In today’s disruptive global marketplace, more and more companies are laser focused on supply and demand planning and how to get it right.

This guide explains the two disciplines, their differences, and how they work together. Use the information to build a solid foundation for controlling your inventory in these challenging times.

What is Demand Planning?

Demand planning uses analytics, data, insights, and human experience to make predictions and respond to various business needs. It leverages demand forecasts—not as an end in themselves—but as a tool to highlight opportunities and risks, establish business goals, and support proactive planning across functions.

There are two types of demand planning — unconstrained and constrained. With unconstrained demand forecasting, the planner focuses exclusively on raw demand potential, not factoring in possible constraints like capacity and cash flow. This method determines how much you could sell if supply were not an issue. Constrained forecasting, however, considers these factors, creating a more realistic picture.

Businesses should leverage both unconstrained and constrained demand planning to deliver the most value to consumers while keeping costs down.

Essential Considerations in Demand Planning

Businesses must focus on these four areas of demand planning to succeed during this global unrest.

• Historic product sales: What you’ve sold in the past may indicate what you can expect to sell in the future, although that may not always be true. What’s critical to getting things right is to select the correct historical periods and market and economic conditions.
• Internal trends: Using historical data, identify sales trends for one product or group of products.
• External trends: Some factors that may impact a company’s ability to efficiently meet its customers’ needs. These include competition, sociocultural issues, legal factors, technological changes, the economy, and the political environment. (The last two are particularly critical today.)
• Promotional events: When companies run sales, events, or promotions, sales often increase. Demand planning must account for this as well.

Accurately forecasting demand is complex, but businesses must master it during challenging times like today.

What is Supply Planning?

As we covered, demand planning is the process of predicting consumer demand.

Supply planning, by contrast, determines how a business will fulfill demand within the organization’s financial and service benchmarks. It must factor in things like inventory production and logistics. Specifically, it must consider factors like on-hand inventory quantities, open and planned customer orders, minimum order levels, lead times, production leveling, safety stocks, and projected demand.

The five key functions of supply planning are:

1. Business operations is where demand forecasting comes in. Once you’ve calculated the demand, you are able to decide how much inventory you need. At this step, you should know how much product must be ordered and produced.
2. Acquisition involves purchasing materials or final products. Buying supplies is a critical part of having adequate inventory on hand. It requires partnering closely with your suppliers — and their suppliers — especially during uncertain times.
3. Resource management is where companies ensure adequate resources are available and distributed to the correct locations.
4. Workflow of information keeps supply chain management on track by using standardized systems across all departments preventing disconnects.
5. Transportation and logistics pull together all the components of planning, buying, manufacturing, storage, and transportation to ensure an adequate supply of items reaches the consumer.

Practicing supply planning effectively can help keep companies successful during challenging times.

Supply Planning Versus Demand Planning

Demand planning and supply planning aren’t two completely different things. They are actually two halves of a whole.

Demand planning aims to predict how much of a product you need to have available to meet consumer demand. Supply planning determines how to meet that demand within your company’s cost and service rules.

Demand impacts supply, and supply is dependent on demand.

You cannot meet demand without sufficient supply. Similarly, you can’t ensure adequate supply without clearly understanding demand, especially in changing times. You need both to keep your business healthy.

The key difference between the two types of planning are the characteristics of the data that fuels them.

Much of the information used for supply planning is internal or comes from sources connected to the company. It involves analyzing production capacity, time constraints, supply costs, delivery times, storage requirements, and other factors. Because you have relatively easy access to — and control over — supply chain data, it is u easier to master the supply side of the supply and demand equation.

Businesses typically have less control over demand data. While some of it is internal, like historical and seasonal sales records, much is external, like economic trends. This makes demand planning less dependable and more challenging than supply planning.

In short, because supply planning uses more defined and owned data points, it is typically more concrete and reliable. It provides practical direction on how you’ll meet consumer needs. By contrast, demand planning uses less definite and owned information. While certain algorithms and data sources are more accurate than others, forecasting always involves some level of prediction. Supply planning and its practical calculations using more reliably sourced data are typically less volatile.

Another way to view supply planning versus demand planning is to compare their ultimate goals. Demand planning delivers predictions that impact supply planning and other business decisions, while supply planning pays off with inventory optimization.

• Predictions: Demand planning considers a wide array of factors to develop as accurate forecasts as possible. Demand predictions inform supply planning and support other business decisions, such as when to offer promotions or find new vendors.
• Optimization: Supply planning determines how you’ll meet projected demand within your organization’s operational constraints and business objectives. It considers available resources and other factors to develop a plan prioritizing efficiency, cost savings, and speed. The supply plan must align fully with company goals and allow it to take action to achieve them. For instance, if an organization wants to reduce costs for a project, a supply plan might recommend buying materials with a slower fulfillment timeframe. This approach wouldn’t be appropriate for a business driven by tight deadlines.

A balanced approach to demand and supply forecasting is essential for ensuring appropriate stock levels without storing extra inventory, but striking that balance looks different for every business. High-quality data is a key component of both planning types, making analytics and robust supply chain management software and systems especially valuable.

Supply Versus Demand Planning: The Final Word

Supply planning and demand planning aren’t competing factors within a company. Instead, they should be viewed as complementary functions that allow businesses to operate more efficiently and effectively. This is especially critical when operating in dynamic and challenging times like today.

Supply chain is complex, encompassing a broad range of functions, including supply planning and demand planning roles. It can be challenging to distinguish between these functions, leading to confusion among companies and hiring managers.

