Two words that are often used quite often when discussing inventory management are demand planning and demand forecasting.
Though some people might make the mistake of thinking these two are interchangeable, they are not though the differences are quite subtle indeed.
While both are part and parcel with one another and work hand-in-hand to help businesses develop effective inventory management strategies, the nuances between the two can be best understood at the functional level and how each contributes to the other.
Demand Forecasting
Demand forecasting is the process of using data and analysis to predict future sales based upon past events, market research, company tradition, seasonal cycles, and even a little bit of gut intuition. This is the foundation of demand planning and is a sophisticated process that attempts to harmonize the unknown with what companies have experienced.
As such, demand forecasting can either make or lose a lot of money because, in a way, it attempts to time the market. Frictionless and fully optimized demand forecasting would involve the exact right amount of inventory being ordered and sold such that demand is equal to supply. In other words, perfect demand forecasting is impossible, but getting as close to possible to a perfectly efficient system of buying and selling inventory with zero risk is the goal of most firms.
Demand Planning
Demand planning is the corporate logistics that are framed around the central analysis offered up in the demand forecasting process. Demand planning seeks to efficiently utilize predicted demand (or forecasted demand) in such a way that inventory and capital are maximized for the highest possible return on investment and the shortest amount of time between vendor and end customer.
A process involving not only strategy but also logistics, demand planning is used to shape short, mid, and long term directions for the company in general. Accurate demand forecasting will unveil potential markets once unknown and will reveal downturns before they become serious liquidity issues.
Why Proper Demand Forecasting and Demand Planning are Necessary
When executed properly, demand forecasting and demand planning have a range of impacts on everything from your bottom line to how customers perceive your company. Balanced correctly, accurate demand forecasting helps companies retain and utilize working capital more efficiently and invest in future opportunities or projects. It also prevents market obsolescence for a product or service as well as periods of low to no stock on hand. In terms of negotiations with suppliers and others, demand forecasting and demand planning can give you the upper hand in ordering and receiving goods at the best available price.
Of course, if pursued incorrectly or upon the wrong assumptions, inaccurate demand forecasting and planning can lessen a firm’s ability to execute on its planned strategy, harvest gains in the marketplace, or even effectively bargain with suppliers. Central to all of this, and at the heart of both demand forecasting and demand planning, is the efficient usage and allocation of capital according to company needs – a process wholly reliant on the forecasting and planning executed around it. The experts at Thrive are available to facilitate all of your forecasting needs.
