demand planning

Demand planning constitutes an important supply chain management (SCM) attribute affecting various business operations and aspects, from production to distribution, warehousing, the end consumer, and eventually the organisation's bottom line. Generally, demand planning encompasses forecasting demand (Jain & Malehorn, 2012). Effective demand planning is important for aligning inventory with changes in demand and enhancing the accuracy of revenue projections (Chase, 2013). This paper examines the importance of effective demand planning. First, the paper focuses on issues associated with demand planning in today's business operations. Next, attention is paid to the impact of poor demand planning on business operations. Finally, the paper focuses on the implications of ineffective demand planning on production, supply chain operations (specifically distribution, warehousing, capacity management, the end customer, and engineering), as well as the organisation's strategic planning process and bottom line.

Businesses exist in a constantly changing environment. Customer tastes and preferences, technologies, regulatory requirements, markets, and the industry environment keep evolving, affecting demand planners in different ways (Stadtler, Kilger & Meyr, 2015). The challenge of constant change is that the change sometimes comes at the most unexpected of times, catching demand planners completely unaware. For instance, an unexpected legislation or economic catastrophe causing a revision of previously projected demand levels. In today's business world, therefore, it is more imperative than ever before for organisations to make demand forecasts in consideration of the uncertainties and complexities that exist in the operational environment.

Demand planning issues in today's business world emanate from not only the external environment, but also internal environment. Forecasting tools, management support, and involvement of stakeholders in the demand planning processes are crucial ingredients of success as far as forecasting is concerned (Barr, 2002). Lack of proper forecasting tools, for instance, may result in inaccurate forecasts. With technological advancement, demand planners have a wide array of forecasting tools at their disposal. Acquiring and maintaining these tools, however, requires the support of the management. The role of the management involves not only providing the necessary resources and support, but also creating an atmosphere of stakeholder involvement. Indeed, stakeholder involvement has become crucial in today's demand planning processes (Jain & Malehorn, 2012). Organisations now have to more closely work with customers, suppliers, distributors, retailers, and other key stakeholders in the supply chain to produce more accurate demand forecasts.

The importance of effective demand planning has increased significance, contemporarily. Indeed, ineffective demand planning can negatively affect business operations. Underestimating demand, for instance, may cause products to run out of stock when most needed by customers (Hensel, n.d.). This may not only cause loss of revenue, but also hurt the business's relationship with its customers (Huff & Sultan, 2014). It may result in customer dissatisfaction, reduced loyalty to the brand or organisation, and even the loss of customers. With customers' increased access to many options in today's increasingly competitive business environment, an organisation cannot afford to allow its relationships to weaken with its customers. Poor customer relations may negatively affect business operations. Running out of stock may hurt the business in terms of not only revenue loss and customer dissatisfaction, but also creating needless costs (Chase, 2013). During out-of-stock circumstances emanating from underestimating demand, organisations are often compelled to incur extra costs in instituting unexpected production changeovers (Hennel, n.d.). On the other hand, over-estimating demand may lead to excessive inventory. It is well-known that excessive inventory can significantly increase costs (Stadtler, Kilger & Meyr, 2015). The following sections highlights the specific areas that may be affected by poor demand planning.

Production

One of the key areas affected by poor demand planning is production. Production processes are significantly supported by demand forecasts (Chase, 2013). If an organisation forecasts that the market will demand 1,000 units of a given product in the next 12 months, for instance, it will purchase enough raw materials or components to support the production of the expected demand. The organisation would also calculate the amount of resources required to yield the expected level of output, resulting in effective capacity management. The organisation would ensure adequate capacity (in terms of labour, machines, equipment, and facilities) to fulfil the projected production volume. Moreover, the organisation would be better placed to plan engineering processes such as research and development as well as product design. With poor forecasting, production, capacity management, and engineering processes would be affected. There may instances of excess or inadequate materials, obsolete materials, excess finished goods, as well as capacity underutilisation (Huff & Sultan, 2014; Stadtler, Kilger & Meyr, 2015).

Warehousing

The level of production obviously determines the amount of product held in the warehouse, meaning that poor demand planning may also affect warehousing operations. It is important to maintain optimal inventory levels in the warehouse (Hennel, n.d.). Optimal inventory levels are essential for reducing warehousing costs and, more importantly, addressing unexpected increases in demand (Huff & Sultan, 2014). In an increasingly uncertain world, demand may often deviate from the projected level. With sufficient inventory in the warehouse, however, this problem can be easily overcome. Even so, discretion should be exercised to avoid locking capital in inventory. Overall, though demand forecasts may not always be 100% accurate, it is important for the forecasts to be as accurate as possible to ensure the right level of production and inventory all the time.

Distribution and Bottom-line Prospects

Poor demand planning may also affect distribution. Organisations often rely on distributors to get their products to the final consumer. Poor demand planning may affect distribution in two ways. First, when there are not enough products to distribute due to inaccuracies in forecasting, distributors may start losing confidence in the organisation (Huff & Sultan, 2014). They may no long trust the organisation's forecasts, which may deteriorate the relationship between the organisation and its distributors. Second, forecasting inaccuracy may compel distributors to incur extra costs in an attempt to cover shortfalls (Huff & Sultan, 2014). These costs may be passed on down the supply chain to disadvantage of the final consumer.

Thus, poor demand planning directly affects production and supply chain operations. Its negative effects, however, transcends the supply chain. Customers, strategic planning processes and organisational performance can as well be affected (Stadtler, Kilger & Meyr, 2015). Forecasting inaccuracies may cause unnecessary shortages, thereby hindering customers from accessing products whenever and wherever they need them (Chase, 2013). This may cause customer dissatisfaction, leading to loss of customers and revenue. Missed revenues would certainly affect the organisation's bottom line as profitability would be reduced. The organisation's bottom line may further be affected by the needless costs created by obsolete materials, excess inventory, and stock shortfalls. Increased costs often reduce the gross margin.