What is demand planning? The essential function that drastically increases profits.
Demand planning—on its surface, sounds aggressive, intimidating, even scary! But as misleading as the term may be, anyone in retail will tell you, demand planning is an essential function to master—so much so, that it can make or break your business.
While demand planning is Boon’s bread and butter, we understand that it can be a tough nut to crack for new business owners, so we’ve compiled the basics to help you understand its core components, figure out where to start with the process, and help you get ahead of common mistakes we’ve seen clients make.
If you’re still struggling to understand how demand planning can work within your business at the end of the post, we can help! Our team is available to discuss ways we can take demand planning off your plate and your projections through the roof.
What is demand planning?
Demand planning is a process used by businesses to prepare for customer demand while minimizing excess inventory and disruptions to its supply chain. In its simplest terms, demand planning is your best educated guess of how much product you will sell to your customers.
You can’t sell something if you don't have it, so demand planning is an essential function to your business. It’s also an ever-evolving process that’s affected as your customer base grows, inventory becomes less relevant, and seasons change. All of these unpredictabilities can create a ‘Chicken or Egg’ situation, but that doesn’t mean you have to blindly guess inventory counts. There are structures, tools, and experts available to help you develop an accurate demand plan.
Why is demand planning important?
When you spend capital on inventory, it’s committed—those dollars aren’t flowing back into your business until you sell your product, so spending your money without some kind of strategy has a high risk of leading to financial waste.
Your inventory is what earns you revenue, which means it’s also one of your largest expenses. That’s why it’s key to figure out demand planning sooner rather than later. To get the most revenue back from your investment, you need to be strategic about your inventory decisions. Putting a demand plan in place doesn’t just get ahead of future problems, but the sooner it’s in place, the sooner you can understand and repeat your successes!
What information do you need to effectively create a demand plan?
Like many things in life, creating your very first demand plan will be the most difficult. Because the backbone of a demand plan relies on previous sales data, the task can be especially tough for new businesses. But this is where Boon is your best friend!
With our vast experience across the retail industry, we can help provide context for what kinds of sales curves to expect for just about any product out there.
Sales & inventory history: Any skillful demand plan includes a bunch of prior sales and inventory history, as well as contextual data that you can use to make your best guess for the future. If you’ve never formally sold your product before, you don’t have your own history to draw from, so will need to rely on advice and experience from others.
Sales & promotions: Your inventory needs during high-velocity sales times vary drastically from an average weekday! The type of sale or promotion you plan will impact your unit sales velocity in a positive way, and may likely increase overall revenue, but it will also reduce your profit too.
Key metrics: Depending on how you run your business, there will be other costs that can drastically affect your margins—from raw materials to production and shipping times, to storage, these numbers can have a significant impact on your bottom line.
With key data and metrics in mind, read more industry best methods and tips for what to avoid when creating your demand plan.
Steps for setting up a demand plan
Demand planning helps you lay a strong foundation for your business’ future success. Taking steps to create structure for your sales and inventory processes is key. Creating SKU numbers, a product hierarchy, a pricing strategy, and the lifecycle of your assortment will help you analyze the success of your business and repeat what’s made your customers the happiest.
Consider your product and choose a timeframe to focus on: Many retailers create a plan on an ongoing basis for 6-12 months out, but if that seems overwhelming, you can start with a quarter. Consider how your sales will differ month-to-month as your product’s relevancy ebbs and flows through the year.
Look at your sales from the top down and distribute those sales across each product category and subcategory. Depending on the number of items you offer, you may even want to plan down to the specific SKU. Gut check the sales units and dollars by each unit, taking special care if you’re selling via brick and mortar—how many of each item will you need to sell each week in order to achieve this demand plan?
Create a way to regularly review your sales performance: Most of our clients briefly recap sales data on a weekly basis while also taking the time to do a more in-depth analysis once a month. Based on how your sales are actualizing against your plan, you may want to re-plan your sales for the coming months.
By implementing these processes early on, you can compare sales and inventory performance in an apples to apples way. Your demand plan can also help you track production, place re-orders when it’s apparent that you’re running low on inventory, and take promotional or liquidation action when product’s not moving.
Mistakes to avoid when creating a demand plan
Boon’s been in the demand planning game for a very long time—which means, we’ve seen it all and we’ve been on the other end of the phone too many times when a retailer calls for help correcting massive mistakes. We want you to benefit from that experience, so here’s what to avoid.
Buying inventory without creating a demand plan, or buying inventory blindly, can lead to your capital being tied up in unproductive inventory. This can result from buying the same amount of everything or buying too much in general —both lead to unproductive inventory. There’s also danger in buying too little and running out of product, so your customers shop elsewhere.
Not reviewing previous sales performance on a regular basis means you’re likely to repeat mistakes. Oftentimes, this means buying more inventory blindly and rather than building loyalty among customers, you’re likely to position yourself as a one-trick pony.