I recently had a discussion with a friend who is a leader in placing people in supply chain, demand planning, and S&OP roles. He shared with me how companies often misidentify their needs, using certain terms interchangeably, such as calling a Supply Planner a Demand Planner and vice versa. As an example, he mentioned a job description he received for a Demand Planner to manage materials for the manufacturing process, which should have been a supply planning role. This confusion in terminology can be perplexing.

Demand Planners and Supply Planners do have one thing in common, however, and that is working together in the S&OP process. I recently spoke to an S&OP expert on the IBF On Demand Podcast, Alina Davydova, who is Senior Manager SIOP at Danfoss to clear up some of the ambiguity around these terms. The below is taken from that conversation.

First of all, how do we define demand and supply planning?

It is important that we look at the S&OP process as a whole. Within operations, we know that there is a demand (sales) part and a supply part. When we understand that demand and supply planning are one body, we can start  defining them individually.

Starting with demand, we are looking into the market needs and trying to understand what we are going to sell. Then, we transform that prediction of demand into what we can actually provide in the supplying part and how we can support sales. This is where the demand and supply functions meet, discuss, and contribute to the deployment plan at the end. This discussion has to be regular, ongoing, and looping into each other so that we are not splitting or separating demand and supply.

Does it matter what we call the different roles in supply chain?

Yes, because when it comes to roles and responsibilities within the organization, we need to be very clear who is facilitating the demand plan and who is then looking at the rough cut capacity plan, and making sure that we do the right estimation of what we can produce versus what we need to sell. And then, at the end of the day, who is reconciling and validating these numbers at the end? That would not be the same people who are creating the demand plan.

So when we are talking about creating the competencies within the organization, all of these roles need to be defined and designed: Demand Planner, Supply Planner, Demand Manager, S&OP Managers etc. These things are crucial to the effective operation of the business.

A lot of companies that have these different roles without a strong S&OP process operate in  silos. How do we break down those silos and work together?

To avoid this we need to have the whole process under the umbrella of an S&OP Manager so there is one person who is plugged into every step of the process and can bring everyone together. He/she is not necessarily dealing with any particular element like the sales forecast, for example, but knows what the main highlights are, and brings it into the supply planning where this can be discussed and agreed upon. If there are any questions or contributions regarding the demand plan, they can be brought up in the next cycle.

The person leading S&OP and the end-to-end process is crucial. You need somebody who understands exactly when things have to happen and who is responsible for this or that input and making sure that it happens, being there at the executive meetings, and facilitating the executive handshake to get the right decisions at the right time and bringing them back into the organization.

There can be a lot of confusion if the job title doesn’t match the role. What advice would you give to hiring managers when hiring Demand or Supply Planners?

I would start by describing all the steps that have to be done by that person in the normal, regular S&OP process. We have the monthly cycle, we have certain things that have to be done: Market analysis, the statistical forecast adjustments, going into the supply capacity checks, the pre-S&OP meeting, the executive S&OP meeting. All these things and their constituent steps are very clear activities that come with the role. Prepare a simple roles and responsibilities matrix. Who does what? Who opens the tool? Who signs off approval for level A, level B and so on? Who needs to call for the meeting with the executives? This will become the outline for your job description. Depending on the specific activities, it will be clear whether it is a Demand Planner or Supply Planner you’re looking for.

The Bottom Line: Supply Planning Vs Demand Planning

When we talk about demand planning, that’s the prediction side of the equation. Demand Planners are responsible for compiling a demand forecast. Supply planning on the other hand, that’s the optimization side of the problem. Supply Planners are responsible for translating the demand plan into the most efficient and executable plan that meets demand.

The goal from a supply planning perspective is to minimize cost, increase service, maximize resources, and leverage inventory to reduce cash being tied up. So it’s really a cash/cost/service triangle that must be balanced in a manner that achieves the particular financial/customer service objectives set by the company, whatever those may be.

To learn the fundamentals of business forecasting and demand planning, join us for IBF’s Chicago Demand Planning & Forecasting Boot Camp from March 15-17, 2023. You’ll learn how to forecast demand and balance demand and supply from world-leading experts. Click here for more information. 

Using history to predict the future is the most basic assumption that underlines demand planning processes and activities. This assumption presupposes that there is inherent demand variability in sales and, by analyzing sales data, the variability can be identified and managed – that is a given. But it’s not only demand planners who must understand variability; Supply Planners also need to be proficient in identifying factors that impact supply and then manage them to mitigate risk.

Not All Risk Comes From Demand

Supply planners must look internally and understand that not all risks come from demand. Risks and variability in the supply chain are often viewed as a forecast problem but the forecast isn’t the only part of the supply chain that features variability, and demand assumptions aren’t the only assumptions driving our supply chains and S&OP. 2020 has been a year that has really highlighted the need to manage assumptions across the entire supply chain and not just for demand.

Understanding Supply Chain Variables

Assumptions exist outside of demand. They impact our ability to serve our customers and need to be identified and managed, just as we do with demand assumptions. Attribute data (data relating to those things that cause variability in supply) related to an item’s characteristics, distribution network, manufacturing process, purchasing terms, and even general planning settings, all contain variables that impact the supply chain.

We have an opportunity to introduce previously unrecognized uncertainty into the supply process.

Typically, these factors aren’t considered to impact supply. Often these attributes are poorly managed and unvalidated unless persistent and serious issues make them impossible to ignore. When we input this data into the master data of planning systems, we have an opportunity to introduce previously unrecognized uncertainty into the supply process. When we do this, we get visibility into supply constraints and are in a position to manage them.

