Demand Planning: A Game of Chance or Strategy?

It is not a game of chance, although it often seems that many organizations have chosen to "guesstimate" their inventory needs. Others install features to assist with demand planning, but their intentions are often better than their implementations because they do not utilize the capabilities to their full potential.

The bottom line is that planning for future demand is truly not a game — it is a skill that relies on data collection and analysis. You have to know the issues, the drivers behind the issues, and the solutions for the best possible forecasting and inventory management.

Many firms ineffectively forecast demand, while a remarkable number do not forecast demand at all  — not even as simplistically as the past three months of inventory demand divided by three (which is not entirely inaccurate and not recommended).

Furthermore, for those that forecast demand, many do so in isolation with little or no discussion with either sales personnel or customers. Open communications with customers, a sales and operations planning (S&OP) communication process, a good statistical forecasting tool, and a solid instrument for measuring and improving accuracy are all necessary. For demand streams that include one-time events — such as sales and promotions — a strong forecast editing capability is an additional necessity because the history can be so misleading.

Additionally, solid customer service- or gross margin-based safety stock policies are essential. Equally important is a good understanding of management priorities for in-stock positions across the product line, as well as an even better understanding of the relationship between inventory working capital and increased (or lost) revenue. Many firms that purchase software for inventory management or replenishment buying have defined parameters that are unclear or inappropriately set. This undermines both the software capabilities along with the resulting inventory performance.

Simple yet straightforward communication is necessary to reconcile purchaser expectations with vendor realities. Then, as in the case of forecasting, a tool that focuses on mutual understanding can best measure, report, reduce initially variability, and later, measure and report total elapsed time.

Cultivate well-trained personnel to manage inventories, including measuring, reporting, and continually improving customer service and financial performance. Without demand planning strategy in place, you can be sure that you are either over-investing in your inventory, damaging your customer service, or both.