4 metrics for accurate demand planning

As a business owner, you know that figuring out demand for your company’s products or services can be a tricky proposition. There are obvious busy periods for every industry, of course, but beyond looking at historical data, how can you create accurate demand forecasts?

Planning solutions can help you weather uncertain times or seasonality by having a better grasp on forecasting. Read on to discover how having an accurate demand plan can help your company anticipate customer needs using four forecasting metrics.

What is demand planning?

Demand planning is a business process where organizations forecast the demand for goods and services so they can deliver on time to customers. It’s a crucial part of optimizing your supply chain management—if you don’t know how much your customers want, you can’t control your supply chain to ensure their needs are met.

Demand planning can be based on quantitative assessments, such as rule-based forecasting or extrapolation, or qualitative assessments, like prediction markets or game theory.

Your demand planner could come from any part of your business, but will need to be someone with strong statistical analysis skills and good insight into customer demand.

What are the benefits of demand planning?

Demand planning offers several benefits for businesses.

Fewer supply shortages

Material shortages can be a huge business risk for many organizations. Gaining real-time visibility into the material you have on hand, and how much of the finished product you’re selling, can help you know when replenishment is needed. You can also increase the amount of safety stock you have on hand, in case of a delayed order of raw materials, to avoid stockouts.

Less money spent on storage

Figuring out how much material or product you should have on hand is a balancing act. If your inventory levels are too high, you’re stuck paying storage fees. Too low, and you might have dissatisfied customers waiting weeks for their order. Demand planning can lead to better inventory management, so you aren’t stuck storing finished product or raw materials for very long.

Increased customer satisfaction

In these days of two-day shipping, customers have come to expect that orders will arrive quickly. When you always have products and materials on hand to meet demand, customers receive their orders faster and, ideally, will be more satisfied and have higher brand loyalty.

The demand planning process

Now that you know a little bit about demand planning, here are four steps you can use to get started.

Collect data

Collecting accurate data is the first step for demand planning. A few sources of demand planning data might include historical sales data, your point of sale (POS) terminal data, or from your accounting or ERP (Enterprise Resource Planning) software. Once you know what information you want to collect, automation might be able to help you do it faster.

Run statistical analysis

Once you have your data in hand, it’s time to start crunching the numbers. There are three popular models for predicting demand: trend projection, barometric, and econometric.

Trend projection relies on historical data to study linear and exponential trends, barometric uses past or current events to figure out future demand, and econometric combines statistical analysis with economic theories to forecast demand patterns. Machine learning and artificial intelligence may also help you run analysis, along with other proprietary algorithms.

Often, demand planners will run several algorithms and then choose the forecast they feel is most accurate depending on the level of bias. They might also run separate analyses for different products, or families of products, to further narrow the models available for decision making.

Model your forecast

After you’ve run your analysis, the next step is modelling your forecast for better supply chain optimization. Since demand planning and demand forecasting can stretch across many areas of your business, from marketing to finance, it’s important to clearly model your results so you can share them with other stakeholders.

Collaborate with internal and external stakeholders

Once you’re almost finished with your new forecast, it’s time to collaborate with internal and external stakeholders to gather information. Maybe your manufacturer knows that delays are coming, or your sales team is ready to hold a big event that will affect demand. Knowing these things in advance can increase the accuracy of your forecast and aid in the decision-making process.

Four types of metrics for accurate supply chain planning

Getting the right data is key to producing an accurate forecast and helping your company achieve greater profitability. Here’s four types of metrics you should keep an eye on as you run analyses throughout the year.

Cost variance

Cost variance is a comparison between the amount you spent and the amount you budgeted. It’s a helpful number to know to gain insight into your budgeting accuracy.

Forecast attainment

Forecast attainment compares total shipments during a certain time period to the forecasted amount of shipments. Over-attainment could result in stockouts or service problems, and under-attainment can lead to excess, obsolete inventory. When used with forecast accuracy and forecast bias, it can help you identify the impact of forecasting errors.

Mean percentage error

Metrics that calculate error, such as mean percentage error, are key to the forecasting process. Mean percentage error is the difference between an experimental and theoretical value, multiplied by 100 to give a percentage.

Forecast bias

Bias is unfortunately inherent to forecast creation. People producing forecasts can have unconscious biases that skew the results. For example, we often overestimate our ability to predict future events, and may subconsciously skew toward positive outcomes. Reduce the bias by reducing the input from biased sources (easier said than done, of course!).

Conclusion

Accurate demand planning requires accurate financial data, a stable prediction methodology and a single source of real-time truth. Customers around the world expect compacted delivery times, and increased customizability when placing orders or making purchases these days. In many competitive industries, this demand has shaped the supply chain, shifting the balance between “on demand” and “in the back”. Start with as clear a picture as possible and choose a forecast tool that allows you maximum flexibility to help you find the balance for your business. QuickBooks can help give you a clear, real-time look at the financial health of your organization.