Failure to understand these supply assumptions results in either a growth of excess and obsolete inventory or in a shortage of good inventory,

This data (or attributes) should be regularly reviewed for accuracy, tracked for performance, and actively managed and maintained. For example, we must understand the impact on supply performance when lead times, run rates or process times change, or minimum order quantities and lot sizes are greater than our total annual forecast, or when any other supply constraint appears. Failure to understand these supply assumptions results in either a growth of excess and obsolete inventory or in a shortage of good inventory creating customer dissatisfaction and service failures.

Variability In Demand Is Often In Fact Variability In Supply

When things don’t work out as planned from a supply chain perspective, we often assume it’s due to a random, non-repeating event that could not be prevented when in fact there were indicators in the data that could have alerted us to it ahead of time. Key attributes impacting our supply chains should be identified to reduce unplanned variability and poor performance. They should be measured for accuracy and adherence to bring about best supply results. Unfortunately, when this is not done it shows up as variability in demand! 

We know there are many circumstances that can change the results of attribute values both internally (labor availability, repairs, inaccurate inventory) and externally (weather, transportation limits, vendor capacity). Measuring supply performance and communicating this performance and its drivers back to demand can help demand planners better manage forecast variability. Loading supply settings without validating if they are correct restricts the value demand planners add and that of the demand plans they generate.

Scenario Planning Requires Properly Managed Supply Assumptions

Properly managed supply assumptions create better scenario planning. Scenario planning is a useful part of the S&OP process that aims to maximize margins and profitability. Many of us already create scenarios based upon various demand expectations, but we should also create scenarios based upon potential supply changes. Understanding how adding an extra shift impacts inventory is just as important in reaching our goals as understanding what happens if customer X sells 40% more than planned.

Taking the time to understand the assumptions outside of demand allows us to create scenarios and understand potential financial risk to the business. Understanding variability in supply and how we are performing against expectations will certainly improve the quality of the scenarios we run in S&OP.

I believe demand planners need to teach supply planners how to recognize and manage assumptions.

Bottom Line: Supply Planners Can Learn Much From Demand Planning

I believe demand planners need to teach Supply Planners how to recognize and manage assumptions. Not only that, like Demand Planners, Supply Planners should also be held responsible for understanding and managing variability.

Metrics may be different between demand and supply, but they have the power to work together to reduce it. Supply planners must understand why there are differences between planned and actual results, find the root causes of the differences and understand when we might see changes in the future that don’t adhere to standards. When we fail to manage supply variability, we introduce additional variability not just into the supply plans but also into the demand plan, resulting in inventory imbalances and poor service levels.

If you haven’t defined which supply attributes are key in your supply chain, 2020 is the year to take a leaf out of demand planning’s book and start defining, reviewing, and measuring them and incorporating them into your process as core assumptions.

The onset and the spread of the coronavirus will entail alterations in the way supply chains and businesses are run. This is a truly both a humanitarian and an economic crisis – the type that we haven’t seen so far.

It is in this light that a function/profession hitherto taken for granted has come into the limelight. Logistics and supply chains keep the world economy and global trade humming. However, given the massive lockdowns and the socio-economic costs of these decisions, supply chains are coming under severe stress. Moreover, no risk model could have predicted the monumental shocks and effects that this virus would bring with it.

So, given this scenario, what can we do as demand planners, logisticians, sourcing, and supply chain professionals? There are no easy and clear answers. But it is a good time to revisit the 3Vs – Visibility, Velocity and Variability.

Any endeavor at this stage should be towards controlling variability and increasing system wide visibility and velocity. Below I present some thoughts and suggestions that might help. These have been divided into “Strategic” and “Tactical/Operational” responses.

Strategic Response

Supply Chain Design: It may be worthwhile to go back to the drawing board and take a quick look at the existing supply and distribution network and all the nodes across the chain.

Key areas to focus on:

• Demand planning process
• Demand aggregation
• Number of product groups
• Product and Inventory classification
• Customer segments
• Warehousing and physical distribution infrastructure

Any supply chain these days is designed to be responsive, agile and flexible – whether on the supply side or the demand side. Moreover, customer fulfilment / order management is primarily governed by a combined Push-Pull strategy. Companies in most industries (barring those operating in Make-To-Order and Engineer-To-Order environments) use Push-Pull based strategies.

Given that the current scenario is highly uncertain it is necessary to focus on customer as well as product segmentation based on “Push” and “Pull”.

Products with a steady demand can be stocked based on forecasts. However, for products with uncertain demand, we need to use a consumption-driven approach. It is here that this kind of pure “Pull” based strategy might work for companies.

Operations Excellence Philosophies: Pull-based systems such as Lean and TOC (Theory of Constraints) could be implemented. Daily distribution requirement plans (DRP) could be generated for movement of products through the primary chain (Plant to Fulfilment Center/Regional Distribution Center). Inventory norms or buffers would need to be calculated for the relevant SKUs. It is essential to ensure product availability in the primary chain through efficient replenishment planning.

At this time, it may be prudent for the planner to devise inventory rationing/allocation based on defined business rules. This would enable optimized allocation and distribution of critical products to the key distributors or retailers in the chain. This approach is particularly effective for CPG, food, health care and pharmaceutical companies where availability of essential items is of utmost importance.

Omnichannel Distribution: From a distribution standpoint, it is recommended to adopt an omnichannel approach where a mix of online and physical distribution can be used to reach the end customer/consumer. Most companies are using online channels but brick and mortar stores continue to play a major role.

Tactical/Operational Response

The demand planner needs to focus on two key metrics: Availability % and OTIF % (or Product Fill Rates). These metrics need to be monitored on a daily basis. Close coordination with the transportation teams is very important. Given the daily consumption and distribution patterns, there could be a higher proportion of LTL (Less Than Truck Loads).

