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Demand planning, also known as inventory (merchandise) planning and forecasting, is the process of calculating consumer interest in order to understand the right quantity and types of goods to purchase, at the right time for the right place.
Essentially, the goal is to buy inventory at a low cost with the intent of selling it at a higher cost at a later time in order to make a profit. The challenge of course lies in knowing how much to buy and when. You’ll want to make sure you have the right product available for your customers so that they have an opportunity to fully engage with your brand. With these goals in mind, accurate inventory planning can play a critical role in improving your cash flow and scaling your business.
If you’re part of a business that orders inventory, then this guide will help you know:
Though often intertwined, there are differences between the tools and methods used for managing and planning inventory. While the act of planning inventory is a form of management, traditionally inventory management refers to the act of keeping track of goods in stock. Monitoring the location, quantity, dimensions, and weights of available inventory are all forms of inventory management.
Alternatively, inventory planning involves looking into the past, present, and future to know what products to order and when to order them by. Because inventory planning takes into account consumer demand, the process also informs the appropriate allocation of inventory between selling channels and locations. Inventory planning takes into account this demand, goods in stock, as well as goods on order to generate projected order quantities well into the future.
The goal of inventory management is to reduce inventory holding costs and facilitate fulfilment by communicating stock levels and locations. The goals of inventory planning go far beyond, informing future budgetary requirements, revenue projections, optimal product assortment, and much more.
Note, inventory control is another term for inventory management. Both refer to having control over and managing existing inventory.
It’s important to note that the terms forecasting and planning are often used interchangeably. As is the case with the words that precede them: sales, demand, inventory, and merchandise. There are 8 combinations of these words alone that might have you wondering, what’s the difference?
In the context of inventory, both planning and forecasting are supply chain management techniques used in timing, quantifying, and allocating products that will eventually be sold. Both functions account for internal and external factors that might impact demand. Such factors include:
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External:
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Internal:
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In analyzing these components, an inventory or demand planner predicts how much of a particular SKU to order at any given time and communicates this information to the rest of the business to ensure interests are aligned in supply chain, finance, and marketing. Beyond cross-functional alignment, having a prediction sets a bar for assessing performance and allows for continuous refinement as new information is received.
So is there a difference between planning and forecasting? Hardly. Planning can sometimes be seen as the act of thinking about and strategizing for the future in order to meet an objective goal whereas forecasting takes past insights into consideration along with judgement to inform a future prediction. But depending on who you’re talking to, these two terms can mean the same thing.
Depending on the size of the business, planning can be reserved for those in management as it is more strategic. However, strong demand planners possess the ability to do both planning and forecasting. Due to the degree of overlap, the remainder of this content refers to these terms interchangeably.
Note, within an organization, planners may define plans, forecasts, and projections as referring to variations of the following:
In a perfect world, these two terms would identify the same thing - the value of goods expected to be sold. However, due to one critical component, the two are not always equal. Demand reflects the customer or market appetite for a business or product. But sales reflect what is or could be actually sold. A key component separating the two is the amount of inventory actually available.
For this reason, true demand cannot always be quantified, whereas sales can. Sales reflect actual past and current performance whereas demand serves as an indicator of performance. Planning is typically projected at a demand level, and based on current and future available inventory, a sales forecast is created.
Sales = minimum(demand, inventory available to sell)
Demand will determine how much of what items need to be ordered. But sales will determine when you will actually need to order as they take into account what you will actually deplete.
Another pair of similar words, inventory and merchandise often get used interchangeably as the difference between them is slim. Merchandise refers to finished products that are available for sale. Alternatively, the term inventory can include both finished and unfinished goods. Inventory can refer to components or raw materials.
As an example, a yellow dress on a store hanger can be seen as a piece of merchandise whereas the buttons and zippers on it can be referred to as inventory used to make it.
Goods are typically accounted for as records of inventory, not records of merchandise. The two terms also differ as verbs as merchandise refers to the trade whereas inventory refers to the calculation of stock.
