What is Retail Demand Planning and Why Do You Need It?
Acquiring new customers is the goal of every business but unless you have good retail demand planning in place, you’ll have a hard time making sure you have the right amount of products at the right time and could miss out on sales and even worse lose a customer altogether. If you don’t have enough inventory to meet their needs, they’ll go somewhere else, if you have too much inventory, you’ll make it harder to manage and you’ll incur holding costs.
Good demand planning improves the quality of retail and e-commerce stores, so let’s see exactly what demand planning is, why it matters and explore the methods that could make your business more successful.
Table of Contents
- What is Demand Planning in Retail and E-commerce?
- The Importance of Demand Planning
- What Factors Influence Demand Planning?
- Demand Planning vs Demand Forecasting
- Retail Demand Forecasting Methods to Support Your Demand Planning
- Elements of Demand Planning in Retail and E-commerce
- Five Essential Demand Planning Steps to Follow
- Demand Planning Best Practices
- Get Started with Retail Demand Planning
What is Demand Planning in Retail and E-commerce?
Demand planning in retail and e-commerce is an inventory planning strategy that helps make sure you’re meeting customer demand without compromising on warehouse space. Good demand planning keeps your business ready for change so you can keep your customers happy.
Forecast demand, issue and track POs, re-order on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.
The Importance of Demand Planning
Retail and e-commerce demand planning is vital. You can do everything else right, from marketing to sales and customer service, but if you don’t have any stock, you won’t have any customers. And if you overstock, you’ll tie up all your money in inventory, leaving nothing left to spend on marketing, sales and customer service to grow your business. Let’s see how demand planning can benefit your business:
Improve the Customer Experience
When a customer discovers a product is out of stock, they have a few choices. They can wait for you to restock it, they can buy it elsewhere or they can decide it’s not worth it and spend their money on something else or somewhere else. Whatever they choose, their buying experience won’t be a good one.
Demand planning makes sure you have inventory ready for when a customer wants to buy. If your product isn’t available for them, you could lose out on a sale but what makes it worse is that a bad customer experience could stop them from ever coming back.
Demand planning makes sure you know when changes in demand are likely to happen. This information makes it easier to avoid going out of stock. You can plan for seasonal changes and spikes or dips in demand to keep your customers happy, and to maximize your cash flow.
It’s awful when you don’t have enough stock and it’s just as bad when you have too much. You have to pay for storage costs, your cash is tied up in inventory that’s not making money and your stock can expire before you ever have the chance to sell it.
Retail demand planning makes sure you have just the right amount of safety stock to cover your customers needs so you can reduce costs and improve sales at the same time.
💡Pro Tip: Use Singuli’s location-level forecasts and replenishment alerts to optimize your inventory. If you have a mixture of retail and e-commerce channels, Singuli bases your forecasts on distinct models to reflect the variations in inventory patterns.
When you don’t have enough inventory, you can still sell on backorder. Although this can help in the short term, it often creates as many problems as it solves. Your customers have to wait longer for their order to be fulfilled, you have to rely on your suppliers to deliver on time and the increased potential for something to go wrong heightens the possibility of losing a customer forever. In addition, many systems aren’t set up to support backorders, so they have to be handled manually and treated as an exception.
Demand planning reduces the need for backorders by making sure you always have enough stock to meet your customers’ needs.
Improve Size Curve Ordering
There’s lots to consider when it comes to demand planning. A technique that’s often used is the weeks of supply formula. It has its benefits, but often goes wrong when it comes to planning for demand at the stock keeping unit (SKU) level.
One example of this is with sizes. You can plan for the demand of a certain shirt but if you’re mainly selling sizes M and XL and you’ve ordered evenly across every size, you’ll have stockouts in two sizes and overstocks in the rest.
Planning at the SKU level requires good demand planning software that makes sure you have just the right inventory amount for every variable.
📌Get Started: Automatically compute the right size curve for every sized-based product in your assortment with Singuli’s size-based forecasting and planning tools.
Succeed at New Product Launches
The moment is finally here. You’ve been excited about this new product launch for a while and so have your customers. The only problem is you’re not sure if you have enough stock to meet demand or if you’ve bought too many units.
