part 2.

© 2009 Vivek Sehgal, All Rights Reserved

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