As mentioned earlier, for demand side management and order fulfilment, it is essential that production systems and strategic suppliers are flexible. Lean production systems can facilitate this thanks to shorter operational lead times and quick changeovers.

Tools & Techniques: Given the current uncertain and evolving situation,  demand planners need a system that aids in dynamic planning through the use of scenario analysis and “What-If” analysis. A flexible planning approach is needed and even short term forecasts need to be reviewed.

S&OP/IBP: These meetings need to take place more often – daily or weekly basis. This will help to get a grip on pipeline and channel inventories, service levels and product availability.

Risk Management Tools: This is the right time to invest in a risk management tool or system that can model the impact of potential risks across the supply chain. The output from this system can be used as an input for integrated supply chain planning.

Summary

There is no magic bullet for demand planners and supply chain professionals to solve current problems. But what we can do is review the supply chain design and associated strategies in addition to the planning and distribution systems in the light of the push-pull boundary.

• Daily visibility into consumer/customer consumption is essential. Focus on two key metrics: Fill Rates/OTIF % and Availability %
• S&OP/IBP meetings need to be more frequent. It is good idea to invest in risk management tools and systems.
• The aim should be to minimize variability and increase system-wide velocity and visibility. Transportation and distribution operations are the key differentiators.
• Inventory allocation and rationing needs to be adopted based on segmented products and customer profiles.
• Last but not least planners need tools to enable dynamic planning. These tools include “What-If” and “Scenario Planning”.

We will need to wait and watch how this crisis evolves over the next two to three months and calibrate our supply chain strategies accordingly. Your approach will differ based on your industry types – CPG or non-CPG.

 You can find more insight into demand planning from Sunil Bharadwaj in his article Demand Management and S&OP — Present and Future, published in the Spring 2018 issue of the Journal of Business Forecasting.

You may think that Demand Management in Supply Chain is straightforward. Oh, how wrong you would be! Here in the UK, we have a problem with OTIF (On Time, In Full), and it is that the customer doesn’t stick to their own rules. What makes it worse, suppliers are often unwilling to stand up to them.

This creates confusion, delays and unnecessary cost for both customer and suppliers. Something is clearly wrong, and much of it is due to how we negotiate delivery, and how suppliers fail to enforce the customers’ contractual obligations.

Let’s imagine that at a major manufacturer (the customer) defines each stage of production which allows suppliers downstream to organize their own production processes accordingly. The number of assemblies is known, so all the components required from suppliers is predictable. Everybody in the Supply Chain knows what to produce or take delivery of, in exactly what quantities and when.

Sounds simple, right? There are, however, a number of realities in Tier 1 and 2 businesses that make this anything but simple.

How The Customer Unintentionally Throws OTIF Out The Window

Development may not be able to plan their requirements effectively and may scrap unpredictably. Spares should be predictable and forecastable. In my industry (areospace), AOG (Aircraft on Ground) requirements should normally be deliverable from spares stocks for production aircraft but legacy programmes may not hold sufficient stock.

Demand Planners will adjust re-order batch sizes and minimum stock levels and then adjust them, placing delivery pressure on suppliers. They also adjust planning lead times, which throws a spanner in the works for even the best organized supplier.

Production scraps components and assemblies and (unpredictably) discover quality issues that are not noticed upon delivery. They also change production methods that alter planning lead times and line side stock requirements.

Operations fail to book delivered batches to stock, or incorrectly book them. They also hold deliveries in quarantine for extended periods to check for quality issues (then ultimately book to stock if resolved).

How Customers Create Unnecessary Pain For Suppliers

When customers do any of the above, suppliers have to absorb the resulting demand noise into their manufacturing planning process, and have to commit material, machine and labour capacity. But because of the customer’s disruptions, they cannot sell the parts for another few weeks. Suppliers typically have difficulty in managing changes in quantity and delivery date for parts that have been agreed to be delivered on a weekly schedule, especially considering that they often make over 100 different parts which requires careful planning and organization. Any change can cause havoc.

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Customers agree a Firm Zone with the supplier, and they should stick to this. This is, after all, the planned manufacturing lead time that both sides committed to. As part of the OTIF agreement, the customer is contractually bound to accept delivery of components where the demand falls into the Firm Zone and the Supplier can insist the Customer take delivery if such demand is accepted and then rescheduled out again. But in reality, do suppliers enforce the contractual agreement? All to often they don’t.

But they must.

When customers schedule demand out of the agreed Firm Zone they’re breaking the contract and making life extremely difficult for tier 1 suppliers, creating problems that often ripple down to tier 2 and tier 3 suppliers. Not robustly managing customer schedules and ensuring they to stick to contract terms is a very common problem and results in:

• Constant pressure to change the production schedule
• Unpredictable weekly re-schedules in and out
• Launching of work orders that then stop and are held
• Rush jobs that need to be prioritised to meet customer delivery expectations

The net result is ineffective use of capacity, ineffective use of resources, and holding significantly more inventory than is necessary to satisfy the forecast.

What Customers Must Realize

Supplier Management teams using OTIF as the sole measure for their own performance and that of their suppliers causes disruption and inefficiency in the supply chain that compromises their other key objectives of delivery reliability and ultimately, minimising cost of supply.

The Suppliers ability to demonstrate that they plan appropriately and show they are Rate Ready for all parts to all Customers is vital, and once a Supplier can do that, flexibility in managing weekly demand change can produce an overall better result.

What Suppliers Must Do

• Robustly manage customer demand changes within lead time and not introduce short term demand changes into their planning processes despite pressure to do so.
• Confidently show that they are Rate Ready for all of their customers’ parts and drive that rate in their day to day management of the factory, not chase the short-term customer demand changes.
• Ensure their systems and data are set up properly and that demand management processes are consistently driven by their internal team.

