Demand forecasting or demand planning?

Does your company do ‘demand forecasting’ or ‘demand planning’? I have seen numerous consultants address this semantic difference and argue for one over the other – most often for ‘planning’ over ‘forecasting’ as it gives a more active echo.

However both are needed in supply chain management and are indeed different things. Planning involves a collection of actions you are going to perform to obtain the results that you are seeking. In sales that might include, for example, pricing, campaigning and other marketing activity. Forecasting is always a numeric estimate of future outcome, and is based on historical performance, a selected plan, and the potential changes in other factors in the environment. A plan can be controlled, but the forecast always has an element of uncertainty; and the more you understand that uncertainty the better.

What’s the difference?

The difference between a plan and a forecast is best seen in stock management in a retail DC. For example for a future sales promotion you need to calculate a demand forecast for each product for each store – just to be able to order the right amount to fulfil the demand. Then you come to the delivery plan side – you can plan to ship e.g. 70% of the forecast volume 2 days before the promotion to give the stores enough time and goods to build up promotional displays. The pre-delivery is the biggest demand fluctuation of the promotion from the DC point of view.

However it doesn’t even need to be forecast – it is basically a delivery plan, and you can get a precise picture of the volumes to be sent to each store and thus the required goods and resources to make those deliveries beforehand. This example also shows that even though retail demand forecasting and replenishment are often seen as separate processes, they cannot be totally separated.

Remember!

So try to always remember to make a distinction when you are forecasting something uncontrollable – like the effect of weather on end-customer demand, and when you are dealing with factors in the supply chain that stem from your own decisions – like a delivery plan. When dealing with plans, you normally have access to lots more accurate information.

Mikko Kärkkäinen

Mikko Kärkkäinen

Group CEO, D.Sc. (Tech.)


Phone+44 7802 658 237

Mikko Kärkkäinen is the Group CEO at RELEX and the author of more than thirty papers on logistics and supply chain issues delivered at conferences or published in leading magazines.

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