We’ve covered the major differences between demand/sales and inventory/merchandise. But what’s the difference between these pairs of seemingly identical terms? In simple terms, demand and sales are measurements of satisfying the customer with what they want and what they don’t know they want. The tools used to fill this demand are inventory and merchandise. Trends are quantified on the demand level and qualified on a merchandise level.
Now that you understand the jargon, let’s go over the benefits of planning. Beyond the organization and structure imposed by this function, businesses can expect:
Having an expectation of future revenue is a benefit in and of itself. But having an accurate expectation is what will help you grow. Demand planning is a key contributor to a credible plan that can be trusted.
The reason demand planning can accurately predict the future is based on the practice itself which takes into account prior results, accounts for external and internal changes, and spits out what can be expected based on these variables.
A simple example of this would be if a business spends $100 on an advertising campaign which results in the sale of 5 widgets. Holding all things constant, one would eventually learn spending $200 sells 10 and so on.
Of course, things are not always this simple. The job of the planner is to take all things known and unknown into consideration. A bottom’s up forecasting approach will yield what can be expected based on a business's current assortment, assuming all things remain constant. A top down forecasting approach will help inform merchandising and buying teams of the need for new products. Combining the two will result in what sales can be expected at different points in time.
This revenue guidance is crucial in helping a business plan for all functional areas. The margin expected to be returned from inventory will help fund other budgetary expenses such as overhead, systems, advertising and much more. Having an accurate demand plan not only supports this guidance, but it also helps increase profits from optimizing inventory levels and operations. The combination in accuracy of total revenue and costs is what helps businesses become profitable.
What happens when a product you want to buy is not available? Do you settle for something else? Do you wait? Or do you go elsewhere? These are the risks faced when retailers inaccurately order inventory due to a lack of forecasting.
Having adequate supply to meet demand not only limits the amount of money left of the table, it ensures customers enjoy sitting at the table in the first place. This can even result in more revenue as happy customers are more likely to purchase from you again and recommend your business to others, thus reducing dollars you would otherwise have to spend on retention and acquisition.
As we mentioned above, the costs of understock include forgone sales and poor customer experience. But having too much inventory is also detrimental. Accurately forecasting inventory can help maximize profitability across channels while minimizing holding costs. By calculating future demand and accounting for lead time and safety stock, brands can order the right amount of inventory each time.
Reducing overstock, or inventory that is in excess of what is needed, reduces exposure to spoilage or dead stock which would otherwise need to be disposed of. The costs of excess inventory and storage add up and reduce the available cash for businesses to spend on other worthwhile initiatives. This wasteful and costly endeavor hurts both the environment and the bottom line.
What happens if you need to cut marketing spend? Or what if your managers want to hire more people? Without guidelines or predictions of expected profits, businesses don’t have all the insights needed to make these decisions. Demand planning is a crucial element in making informed business decisions.
In the example given earlier, if the business only has $150 to spend, you can forecast sales differently. Or alternatively, if inventory budgets get cut to make room for overhead, you can accurately predict what this might do to inventory levels and thus, sales.
What happens when a marketer or salesperson doesn’t know what products need to be sold? They can work with what they’ve got, but having a plan in place will optimize their efficiency and output - further improving overall business profitability.
Demand planning is a function that works in close alignment with many other business stakeholders. Planning helps inform business strategy, which acts as guidance to everyone from supply chain and operations, product, marketing, and finance.
Knowing how much will be ordered and when can help inform supply chain owners on how many suppliers need to be sourced and for which product types. And when a current assortment is not enough to satisfy external sales goals, new products will need to be introduced. This would inform those in design and merchandising of how much demand needs to be satisfied with newness.
All of these relationships require ongoing communication. Depending on the long term desire, brands may decide to pull levers in marketing and finance which can impact planning as well. The key benefit of planning is having a basis for alignment that can inform the expected outcome of various strategies.