These problems are endemic in British manufacturing, and we wonder why the UK is 15.0% less productive than the G7 average – but more on that in another post!

Medicines must be delivered to patients at the right time, with the required quality, and at the right price. The consequences of stocks outs and poor forecasts are more severe in this industry so distribution, inventory management and S&OP are things you need to get right. But in this market characterized by volatility, high competition and unique industry dynamics, it is not easy. Here’s where the S&OP process can be a solution to balance demand and supply, better anticipate demand, minimize supply risks and reduce costs.

Pharmaceutical Products- Way More Than FMCG

A pharmaceutical product or medicine is characterized by the fact that it is a common consumer good. It’s therefore subject to a market forces and financial and economic constraints. But it is also provided to the sick, which make it an essential vector of healthcare services. The distribution of pharmaceutical products is similar to other products, but in this industry it is uniquely important because the way they are distributed has direct effect on the health of the population. Therefore, ensuring availability to the consumer is critical.

The Pharmaceutical Wholesaler-Distributors Is A Critical Actor In The Pharmaceutical Value Chain

Pharmaceutical distributors have a key role in the pharmaceutical Supply Chain, as it represents a link between laboratories and pharmacists. They are supplied by the pharmaceutical products, which are managed, stored and distributed to the pharmacists. Distributors manage a wide range of products and know their evolution in the market.

On the one hand, distributors have a limited choice of suppliers. On the other, they suffer from competition from other distributors. Therefore there are no exclusive relationship between distributors and pharmacists. The result? Demand becomes more difficult to anticipate.

The activity of pharmaceutical distribution is characterized by a strong barrier to entry, which makes it very delicate. Laboratories set delivery quotas for certain products, which represent the market share of the distributor for the previous year. This makes the creation of new distributors more difficult and reduces possibilities of gaining market share.

Supply Chain Efficiency Is Crucial To Maintaining Profit Margins

Here in Algeria, the government imposes purchase prices, sales prices and margins, so price competition is limited. Distributors must provide a high service quality and be able to control costs to save the profit margin. The latter means that distributors must pay keen attention to Supply Chain optimization and inventory management. Key factors for us are:

• Managing a large stock of products (over 90% of products) and ensure their availability
• Ensuring on time delivery and delivering within 24 hours
• Delivering high quality orders and products
• Minimizing stock outs and obsolete inventory
• Cost saving and investment in analytics and IT

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The S&OP Process, Key To Success In Pharmaceutical Distribution

As discussed, Pharmaceutical distributors must ensure efficiency and effectiveness in this market characterized by demand volatility of products, competition and a high risk in the supply side. Logistics capacities and inventory cannot respond to demand efficiently if there are errors in order deliveries, stock gaps and delays. This impacts financial performance.

To put supply and demand in synchronization, we must implement the S&OP process. The objective is to integrate the demand plan, the supply plan, and sales plan into one consensus plan. In order to implement the S&OP process, distributors have to:

• Establish a culture of collaboration between all the functions, with a continuous improvement vision
• Win the commitment of senior management to set performance challenges and resources
• Appoint the right person to lead the process, who has the ability to involve and motivate others
• Implement methodologies and demand forecasting software and focus on improving forecast accuracy at family and product level
• Manage supplier relationships by producing an accurate supply plan within the appropriate time horizon, with optimal quantity, discounts and payment deadlines
• Set a consistent list of KPIs to help analyze previous periods and upcoming planning objectives

Pharmaceutical distributors should think about including other players in the pharmaceutical Supply Chain. The first step is to collaborate with pharmacists to exchange information about demand and inventories. The second step is to provide laboratories with the demand and the purchasing plan, and make sure all the stakeholders in the pharmaceutical chain have aligned goals.

Blockchain is set to revolutionize how businesses operate, including the Demand Planning and Forecasting functions. Although a relatively new invention, it has the potential to digitize our entire supply chains. Companies will be able to track, predict and manage inventory down to the item level, using the Internet of Things and Machine Learning to make split-second decisions and transactions. Truly revolutionary!

Or it is all just hype, and Blockchain will never go beyond cryptocurrencies like Bitcoin. Honestly, I am the first to admit I have no idea – if you’re being honest as well, you don’t either.

IBF Research Into Blockchain Is Surprising

At the end of 2017, the Institute of Business Forecasting (IBF) asked Demand Planning and Forecasting professionals how the discipline would look in the year 2025. (Ed: this is the second in a series of articles discussing the results – this is the first].

One of the questions we asked was a kind of ‘buzz word bingo’ where we asked respondents what the next big thing to impact Demand Planning will be. Of the 200-plus respondents, who chose from 20 options, blockchain came in at 10th place –  behind other emerging or tested technology such as Big Data, the Internet of Things, Machine Learning, and cognitive technology.

When looking at the research data, it is difficult to draw definitive conclusions. This data will be our baseline for future research and will indicate where things are going rather than where they are now. Keeping this in mind, with blockchain even making this list at all, it could be a sign of things to come. Could it be a case of people having heard of it, or even knowing a lot about it, but unsure how to leverage it for business planning and Supply Chain Optimization? Could interest pick up when Demand Planners, Forecasters and Data Scientists think about how it applies to their own supply chains?

Difficulty in defining what it is, causes a lot misinformation and confusion about how blockchain can be applied.

