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Demand Planning Explained

When you’re talking about demand planning, a few things come to mind. Demand planning is the art of knowing, as close to reality as possible, how much demand there is for a given product. You want to know the demand because you want to able to plan your buying, manufacturing, logistics and sales. The problem is: you can’t plan for demand unless you have a forecasting tool and a lot of experience to base your projected demand on.

The different types of demand explained

You have 2 main types of demand. Dependent demand and independent demand. Independent demand is demand for a finished product. Something a consumer (or customer in B2B) could buy for example. A lamp, a chair a laptop or a loaf of bread. In B2B these may be trucks, steel fences, windturbines. Dependent demand is demand for parts of the finished product. Component parts. Subassemblies. Ingredients. The create the loaf of bread you need water, flour and yeast. 

If in a given period we expect to sell 100 loaves of bread (the independent demand) we can calculate based on that demand the amount of dependent demand. A bread is relatively easy to make. So it doesn’t have a lot of interdependencies between the ingredients. But if you are a car manufacturer you have a lot of interdependencies in the supply chain. For 1 car you need thousands of parts. If not all the parts for the car’s dashboard are delivered. The dashboard can’t be manufactured. If the dashboard can’t be finished, the car also doesn’t get finished.

This system of manufacturing requires a system called material requirements planning (or MRP). This system considers the number of parts needed to build the finished product. It also takes into account the time to produce the parts, shipment time. Even the time it takes to make subassemblies (the dashboard) so it comes just in time to be installed in the car.

The bullwhip effect

The hard part about planning is that you don’t know what you don’t know. So you have to base your numbers on 2 things: the demand there is for your products and the experience you have with your product’s demand. There’s a common effect in demand planning called the bullwhip effect.

If in a given period demand goes up by 5% a retailer might think that demand will go up more. So he orders 7% more product. The wholesaler thinks the same thing. He orders 10% more product. By the time the orders reaches you, the manufacturer, the original demand change could have quadrupled.

The impact of this bullwhip effect can be very harmful to both your business and other businesses in the supply chain. Think of the costs of excess stocks, losing market share to the competition and disgruntled customers leading to a loss in customer loyalty. 


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