The Role of Demand Planning in Logistics by Grigorita Banaru

The Role of Demand Planning in Logistics

Nowadays, companies are facing an extremely challenging environment, which makes the strategic planning of a business an essential survival tool. Specifically, the main challenges for the Supply Chain Management are: globalization, volatility, complexity, and competition (Excellence in Demand Planning Study, 2015). Dealing with these challenges requires an appropriate demand planning as a foundation. Demand planning is defined as a multi-step operational supply chain management process used to create reliable forecasts to guide users to improve the accuracy of revenue forecasts, align inventory levels with peaks and troughs in demand, and enhance profitability for a given channel or product (Rose, 2010). In the following sections we are going to go through the main benefits of demand planning, the techniques used for forecasting the demand, and, finally, an example of a company with successful demand planning will be presented.

Demand Planning Benefits

Demand planning is a process that requires much attention due to its side effects on the performance of different activities along the supply chain. There are several benefits that could be driven out of a successful process of demand planning:

1. Increased customer satisfaction: the prediction of the right demand will facilitate the provision of the right product to the customer at the right time.
2. Reducing inventory stockouts: demand forecasting helps a business to manage its procurements at the right time in order to fulfill the demand at the time it occurs. For instance, by sending the demand forecast to your suppliers, they can arrange in advance the quantity of raw materials needed in the future, in this way avoiding any delays from the suppliers’ side.
3. Scheduling production more effectively: by predicting the future demand, a business can constantly adapt its manufacturers to the future expectations in the customers’ needs and preferences, thus, being more agile and having the opportunity to have a prompt response to the future demand.
4. Controlling costs: a reliable demand forecast can reduce the chance of keeping a high amount of obsolete stock and the costs associated with it, by reducing the chance of ordering excess stock. Also, a company can place an order for raw materials ahead of time to take advantage of favorable pricing if it forecasts an increase in demand.
5. Better labour management: hiring in advance the expected needed number of employees to face the customer’s demand at the right time.
6. Improved allocation of resources: the ability to forecast the demand helps a business to better manage its financial resources by being able to reserve cash or negotiate credit terms in advance, thus being able to pay its vendors and suppliers on time.
7. Tracking overall performance: demand forecasting gives the company a basis to compare actual demand with management's expectations, thus, making necessary adjustments to its business model and tracking the overall performance (Muddassir, 2016; Saint-Leger, n.d.; Ashe-Edmunds, n.d.)

Basic techniques used for forecasting

This section is devoted to learning about the basic techniques used for forecasting in the demand planning process. Before going into exploring the demand forecasting techniques, there is an important aspect to be mentioned, specifically, the fact that demand planning is not just forecasting. Forecasting is a component of demand planning, the latter including also searching for ways to influence demand through marketing campaigns in order to reach the forecasted figure. The following tables summarizes the most basic techniques used to forecast the product demand and tries to give an easy to comprehend description of those methods.  

Quantitative methods

Method	Description
Naive approach	Assuming that he previous period results will hold in the next period
Moving averages	The average of the results of the last several periods is expected to be the result for the next period
Exponential Smoothing	Assigning to each period a specific weight and using the weighted average approach to obtain the forecast for the next period
Trend Projection	Observing a specific trend and assuming that it will hold in the next period

Qualitative methods

Method	Description
Executive Opinion	Combining and averaging views of several executives regarding a specific decision or forecast
Delphi Method	Sending several rounds of questionnaires to a panel of experts, aggregating the anonymous responses, and sharing them with the group after each round. The forecast is reached by consensus by allowing the experts to adjust their answers in subsequent rounds.
Sales Force Estimates	Predicting future sales by analyzing the opinions of sales people as a group
Consumer Surveys	Forming an opinion about the forecast based on customer surveys

Source: Forecasting Methods Overview. YouTube

Zara and its focus on demand planning

Zara is considered to be a company of fast fashion that employees agile demand planning strategies to maintain its competitiveness on the market. The following strategic choices allowed Zara to reach such a performance:

• With its twice a week supply to its stores, Zara is able to quickly respond to customer demand, reduce excess stock holding, and minimize the risk of a wrong forecast. The fact that the company produces small quantities and a wide variety allows it to cut down on promotions and reductions. By not having to discount as much as, Zara can afford the extra labor and shipping costs needed to accommodate and satisfy changes in seasonality and customer demand (Lu, 2014).
• Zara’s designers gather data on sales and inventory from each of its stores on a daily basis and use this to inform their view on the situation. “The gathered raw data is analyzed in Zara's headquarter, where design team, fast prototyping team, market specialists and buyers sit together in tightly coupled teams” (Zhelyazkov, 2010). Stores managers order items themselves instead of relying on what is sent from the headquarters. Moreover, the accuracy of their forecast influences their compensation, increasing managers’ incentive to provide an accurate one.
• “Zara also commits six months in advance to only 15 to 25 percent of a season’s line. And it only locks in 50 to 60 percent of its line by the start of the season, meaning that up to 50 percent of its clothes are designed and manufactured right in the middle of the season.
• Zara keeps a significant amount of its production in-house and makes sure that its own factories reserve 85 percent of their capacity for in-season adjustments. In-house production allows the organization to be flexible in the amount, frequency, and variety of new products to be launched.” (Lu, 2014).

These are only several strategic decisions made by Zara to be able to respond fast to customer’s demand, the image below illustrating other decisions which have a critical impact on improving Zara’s ability to be fast and up to date.

Source: Vanguard, 2017

Finally, I would like to finish with a phrase that caught my attention and was written by Stephen P. Crane, who is an independent consultant with an experience of around 40 years in Supply Chain Planning and a career that generated more than $200 million cost savings and profit improvement: “Demand planners are kind of like weather forecasters -- they rarely get credit for doing their job correctly, and they're only noticed when they get it wrong.” (Crane, 2016). With these words, Crane tries to emphasize the vital importance of making the right decision when speaking about demand planning, otherwise, the consequences can be disastrous for the supply chain as a whole.

References

Ashe-Edmunds, S. (n.d), The Advantages of Demand Forecasting, Retrieved from http://smallbusiness.chron.com/advantages-demand-forecasting-60405.html

Crane, S., (2016), Demand Planners are Kind of Like Weather Forecasters, Retrieved from https://www.linkedin.com/pulse/demand-planners-kind-like-weather-forecasters-stephen-p-crane-cscp

Forecasting Methods Overview. YouTube. Retrieved from

https://www.youtube.com/watch?v=fp-1_9mLlbc

Loebich, M., Penthin, S. (2015). Excellence in Demand Planning Study. Retrieved from https://www.bearingpoint.com/files/BEDE15_WP_EN_1028_Study_Demand_Planning_final_web.pdf?hash=7267a2a5c88665ddf63bb698cad1ad9a874e5f75cdbfab74

Lu, C. (2014). Zara supply chain analysis - the secret behind Zara's retail success. Tradegecko. Retrieved from https://www.tradegecko.com/blog/zara-supply-chain-its-secret-to-retail-success

Muddassir, A., (2016), Seven reasons why you need to forecast in supply chain, Retrieved from http://www.supplychaindigital.com/top-10/seven-reasons-why-you-need-forecast-supply-chain

Saint-Leger, R. (n.d), The Advantages of Demand Forecasting, Retrieved from http://yourbusiness.azcentral.com/advantages-demand-forecasting-2676.html

Vanguard, (2017), Seven Benefits of Integrated Demand-Supply Planning, Retrieved from http://www.vanguardsw.com/2017/06/demand-data-key-supply-chain-management/

What is demand planning? Retrieved from

http://searcherp.techtarget.com/definition/demand-planning

Zhelyazkov, G. (2010), Agile Supply Chain: Zara's case study analysis. Retrieved from

http://galinzhelyazkov.com/?p=4