Even the Experts Don’t know How Blockchain Can Be Used

When it comes to blockchain there has never been so much written by people who know so little. A survey of over 200 board-level executives recently found that while over half of businesses sampled are planning blockchain initiatives, more than 40% of non-IT/data senior executives admit to not fully understanding blockchain technology. Radia Perlman of Sun Microsystems, who is known as the “Mother of the Internet”, admitted that she cannot distinguish exactly what makes something blockchain technology. She says this difficulty in defining what it is causes a lot misinformation and confusion about how blockchain can be applied. In short, not even the greatest minds in computing know what it can be used for.

So what else does blockchain bring to the table that helps tackle real Demand Planning and Forecasting challenges? I don’t see anybody answering that question.

Beyond Cryptocurrencies: Can Blockchain Be Applied to Supply Chain?

I admit we are still early in the game and what we are seeing today is merely the tip of the iceberg for a nascent technology. Cryptocurrencies such as Bitcoin may have captured the public’s imagination but it is blockchain’s underlying technology that may prove to be of real and practical benefit to organizations. Many industries are already exploring its benefits and testing its limitations, with financial services leading the way. Blockchain is starting to find its way into supply chains as well, boosting transaction speed across borders and improving transparency. While I am still holding out for any use cases specifically in Demand Planning and Predictive Analytics, blockchain may at some point allow multiple parties to transfer and store data in a space that is permanent and easily accessible.

In logistics, a troubling new trend is fictitious pickups. One known blockchain pilot (or use case program) involved Maersk and IBM. It centered on creating a digital distributed ledger to create a single electronic place where all the myriad documents related to a shipment could be housed. In theory, this would help with the fictitious pickup problem by providing a permanent secure ledger that everyone is reading off. If it works effectively, blockchain will have a proven application that solves a specific problem and adds serious value.

There Are Two Sides To The Bitcoin Debate

Although some say the underlining blockchain technology is revolutionary, it is not without healthy skepticism too. Every use case seems to amount to little more than adding a distributed, encrypted, anonymous ledger where none has been needed. Or in the words of Radia Perlman, “Just because you can do something with it (blockchain) doesn’t mean it couldn’t have been done before using an already tested method. And it doesn’t mean it’s the best solution.”

When it comes to data, some see blockchain as making perfect sense; you break up your document into ‘blocks’, encrypt them, and then put them in a distributed ledger replicated immutably across ten thousand servers.

As it happens, blockchain in its current state is just a terrible way to store data. It is one-factor authorization – you cannot unshare it or track who is accessing it. It is not very efficient either; its only application to date (Bitcoin) consumes more electricity than all of Ireland. Imagine what a thousand Internet-of-Things or applications would consume! I yield to the fact that we are early in the evolution of a new technology but facts are facts – the Bitcoin blockchain has consumed almost a billion dollars’ worth of electricity to hash an amount of data equivalent to a sixth of what you get for a monthly ten-dollar Dropbox subscription.

Blockchain May Be a Security Nightmare

It’s not that I don’t see the immense benefits of a secure ledger but it is difficult to argue that smart contracts provide tangible benefits, or drive Predictive Analytics capabilities. When it comes to Big Data (at least right now) it is not providing any real competitive edge for companies, and other emerging technologies may better serve business analytics.

As far as the common security argument goes, anyone who controls fifty-one percent of the nodes on the network can take control of the entire network and steal all the data. It works very well for an application such as Bitcoin or other large multiple node distributed information but this means for niche implementations your data is liable to be compromised. To get around this, a company can own all the ledgers, but guess what? That defeats the purpose of blockchain altogether. So what else does blockchain bring to the table that helps tackle real Demand Planning and Forecasting challenges? I don’t see anybody answering that question.

Blockchain technology holds promise, but it is far from flawless. Much of the current generation of blockchain is clunky, geeky and user-unfriendly, and as far as efficiency and the environment are concerned, it is a disaster. I do not want to be “that” guy who says there is no use beyond distributed ledgers but I do not know enough yet to say if it is capable of adding value to the Demand Planning world. It will be interesting to see where blockchain emerges as a buzzword in future surveys and where fellow practitioners think it may impact their lives. Maybe it will evolve to be useful, practical and environmentally friendly. But we have long way to go before we witness any real benefits in our field.

The research findings are taken from Institute of Business Forecasting’s (IBF) on-line survey “Future of Demand Planning and Forecasting”, conducted between September 1st 2017 and October 24th 2017. The findings were discussed in the Winter 2017 issue of The Journal of Business Forecasting. 

Seth Godin, bestselling author of the books Tribes and Linchpin, once said in an interview that if you can only do what someone else tells you to do and nothing more, then they can find someone (or something) cheaper than you to do it. If you can creatively think through problems, present solutions and make decisions, then you’re a resource that can’t be replaced.

The Institute of Business Forecasting (IBF) asked professionals a few months back a few simple questions to gauge where people in the profession saw Demand Planning and forecasting in the year 2025. A summary of the report came out in the Winter issue 2017/2018 of the Journal of Business Forecasting (JBF). This and other articles will look deeper at those answers and what the future may hold in regard to people, process, and technology in the realm of Demand Planning.

While we did not ask directly if the role will be fully automated in the future, we did ask what the core competencies for the role will be in the year 2025. This sees a changing and possibly elevated Demand Planning role, one that evolves from analyst to a master of orchestration and provider of insights.

Where do You Fit In The Digital and Demand Planning Revolution?

According to many industry observers, we are today on the cusp of a Fourth Industrial Revolution. Developments in previously disjointed fields such as Artificial Intelligence and Machine Learning, robotics, advanced analytics, 3D printing, and cognitive technology and deep learning are all building on one another. The Internet of Things will help tackle problems ranging from Supply Chain Management to Operations. Concurrent to this, the digital revolution threatens to not just give us more data, but do your job faster, better, and cheaper than you do it.