Markets can change at any given time, and having an agile demand plan can help you keep up with the change - putting you ahead of the competition. An accurate demand plan will be needed in order to even understand if sales are a result of external or internal factors. From there, a business will need to assess if the demand realized is a signal of short term or long term behavior.
When the time comes to pivot, dynamic reporting that highlights variances to plan will be imperative. An agile and open internal business system can allow these insights to flow appropriately, further finessing future expectations.
Success is not something that can be measured without a definition for what it entails. The same is true when it comes to business. Having a solid forecast serves as a bar for assessing variation in performance. Trending below plan can help spot issues early on and improve your ability to course correct. Trending over plan can be an indication of external or internal factors that need to be understood.
As the old saying goes, “failing to plan is planning to fail”. The ability to generate a precise demand forecast has a major impact on virtually every area of a business. From sales, to operations to finance and everything in between, demand planning can benefit everyone. Thus, improving everyone and everything’s return on investment. Demand planning, for all it’s insight and guidance, is a stepping stone for profitability.
The key to inventory optimization is a buttoned up process that can scale. Below are 4 simple steps you can take to get started with demand planning and inventory management.
In short, you’ll want to have a repeatable process involving real-time data importing, cross-functional inputs, and total business alignment. The skillset of planners goes beyond predicting inventory needs. Having a set process will facilitate your workload through predictable times and provide a baseline for the unpredictable moments. Having a plan for a plan is ironically the key to inventory success.
What’s a plan without a goal? If you’re just starting out with planning, one of the first things you should consider is what you want to achieve. Are you aiming for a set number of sales? Are you building customer loyalty and retention? How much are you willing to invest and what is your ideal return? These are all questions you should ask yourself as they will influence your business and product strategies, inventory purchases, and product assortment. Since inventory is often the biggest if not the second biggest area of investment, the decisions you make here will influence other things like overhead, selling locations and methods, and much more.
When you’re a growing business, every resource has a cost to benefit value. When it comes to people, having a strong planner will yield immense returns. But with growth comes growing pains and you’ll soon find yourself stretched too thin. Managing inventory budgets is the last area that should tolerate this as every dollar spent here can either lead to or challenge profitability.
There is a point at which implementing systems will yield a greater return - saving you time, energy and frustration. Have a plan in place for what this trigger point might be so that you don’t find yourself scaling with complicated and unnecessary processes. With the right tools in place, you can avoid human error and scale your business much faster.
Accountability is important whether you’re a team of one or one hundred. Because inventory touches almost every aspect of a business, a key step in closing the loop and setting yourself up for constant improvement is to keep your team informed and involved.
Ensure the appropriate parties are incorporated from forecasting to sale. A cadence and format to communication across teams will help strengthen this relationship and in turn, your total business planning process.
While this isn’t a step in getting started, it will certainly be a result of consistent trial and error. Inventory planning can be overwhelming. The nature of forecasting is that you are always wrong, and it’s just a matter to which degree. Setting yourself up with the right processes, tools, and goals will help you finesse your inventory over time and in turn lend itself to supporting your profitability goals.
WHAT TACTICAL STEPS TO TAKE WHEN CREATING A FORECASTThe key to easily forecasting demand is a buttoned up process that can be repeated at specific time periods. Below is a simplified 4-step demand planning approach followed by many fast-growing brands.
The first step in building a forecast is starting with a solid foundation. You’ll want to pull both quantitative and qualitative data tied to your business. This includes:
Once you have preliminary data, you have history that can be analyzed to create an initial forecast. You should understand performance on an individual product basis, but also on a category, attribute and price basis.
Do certain colors or textures follow a pattern? Or perhaps certain product categories drive the bulk of your sales? You should aim to understand how products and categories behave both individually as well as in relation to one another. These trends will form a norm for you to later assess against.
When analyzing product relationships, look for insights on:
When analyzing history, be sure to account for variations in performance due to the introduction of new products, seasonality, and available inventory (ATS).
