What is a demand planning ?
Demand planning, which forms part of an overall management strategy and affects many individuals and functions within an organisation, is just one element - albeit an important one – within demand management.
Demand planning is the management process within an organisation which enables that organisation to tailor its capacity, either production or service, to meet variations in demand or alternatively to manage the level of demand using marketing or supply chain management strategies to smooth out the peaks and troughs.
Demand drives the entire supply chain from suppliers to manufacturing, marketing, inventory, distribution and service to customers. An organisation needs to be able to forecast demand accurately but to do this needs to understand demand patterns, and how factors such as new products, competition, and changing market conditions affect these patterns. This understanding can, however, only be reached by a free and plentiful flow of information up and down the chain.
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How can you forecast demand?
Before an effective system of inventory control can be implemented it is essential to analyse, from records of usage, what has been the trend of demand for a given item of stock over an approximate period of time with a view to forecasting future requirements.
The two most common approaches are:
- Moving averages
- The exponentially weighted average method (EWAM)
What is the difference between dependant and independent demand?
Demand may be either independent or dependent.
- Independent demand for an item is influenced by market conditions and not related to production decisions for any other item held in stock. In manufacturing, only end items, ie, the final product sold to the customer, have exclusively independent demand.
- Dependent demand for an item derives from the product decisions for its ‘parents’. The term ‘parent’ is an item manufactured from one or more component items. A table, for example, is a parent product made from a top, legs and fasteners which are all components.
Demand management relies on accurate data and there is a need for collaborative demand forecasting, where firms reach a consensus, both internally and with their value chain partners on the expected level, timing, mix and location of demand. This data should form a common foundation for merchandising, logistics and budgeting processes.
Which tools or techniques could support demand planning?
- A Materials Resource Planning (MRP) system can support the demand planning process, MRP can be described as a system for supplying the number of components required to produce a known quantity of finished assemblies.
- Economic Order Quantity formula (EOQ) attempts to reconcile the problem of storage cost and ordering cost and to ascertain the order quantity which will minimise both.
- Economic aspects of stock management may be determined through an analysis of the costs incurred in obtaining and carrying inventories
To find out more about this subject read the full knowledge paper: Demand Planning and Demand driven supply chain
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