What does this mean to us, will we be replaced? Your view of a demand planning robot of the future really depends on how you view your role today. If you are only doing what someone else tells you and aggregating data, or relaying what the forecasting system is generating, then they can find something cheaper. If we just need a number, technology can do this faster and more efficiently with greater number of inputs and more accurate outputs.

If you view Demand Planning as discipline that uses data, forecasts and experience to estimate demand and provides solutions for various business needs, then you are the next generation and ahead of the curve.

For the last few decades or more, a forecaster’s role has been considered primarily to provide an accurate single point estimate to a supply chain based on history and inputs from sales people. The fact is that the entire business, not just supply chain, needs insights into what will happen and the focus should be on growing profitability of the enterprise. This requires more complete, detailed analysis and quicker answers. What we are seeing today is that the Demand Planning role is changing and we need to migrate from Big Data to big answers.

We Conducted a Survey Into The Future of The Demand Planning Role And Here’s What You Said

The ability to apply quantitative insight to the wider business context is crucial to the future of the demand planning role.

This was clear as well in the results from the recent online survey conducted by IBF in September 2017. Unsurprisingly, the number one soft skill needed for Demand Planning was Advanced Decision Making (first choice for 34 of the 200 respondents).  I say not this is unsurprising because we are seeing this theme play out across multiple functions (like in FP&A) and is becoming a wider business need. Right after Advanced Decision Making comes our ability to Synthesize Data and Information, followed by Analytics. These top three needs captured almost half (42%) of all responses.

So what does this say about the role of Demand Planning in the future?

The Demand Planner Of The Future Will Be The Story Tellers Who Use Numbers As Their Language

As I mentioned in an earlier post, “My Case for A Centralized Forecasting Process”, Demand Planning can help provide synergies to many other functions and is uniquely qualified and positioned to help a company paint a fuller picture of what is to come. In that article, I referred to us a storyteller who uses numbers as their language. This is seen in the survey with Analytics which received a combined total of 85 first, second and third choices, placing it as a joint top priority. This is not analytics in the sense of a data junkie and a wizz kid at algorithms, but someone who has the ability to develop and plan analytics projects including gathering and visualizing data in response to business needs.

The Demand Planner Of The Future Will Not Report To Supply Chain

It may not (and I believe it won’t) be a Supply Chain role but will be elevated to a more unbiased centralized function with specialties that support multiple purposes and enables decisions making across the organization. The focus of Demand Planning will be more on sales enablement as well as wider ‘business enablement’. When you have more than a dozen people acting as decision-makers and influencers and competing priorities for their time, attention and money, having the right information at the right time to provide context and direction is highly valuable – and that is where the Demand Planner should come in.

The Demand Planner Of The Future Will Focus More On Pre And Post Analytics

The Demand Planner of the future may not be the statistician and programmer you may think we need in the digital world of tomorrow. The truth is that as technology continues to advance, it will not be the creators of the algorithms who will be in high demand but interpreters of them. We see this point clearly illustrated in the survey results; skills like Software Engineering count for only 1% of peoples’ first choices, and Mathematics and Statistics are also low down in the list of priorities.

This is not to say highly sought-after skills like knowledge of R and Python and advanced analytical programming are not needed today but it does provide a glimpse into the Demand Planning role of the future. What will be in more demand is the pre and post analytics that provide insights into what questions to ask, and assist in communicating the impact of the results to the business. These are two soft skills that may never be replaced by machines and are indeed likely to be in greater demand than ever before.

While clearly all of these soft skills or core competencies are important, judging from the responses and what we are in our own organizations, the Demand Planner of 2025 will be an elevated role that will creatively think through problems, present solutions, and make decisions.  And most of all, you will be a resource that can’t be replaced.

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The survey data referred to in this article is based partially from The Institute of Business Forecasting’s (IBF) online survey “Future of Demand Planning and Forecasting”, conducted between September 1, 2017 and October 24, 2017.  The survey focused on three key areas of people, process, and technology as it relates to the demand planning field in the year 2025. The survey consisted of 4 high-level opinion questions asking respondents to rate their first, second, and third choice for each question. Each question had a keyword, along with a definition of that word of how it was to be interpreted for this survey. There were no incentives other than the opportunity to advance the body of knowledge in the profession and we received over 200 responses from people involved or related to the forecasting and demand planning functions.

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In the first of this mini-series, Pat Bower of Combe Inc. reveals the quickest and easiest ways to reduce inventory. Detailing the preferred methods used by leading S&OP professionals and consultants, he discusses how to cut poor quality or obsolete inventory for significant cost savings. Read on for quick improvements that can be leveraged easily in any supply chain focused organization. This week Pat discusses the two easiest inventory reduction initiatives: improving inventory quality and inventory classification.

Identifying Easy Targets For Inventory Reduction

As a consultant hired looking to improve supply chain efficiency in many different businesses, I would look for inventory reduction opportunities that could be implemented without much in the way of research, tool, or infrastructure changes, with the intent of yielding measurable inventory reduction results within a two-to three-month time frame. I call these Inventory Quick Hits. But where do these opportunities lie? In most cases, Quick Hits are a subset of the below inventory reduction solutions, but are narrower in scope and focus:

1. Improve inventory quality by reclassifying R&D inventory and removing junk inventory.
2. Testing and get control over forecast bias.
3. Keep an eye on products in transition so you can manage supply chain parameters reflective of their phase in the product life cycle.
4. Examine waste and yield percentages as well as QC (Quality Control) hold time.
5. Examine “actual” buy-side tolerances.
6. Investigate size, component, and formula consolidation opportunities. Look for easy-to-implement product and component.