Through this process of analyzing history you’ll form a bottoms-up forecast. This will serve as your foundation to be molded by the factors in the next step.
Inventory planning, while predominately a data driven function, affects many parts of the business. And so, with forecasting you must apply both data driven insights as well as business decisions and product strategies to create a well-rounded forecast. You should consider the following factors and make adjustments to your plan as needed:
Once you apply these factors to your forecast, you’ll have an aligned focus and plan that can be adjusted as needed.
A planner is never done planning. The nature of this role is that it repeats itself at specific intervals, typically monthly.
A standard process for making adjustments takes place following the “close” of a set time period. The objective is to understand the variations to plan, why they happened, and what needs to be changed going forward. This is where you would go back to step 1 to import data and assess actuals against your forecast.
While you can dive into steps 2 and 3, a weekly or monthly forecasting interval may not allow for this luxury if you’re managing your forecasting in a spreadsheet.
These steps can be repeated on a quarterly and yearly basis to allow time for faster analyses such as:
As part of the forecasting process, you’ll uncover how much inventory is needed and when to satisfy both consumer demand and business objectives. You might split this product need into two main classes: new and replenishment.
Replenishment is the additional amount of stock needed to cover demand once stock levels reach a certain threshold. This reordering takes into account:
This is where planning can get tricky as these variables become cumbersome to manage in spreadsheets, especially when dealing with receipt delays, abnormal data due to a lack of inventory, materials ordering, and variable lead times and WOS targets by product and/or location.
That’s where Fuse comes in. Built by planners who went through this process many times, our demand planning and procurement tool make this role easy. With Fuse, you can spend less time planning (or trying to figure out how to plan) and more time doing the things that will grow your business. We take care of the inventory so that you can take care of the rest.
If you’ve made it this far, by now you likely understand the benefits of inventory planning: accuracy in revenue, increase in profitability, and the ability to react to shifting demand. Before you start implementing the steps we mentioned in this guide, let us help you prepare for the challenges that may come.
While there are ways to improve your demand accuracy, you may still come across variables that can impact your planning. A common challenge is the use of consistent data, especially as a unified source across the business.
As brands grow, the source of information can stretch across teams. Some members may use ERP data while others use google analytics. While they themselves may be consistently using the same source, the challenge will be in unifying that source across the company. You don’t want to be in a position where you’re debating actuals, especially on days that drive significant sales.
If you’re just starting out, speak with your leadership team on establishing aligned sources of truth. If you’re at a point where various sources are already being used, try to understand the benefit of each source and establish a process of assessing and assigning singular sources for the data points you need.
Another risk in accuracy stems from the systems used. Some tech solutions may only sync with particular sources of information, which would pose a challenge to what we mentioned above.
If you’re in a place where you’ll be using a spreadsheet to manage your plans, the most obvious risk is that of human error. All it takes is one simple keying mistake and you can find yourself ordering millions of dollars in unnecessary inventory.
Moreover, the less obvious challenge of managing inventory in a spreadsheet is that of a changing forecasting model and methodology. As you adapt to your processes and understanding your business, you may find there are adjustments needed to the way you forecast. You might find yourself using different statistical methods or financial models as you improve over time. While this is certainly better than not adapting, the challenge here is recalling which methods were used when in order to appropriately understand shifts over time.
This is where the benefit of a planning system really shows. With Fuse, statistical methods are built into our machine learning algorithms to take the guesswork out of the science of forecasting. This leaves room to focus on the strategy and overall inventory optimization.
We mentioned the challenges faced in aligning teams with a source of truth. However, the cross-functional strains don’t end there. We’ve talked about the importance of establishing processes in a business to align decisions and strategy. While this all sounds great on paper, what someone must be tasked with is ensuring the processes get executed and that they happen on time.
While planners are notorious for their time management and excel skills, the same cannot be said for all employees. Therefore, the adoption of such processes can prove difficult without the proper measures in place.