Not categorizing your assortment can lead to major confusion down the road. Structuring your product assortment will help you easily understand what’s driving your business. Imagine looking at a list of 100 different items and each is selling between 10-100 units per week. How do you figure out what makes your business successful? If you classify your products into appropriate categories, it will help you decipher what’s doing well and what isn’t.
Not using SKU numbers can make it difficult to summarize what’s selling. This mistake explanation gets a bit more mechanical, but it’s crucial to understand. We often see clients name products with quick descriptors like ‘Yellow T-shirt’, but when you decide to sell that same product in a different colorway six months later and increase the price—it can create confusion across your sales plan, making it impossible to tell the products from one another. It also adds a lot of text to the page when you go to look at all your data. Also, consider the confusion when you change to SKU numbers after initially starting with text! When “001003, $25” is also “Yellow Tank Top - M, $28.99”, it’s hard to draw conclusions about historical sales performance and inventory levels.
Making assumptions about performance without numerical data to back it up can be tempting—but should be avoided! If your business is small, you likely have a sense of what’s selling and what’s not, but a ‘sense’ isn’t always accurate and can get you into trouble. Be sure to set aside specific time to review your performance, AKA recap your sales. By looking at the data, you can validate your sales performance and check your ‘sense’ for accuracy.
Reviewing information like how many items sold, how many dollars you spent selling those items, how many dollars you made, and identifying your top and bottom performers will help you detect patterns that you can use to validate future plans.
A sales recap review will also empower you to be specific about how you’re spending your inventory dollars. Rather than buying blindly, or aiming for a total inventory goal, which could mean investing in SKUs that are underperforming in order to maintain a certain weeks of supply (WOS), you can strategically spend on inventory based on specific SKUs planned sales performance.
Not thinking about the ‘what ifs’ can leave retailers blindsided. While it might seem like a long shot, we encourage all of our clients to consider non-numerical factors as they create demand plans. Things like the ‘Taylor Swift’ effect can have a huge impact on sales, as can events like aberrational weather, influencer spotlights, or website or app outages. Afterall, you never know…
As your business grows, your demand planning will likely change
So, you’ve set up your demand plan—amazing work! As much as we’d like to tell you that the job is done, customer preferences are constantly changing, which means your demand plan will have to adapt. Luckily, once the basics are set up, the process gets easier. Here are ways your demand planning process can evolve as your business does.
Build out your forecast: As your business grows and you have more and more sales history to back you up, you can plan further ahead and get more strategic about your sales planning and inventory investing. This may also mean you’ll need to commit to things further in advance, which can be uncomfortable, but it also means your business is growing!
Changes to fulfillment: If you move from self-fulfillment to a 3PL warehouse model, it may create a ripple effect—oftentimes, a positive one if you’re at your limit! Regardless, you’ll need to be aware of how this can impact your lead time. Think about all the added steps a product takes once it’s sent to the warehouse (unpacked and put away in warehouse > input to warehouse software system > picked for customer order > handed off to delivery carrier). This might be a very different process than before. Beyond clarifying delivery expectations with your customers, to accommodate your new delivery timing you’ll need to consider the way that new timing impacts your cashflow. You may own your inventory and be financially liable for a different duration of time than before.
Quantity increases: As your company grows and those sales go up, you’ll have the capital to buy more. Suppliers are often more willing to negotiate when you’re committing to larger buys. This might include having a small portion of your total inventory commitment available ahead of time, so you can get an early read on your sales velocity. You can consider investing in larger amounts of inventory in an effort to get a better price per unit without too much risk.
Storage needs: This can be a delicate issue—as your sales increase and your inventory needs rise with it, you’re going to need to invest in a place to put all your stuff. This might involve renting space on your own or hiring a 3PL. This is a new business expense that revenue needs to go toward and should be considered in your planning.
Channel expansion: As businesses scale, it’s common to branch out the ways you sell your product. Your inventory needs change as your customer base expands, and they can buy your products online, from a national retailer, or in a store. As a result, your demand plan will become more complex. You need to be more strategic about planning to make sure you have the right inventory, in the right place, at the right time, and in the right amount to delight customers, avoid a ton of storage expenses, and sell through your inventory efficiently.
Supplementing your plan with a forecast: Once your business becomes big enough to require demand planning, inventory tracking, and raw material forecasting, you’ll want to create a process for an annual or semi-annual plan that includes a monthly budget. An annual plan complemented by a monthly forecast will help you to account for trend impact and give you the ability to re-flow your inventory so as to not overwhelm stores or storage locations, while also ensuring you’re never out of stock.
Set your business up for success with Boon’s support
When it comes to saving money as a business, you have no better ally than your demand plan! We hope this article gives you a solid understanding of what a demand plan is and why it’s essential to your business. We also understand the intricacies of sales and inventory planning aren’t second nature to everyone.
As a small business owner, your attention is always being pulled in a million directions, so we get that building an accurate demand plan might not be at the top of your to-do list. That’s where we can help. As experts in the field of demand planning, we can quickly set your business up with easy-to-use tools to save your time and save you money. Book a call with the team to learn about personalized solutions for your business today.
