3 Fundamentals of an Effective Demand Planning Process

3 Fundamentals of an Effective Demand Planning Process

If you’ve ever felt the pains of unanticipated inventory demand, you know how vital demand and inventory planning is for your business. 

This is because the demand planning process, which also includes inventory management planning, is essential to your business’s success. When neglected, surges in inventory demand can leave your company scrambling to keep up, making impulsive decisions, and stunting your growth. 

However, when done strategically, the demand planning process can help you better predict your customer’s needs and better manage your supply chain operations. 

By anticipating potential problems and staying ahead of the game with your competitors, you can reduce costs, improve customer service, and make impactful decisions that could accelerate the growth of your business. 

In this blog, we’ll share the ins and outs of the demand planning process and the three critical foundations you need to have built into your own. 

The Demand Planning Process

The key to every successful retail business is a solid demand plan. Why? Because you can’t effectively plan inventory levels without understanding sales expectations first.

Let’s go back to the basics for a second. 

What is Demand Planning? 

So, what exactly is demand planning, and what does it even entail? There’s no one who knows this topic better than us. The demand planning and forecasting process is all about preparing your business for success. It’s about forecasting your customer’s needs by analyzing data and history to predict the demand any given product may have at any given time. If you’re reacting to customers’ current desires, you’re already behind. 

You need to be proactive so that you can adequately supply your business with the right amount of inventory while avoiding a costly surplus. A strategic demand planning process ensures ​you have everything you need to provide the best service while setting yourself up for the strongest growth.

And while the demand planning process empowers inventory planning (aka inventory management planning), the two are not necessarily the same. 

While inventory planning is all about making sure items stay in stock, it’s essentially based around the quality of your demand planning. 

The demand planning and forecasting process considers what’s happening in the market, what’s expected, and how external factors or internal decisions could affect things at any time. A demand plan is what your in-house (or strategically outsourced) inventory planner uses to make decisions. It’s what better ensures the overall success of your business. 

The Foundations of a Successful Demand Planning Strategy

Have you ever wondered, how much inventory should I buy? This one’s for you! 

Using our three fundamental demand planning methods below, you can develop a sound strategy that will make it easier for your inventory planner (or yourself if you do the inventory management planning) to weather the cycles of customer demand.  

Foundation #1: Analyze Previous Data

You’ll want to start with the most accurate historical data you can find. If you’re working with a brand-new item, look for example items that most closely resemble how you think the new item will sell. Be sure to pull this historical data at the level you want to plan at. 

Generally, looking at sales by week and by item will be the best level of detail for most businesses. For apparel businesses, the approach may be slightly different. You may want to plan at the style level and then apply size selling percentages to get your sales and inventory by item (size). 

Foundation #2: Adjust Baseline Projections

Once you’ve analyzed the historical data, you’ll want to apply what you know to the baseline data. To do this, apply the top-line sales growth you’re currently seeing or planning on year-over-year. 

Next, identify any incremental growth you’re expecting based on new items or categories that were not in your historical data. 

Then you’ll want to look at the seasonal sales builds or de-builds that happen week to week in your historical sales data. Do you anticipate similar seasonal sales shifts week to week? If there were any events in your historical data that you don’t anticipate repeating (for example, a viral moment that caused a sales spike in a certain week or month), lower those forecasts.

Foundation #3: Combine Individual Item Forecasts

The final step in developing your demand planning strategy is to combine the individual item forecasts. To do so, you’ll want to roll up your item level forecasts and start to look at it from a total level (and perhaps by category or attribute) to identify any changes that need to be made. 

Your item-level plans likely won’t match your tops-down financial guidance, so the reconciliation process helps you get the item level rollup more in line with how you want to plan your business at a total level. For example, if your item level sales rollup is showing a 20% increase to last year, but you’re expecting a 5% sales increase to last year, you may want to go back to your item level forecasts and see where you should bring sales and inventory buys down.

The two forecasts do not need to match exactly, but the process of reconciling the two helps you to better understand your business and the sales upside that your inventory buys can support. For example, if your item level forecasts roll to a 5% increase to last year, you won’t have enough inventory to support any sales upside beyond that.

Ongoing Management 

Once you’ve done all of this and set the foundations in place, you’ll be ready to place your inventory orders. As sales on these items start to actualize, you’ll want to reforecast in season to determine your inventory reorders and update your stakeholders on the revised forecast. 

Updating your demand forecast and using an open-to-buy tool in season will help this process.

The ongoing management of demand and inventory planning helps you stay ahead of your customers, competition, and costs. But the truth is, as much as we may plan, surprises still happen. That’s where we come in! 

Perfect Your Demand and Inventory Management Planning with Boon

Understanding the fundamentals of a demand planning process is crucial to your success as a retail business. 

By analyzing your previous data, adjusting your baseline projections, combining individual item forecasts, and managing these forecasts while in season, you’ll be able to stay ahead of the competition and effectively answer to the demands of your customers. However, trying to manage everything can burn out even the most resilient founders and team members. 

At Boon, our team takes on your biggest planning challenges with flexible support customized to what’s best for your individual business. No costly, clunky forecasting software needed. 

Interested in learning more about how Boon can successfully assist your growing company? Book a call with us here.