Demand Planning Tools: Are They Worth It?
There are a number of demand planning tools that promise to increase the accuracy of your supply chain demand forecasting. In this article, I examine the cases in which forecasting software is worth the investment.
Software Will Not Fix a Broken Process
Before we examine the benefits of forecasting software, let’s start with how your sales and operations planning process works today. I frequently encounter businesses that have substantial problems in inventory management. They have warehouses full of unsold products, yet lack sufficient inventory of the right products to fulfill orders that should have been anticipated. These issues are frequently symptoms of underlying process gaps. On average, over 80% of forecast error is the result of process gaps.
What Are The Signs of a Poor Plan Process?
- No Collaboration. Sales, marketing, and supply chain fail to align on demand forecasting.
- Missing Forecasts from Sales Team. The sales team is not sharing customer pipeline data to the demand planner.
- Marketing Not Sharing Promotion Activity. The marketing team is not sharing expected promotional spend, nor historical response to promotions.
- Lack of Concise Reporting Views. The planning team is unable to clearly present they key elements of the demand forecast to their business partners.
- Demand Forecast is a Mystery. The demand forecast remains buried in a series of spreadsheets, and it’s a mystery how it is created.
As a result of the above, everyone in the business is confused as to how they ended up with so much inventory. And they are still missing out on sales due to unfilled orders!
If this sounds remotely like your supply chain, then be aware that forecasting software will not resolve your problems. In fact, software deployments can make it even harder to fix the underlying process. Demand forecasting software typically employs sophisticated algorithms that are not easily explained. If your existing planning cycle is unclear or ill-defined, your first priority should be to develop a repeatable planning cycle with defined ownership and communication.
Organizations often implement a demand planning tool without first defining a clear planning cycle. Since the underlying process issues were never resolved, the inventory problems do not go away. Now the business is even more anxious than before: “We spent all this time and money on a solution, and we still can’t manage inventory.”
How I Help Organizations Build an Effective Plan Cycle
In my own consulting practice, I help businesses deploy this critical framework through the following activities:
- Simple Communication Paths. I create simple, standardized templates that enable the sales team to share product forecasts with the demand planners.
- Clear Reporting. I build high-level reporting views that encourages input from each stakeholder.
- Keep it High-Level. We utilize the demand planning reviews to generate forecasts for the top products. We avoid vast amounts of detail, and focus on the elements of the demand forecast that are most important to the business.
What Does a Well-Defined Demand Planning Process Look Like?
Below are the hallmarks of a well-defined planning process:
- Demand Planner. You employ a dedicated demand planner that facilitates the planning process.
- Engaged Sales Leaders. The sales team provides valuable inputs, such as a sales pipeline, to the demand planner.
- Marketing Input. Marketing leaders share advertising forecasts, and provide insight into product launches and portfolio shifts.
- Business Oversight. Business management is kept informed, and is often tasked with approving the demand forecast.
- Frequent Communication. It is best practice for all these stakeholders to meet monthly to align on the forecast.
- Shared Goal of Inventory Optimization. Everyone is aligned to the common goal of eliminating excess inventory through better forecasting process.
Demand planning is undeniably a challenging process. It requires coordination among groups with very different skills, and the information itself is hard to digest. For instance, the stakeholders often are tasked with reviewing large numbers of SKUs, each sold across multiple channels. It’s a vast amount of data, and thus hard to develop a format that keeps everyone engaged.
Benefit #1: Demand Planning Tools Reinforce an Existing Process
Demand planning software may help your organization maintain adherence to an existing planning cycle. As I noted above, software will never fix a broken process. If you lack organizational commitment to demand planning, then a tool will most likely not yield any benefit (and the added complexity of a tool may actually make things worse). However, it may provide some structure that maintains adherence to an existing process.
Seasoned project managers appreciate it is hard to maintain momentum for key programs on an ongoing basis. Cross-functional teams are frequently able to solve an immediate problem. The team eagerly jumps into a conference room and frantically spells out the business issue on a whiteboard. Everyone provides valuable input, and the team agrees on action items to solve the crisis. The project team updates the leadership team on the solution, and everyone is congratulatory on a job well done. Then, the project team goes back to their day jobs. People simply get inundated with daily tasks, and revert back to old habits that contributed to the original crisis.
This same outcome frequently happens to the demand planning function – Supply chain leadership recognizes a crisis in inventory management. Either unfilled orders are impacting sales, or the business has just realized a painful write off a vast amount of unsold inventory. A task force is created to solve the crisis, and sales leaders and supply chain align on a new operations planning process going forward. The demand planning process works great for a while, and inventory is kept under control. However, it doesn’t take long before old habits return – The sales leaders are pulled away on hot customer prospects, and even supply chain leaders begin skipping crucial planning meetings. Without this continued focus, demand forecast accuracy drops, and inventory levels gradually creep back up again.
A robust demand planning tool provides a framework that encourages ongoing adherence to the demand planning cycle. For instance, most demand planning software operates on a predetermined rhythm – At the end of each month, the demand planner extracts actual sales data into the application. The platform calculates the prior month forecast accuracy and generates an updated demand forecast for the coming month in near real time. This output should be reviewed in the business demand planning review a few days later. Once final, the planning software develops a replenishment plan that aligns with the approved demand forecast.
Deployed correctly, the demand planning software enforces a monthly cycle, and discourages stakeholders from neglecting the process. This is probably the single most important benefit to a demand planning tool, as a repeatable process is absolutely crucial to effective inventory management.