Some Steps To Facilitate The Adoption Of Processes Are:
Patience, while not necessarily a step, is also important to have. With anything new to a business, there is a window of time for trial and error. Once the steps are working seamlessly on a repeated basis, you may uncover the next challenge which is user override.
When using tools like spreadsheets, you will have to put rules in place to mitigate data override in shared documents. One common feature you can use is the lock functionality in excel. This allows edits to a shared doc on a user by user basis. It’s not the most conducive process, but it's a way to protect your files from this sort of risk.
Finally, you’re in a good place. Your data is aligned. Your processes are in sync. What else could possibly go wrong?
Similar to how different teams have different sources of data, they also can have different methodologies for forecasting sales such as those by:
This goes back to our recommendations on aligning these inputs to create a final forecast. The challenge of course arises when there are different targets being marched towards and analysis done on. You’ll have to again establish what the best methodologies are for the business, and for your inputs.
Everyone relies on planning to stock the right inventory to sell and meet targets. But the relationship works both ways. Planning is also impacted by what actions are taking place in supply chain and marketing. It's important to have good working relationships and buttoned up processes. Expectations should be clearly outlined along with the repercussions of delays.
When in doubt, remember the old adage - team work makes the dream work.
Let's take a moment to talk about the gut. Planning, like many things, follows the 80/20 rule where 80% of the forecast is based on science and data and the remaining is based on the art of planning. However, even this “art” comes from years of experience with data. So while numbers may guide you one way, your experience can add a layer of perfection to what is already there.
What is sometimes used synonymously with this art form is this idea of listening to someone’s gut. In other words, subjectivity. It will always be there as it is a force of human nature. So how do you protect yourself (and your plans for that matter) from this non-data, non-insight driven direction? The short answer is, you don’t.
Oftentimes this inkling will come from those in leadership positions. Like any opposing view, it helps to understand the why. Is it the weather? Political landscape? Noise of the market? There will always be a reason, even if it’s not singular or concrete. This is where the importance of data and communication skills come into play.
The best defense is data. What happened during the last “why”? Do you know? If not, find out. See if there are patterns in other’s hypotheses. If for nothing else, for your own curiosity. Being armed with facts and insights will help position you as a source of knowledge and over time, authority. In the meantime, know the data. Be aware of the opinions. And if push comes to shove, have a plan for pivoting.
We spoke earlier about the challenges of acclimating to programs like excel. The same holds true for systems. This is why usability is so important when sourcing new systems. If you want people to follow processes, they should be as easy and pleasant as possible.
Even with easy to use tools, you may be wondering if the costs are worth it, as they themselves can be seen as a challenge. This is where we would advocate for finding solutions that don’t charge per user or the number of products you have as these are not indications of revenue and therefore do not equate directly to a cost:benefit ratio.
Look for tools that show value as you grow such as a decreasing cost per order. And more importantly, consider what value the tools bring to your team. Will you need a designated person to manage the system? In which case the “cost” of the solution can very easily double.
When looking for planning tools, keep in mind the average salary for an advanced planner is upwards of $100k depending on your market. If a system can reduce your headcount at a lower cost, then it makes sense to invest early on as the benefit will only amplify over time.
Fuse exists because we deeply understand the challenges of inventory planning, especially for a fast growing brand. We’ve taken decades of industry experience and built a solution that solves for the pain points of this role. With Fuse, you’ll be free from the woes of spreadsheets and out of sync processes. Our platform pulls data from every step of your supply chain into one source of truth, then uses proprietary algorithms to forecast demand so you can plan your inventory efficiently and accurately. We then translate the demand forecast into smart purchasing recommendations that help you optimize your cash flow and scale your business.
Not sure where to begin? Don’t worry, we'll work closely together to customize your experience for your business. Think of us as another member of your team. We want your business to grow and be successful, and we’re here to help you do just that.
When it comes to demand planning and procurement, we knew it was time for a change. That's why we built Fuse.
Effective Ways to Improve Your Forecast Accuracy
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