Quick Hit 1: Improve Inventory Quality

Inventory has many classifications: active, slow-moving, obsolete, and inactive or run-out mode. Inventory that turns quickly and is actively sold is thought to be of high quality, while inventory that is slow moving, has no turn over, is obsolete, or residual is considered low quality. This “junk” or low-quality inventory is a favorite target of inventory consultants trying to reduce inventory. Slow-moving inventory has low volume sales or consumption relative to on-hand inventory. It simply does not turn over that fast or frequently. There are countless potential reasons why inventory is slow moving.

It’s possible that inventory turns slowly because of batch sizing, where each production run makes a large portion of an annual forecast, or because the product’s demand is slowly eroding, or for other reasons. Reducing slow-moving inventory requires a reassessment of supply chain parameters such as batch sizes, EOQs (Economic Order Quantity), and the like.

By contrast, obsolete inventory has no demand, and is often a combination of residual finished goods and leftover components. Obsolete inventory has lost the primary customer base, and the only sales opportunities it has are typically in distress or closeout channels. Run-out inventory is typically a combination of finished goods and components that are still being sold, but clearly are at the end of the product life cycle. Inventory is often placed in a run-out mode to help reduce the final inventory liability and may be kept as an active finished good, even with a greatly reduced customer base as a placeholder for a new product introduction. Run-out inventory usually requires a greater understanding of what the total inventory liabilities are as well as the possible disposal options. Inactive inventory generally has no raw material or packaging consumption for some period of time, typically six months to a year. It is not uncommon for ongoing finished good sales to be maintained for a variety of reasons, including trying to exhaust raw and packaging liabilities, or to cater to a niche market, or a special customer.

Analyse Inventory Holding Costs Vs. Potential Liability Savings

Eventually, when the finished goods or components are exhausted, the product ceases to exist, and the raw and pack components will be inactivated. In one company, for example, we observed there was a considerable inactive inventory for components sold into foreign affiliate markets. Despite the fact that components were ordered in the smallest possible increment, a single production run yielded enough finished goods inventory to cover demand for a couple of years. These unused components sat idle for a number of years waiting for the next production run. An analysis of inventory holding costs vs. potential liability savings are typically a first step in determining whether the inventory should be held. Most planning systems (ERP or SCM) have some variation of reporting tools for slow or not-moving, obsolete and excess inventory (often referred to as SLOB) that planners can run to examine any inventory that has not been used in the last 12 months or more, or that has exceeded coverage tolerances. Such reporting is very helpful in targeting inventory that falls into the junk classification, yet in our experience it’s often under-utilized. The quick-hit opportunity for inventory reduction is really focused on becoming very familiar with this reporting.

Understand Why Inventory Is Not Turning

Certainly, finished goods inventories should be examined, but the real opportunity is usually with the raw, pack, and component inventory left unused for 12 months or with excess coverage. There are many reasons why this excess inventory exists, including discontinuations, poor EOQs, packaging changes, and formula changes. The real magic in this suggestion is not to simply toss out the old inventory, but to get to the root cause of why inventory is not turning, and see if there are ways to correct the problem from a planning perspective. To get a better grasp of this “junk” and to create a unified metric for inventory quality, you may want to use tools that provide an Inventory Quality Ratio, (IQR) in which active inventory (net of excess, slow-moving, inactive, or obsolete) is divided by the total inventory.

In a newly developed S&OP process, the inventory quality ratio (IQR) can be an important metric used to track overall inventory values. Some companies have a very high percentage of slow-moving, inactive, or obsolete inventory. When I was consulting, it was not uncommon to see clients with low-quality inventory in the range of 25% to 50%. Periodic reviews and measurement of inventory quality, followed by purging the warehouses and plants of useless products, is among the simplest ways to reduce inventory.

Quick Hit 2: Reclassify R&D Inventory

This is a bit of a variation on the “cleanup of junk inventory” theme. Inventory should be properly classified from an accounting perspective and yet it is not uncommon for companies to accidently place inventory used for research and development purposes into an active (everyday use ) status. For example, a company that makes mixes, compounds, or blends chemistry may have a slew of random R&D chemicals, materials, or components that have been mistakenly classified as active production inventory. The list of companies with misclassified inventory includes more than just big industrial/commodity chemical companies— OTC pharma, cosmetics firms, health, beauty, and even food manufacturers blend chemistry. How does inventory get misclassified?

Cut 2% Of Misclassified Inventory Right Away

Sometimes inventory is ordered using the wrong accounting code, and sometimes-unused production inventory (mostly chemical compounds) of obsolete products are saved for a future R&D use. Either way, this inventory is often sitting on the books in an active status yet has no consumption or use against it, historically or planned. A full review of inventory may reveal a number of these odd ducks; one such review at a client revealed that over half of the inventory saved for future R&D use was expired and unusable, even for research purposes. While the percentage of this type of misclassified inventory is relatively small (usually within 1%- 2%), experience has taught us that most of it serves little useful purpose and occupies valuable storage space, making it a relatively easy target for reducing your total inventory tally. A full review of all active items with little to no consumption over the last year or more is likely to turn up in some of these stray inventory exceptions.

These two quick hits are easy targets for inventory reduction, and should be your first port of call when attempting to streamline inventory. They often provide significant cost savings in a relatively short amount of time, and with relatively little effort. Next weeks Quick Hits are Testing for Forecast Bias and Keeping An Eye On Product Transition. Stay tuned!

This post has been adapted from an article that appeared in The Journal of Business Forecasting, Fall 2011 issue. To receive the Journal of Business Forecasting, and wide range of other benefits, become an IBF member today.

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