Benefit #2: Standard Reporting Views Out of the Box
It is unrealistic to expect a business leader to grasp sales patterns from a product-level spreadsheet with 2,000 SKUs. Thus, the demand planner needs to provide high-level reporting views that allow business stakeholders to understand historical sales trends and provide input on future forecasts.
Without a planning tool, the demand planner is often relegated to making ad hoc charts and graphs in Excel. This is a time-consuming task, and often the views are not consistent from month to month. Further, executive reporting is a unique skill, and even a highly competent demand planner may not possess the right skill set to build succinct reporting views.
Demand planning software typically has built-in reporting capabilities that provide crisp views of historical data and expected performance. While Excel provides flexibility in reporting design, a dedicated tool generally provides relevant reporting views right out of the box. Further, enterprise-grade planning tools are often able to export data into reporting tools such as Microsoft Power BI.
Benefit #3: Adopt Best Practices
Frequently, the supply chain planning team “grows up” at a specific business. Members of the team may have been hired by the business early in their careers. As they mature in their skills, they are promoted to senior demand planning roles in the supply chain function. This is generally positive for the business, as it provides a deep bench of talent that is intimately familiar with the operations of the business.
Because they have experience only with one company, these employees simply hasn’t been exposed to best practices. By deploying a mature demand planning tool, the planning team will gain exposure to commonly-accepted best practices. For instance, there exists defined formulas for calculating forecast error and forecast bias. There are also proven approaches to calculating safety stock based on historical demand volatility. Many organizations simply aren’t aware of these best practices.
Demand planning tools are generally developed with input from leaders in the demand planning discipline. Further, the best demand planning software has been refined over years based on feedback from customers. The software will provide summary statistics on an ongoing basis, and will help the team adopt best practices going forward.
Benefit #4: Demand Planning Software Increases Forecast Accuracy
It is undoubtedly a technical challenge to develop a SKU-level forecast. For example, E-Commerce retailers maintain an average of 2,000 active SKUs. To develop a replenishment plan, the business needs a forecast for each of these SKUs. Further, omni-channel retailers likely sell their products into different channels, each with different seasonality and order patterns. Thus, a demand planner may need to forecast monthly demand of several thousand SKU/channel combinations.
This amount of data quickly gets unwieldy in Excel workbooks, and it is nearly impossible to develop a reasonable prediction model for multiple channels. Dedicated demand planning software is better equipped to extract sales data and utilize machine learning to predict product demand.
In my experience, a demand planning tool can increase forecast accuracy by 5% to 10%. This assumes the forecasting software is properly utilized – For instance, if recent sales are impacted by a one-off advertising campaign, the software will not know if this is a one-time event or a shift in order pattern. Thus, it is necessary to first normalize historical sales data to remove one-time events. The planning software can then better predict future sales based on historical seasonality.
I purposely kept this benefit for the last, because frankly over 80% of forecast error is generated from process issues. If your demand planners are working with incomplete information, then demand planning software will not improve forecast accuracy. But, if you have an elegant planning process, then the right planning tool can certainly increase accuracy of your demand forecasts
Choosing the Right Forecasting Software for Your Supply Chain
There are any number of platforms that promise to improve your supply chain planning. Modern planning solutions even utilize demand sensing and machine learning algorithms to better predict future demand for your product portfolio. Nearly all publish recommendations of current customers that praise the software for solving the issues with their supply chain planning. So, how do you look through the noise and identify the right platform for your supply chain?
Identify Your Goals
What are the specific issues are you hoping to solve with a supply chain demand planning tool?
- Machine Learning. If you have a large product portfolio across numerous sales channels, then you may benefit from a tool with machine learning capabilities.
- Inventory Management. If you have multiple warehouses with inventory stacked to the ceiling, then you may want a tool that focuses on inventory optimization.
- Process Discipline. Do you struggle with adherence to an existing sales and operations planning process? Then you would benefit from a platform that forces some discipline – As described above, the true benefit to a demand planning system is that they operate on a pre-determined cycle. Thus, your supply chain team is more likely to follow the process.
Whatever your goals, you should meet internally and agree on the desired outcomes well in advance of initiating discussions with a software provider. Software vendors are very good at selling their software. They will undoubtedly share with you that their software is the perfect fit for your supply chain. Prior to engaging with the sales team, it’s a good idea to read as much about the software in advance. Ideally, you could even reach out to your industry peers and see what planning platform they are using in their supply chain. They are most likely to give you unbiased recommendations.
Take Online Recommendations with a Grain of Salt
Virtually every software vendor curates reviews and recommendations. They publish glowing reviews of customers extolling the benefits of their platform. Look through the users who are sharing just broad recommendations, but instead focus on users that describe how the software helped their supply chain planning team – Did the platform help with their inventory optimization? Or did it simply just help their supply chain leaders force discipline in their demand planning processes?
I always advise my clients to ensure their software vendors provide real time customer service. Ideally, they maintain 24/7 live support to ensure a good user experience. Also, I strongly recommend a cloud based solution. There are still a few vendors that still require their software to be installed on a server at your premises. This is a hassle, as you need to locate and manage the server, and install software updates yourself. With cloud based planning solutions, all this is done for you. You just pay for access and go.
Conclusion: Planning Tools Are Beneficial When Used Correctly
As with any software, supply chain planning tools provide the most benefit when they are used in the manner for which they are intended. If your business already has a well-defined sales and operations planning process, then you can expect the platform to reinforce this process in your supply chain. It will likely even provide some incremental forecast accuracy. Further, you will likely be pleased with the reporting views available right out of the box.
However, if information gaps between your teams is yielding out of control inventory, then you will likely not see any benefit.