How do you plan for a new product? You use past product sales, you combine it with the information you have on the new product and you consider marketing plans, trends and any other relevant data to calculate accurate initial order quantities.
💡Pro Tip: Use Singuli to quickly forecast new products. Singuli uses your past sales and product attributes to recommend accurate initial inventory orders.
What Factors Influence Demand Planning?
Pretty much anything that affects your customers’ buying habits affects your demand planning.
Something as simple as the weather can put customers off visiting your store. Seasonal fluctuations, political disruptions, economic downturns, growth rates, the latest style trends and of course your own marketing can all have an effect, so keeping track of these factors is crucial.
Demand Planning vs Demand Forecasting
Demand forecasting is an element of demand planning. Although the terms are sometimes used synonymously in retail and e-commerce, they have slightly different goals. Demand forecasting predicts future sales by taking factors like historical data, customer buying behaviors, seasonality and supply chain disruptions into account.
All of this is vital for demand planning, which is why demand forecasting plays an integral role but demand planning goes further. Demand planning looks at the future and the present. It makes sure you have enough time, staff, inventory and other relevant resources to meet demand.
Retail Demand Forecasting Methods to Support Your Demand Planning
There are four main demand forecasting methods that contribute toward demand planning.
Before anything else, it’s important to understand the granularity you want to forecast for. If you use a top-down forecast, you start with organization-wide targets and communicate them down to each department. Specific details about each SKU are important, but only if they meet the overall objective.
As you might expect, a bottom-up method works in the opposite way. Each department identifies potential for growth and you set targets to meet the current and future demands. Each SKU makes a huge difference and the success of each department contributes to the overall success of the business.
If you’re just starting out, a top-down forecast can help you get established and form a general direction of travel. As your retail or e-commerce business grows, you might want to change tactics and plan demand at a SKU level. Either way, it’s important to have the right methods in place to make your forecasting and planning work. Let’s review all the retail demand forecasting methods that contribute to demand planning in detail:
Across a year and even across wider and narrower time periods, customer demand changes for certain products. A world cup is likely to increase the number of international soccer jerseys bought and the start of Dancing With The Stars could see an uptick in ballroom dresses. Whatever the occasion, you need demand planning software that can cope with change.
📌Get Started: Seasonal trends change all the time so make sure you’re planning for them with Singuli’s Advanced Forecasting.
Moving Average Demand
Demand often fluctuates. Let’s say your gross sales in 2019 are $2m and $4m in 2020. But your sales drop to $3m in 2021 and pick back up to $5m in 2022. With moving average demand, you take an average of a particular data set and use it to forecast sales for the next equivalent period.
In this example, you would have a total of $14m in sales (2019 through 2022). If you divide that by the number of years (four), you get a moving average demand of $3.5m.
Sales forecasts look at past performance in the same way that a moving average does but it splits each period into smaller segments and compares them. Using the example above, you could have had $5m worth of sales in 2022 and $3m worth of sales in 2021 but in both of those years, Q2 brought in 25% more revenue than Q1. This gives you a reason to predict the same thing will happen again in 2023.
(Linear) Regression models attempt to explain a data series using a set of explanatory variables. In the case of retail forecasting, you might use historical sources to model future demand, including past sales, GDP and consumer spending habits. A statistical model finds the best fit for a set of data points, to predict future sales and lay the foundations of a demand plan.
Elements of Demand Planning in Retail and E-commerce
When you’re demand planning for retail and e-commerce, there are a few critical elements that you must consider:
Product Lifecycle Management
Product lifecycle management starts with the introduction of a new product and considers its status through sales, service and eventually retirement. Individual product lines can vary greatly and can also influence the demand for connected items.
For example, you could sell a phone case to go with a smartphone that fits its dimensions perfectly, which would increase sales. However, if you start to sell a new phone case with the same dimensions but a different style, you might split your sales between the two.
Sometimes, even with the best laid plans, we need to go with our gut. This isn’t quite true as we’re still making sure we have evidence to back it up but demand sensing has a lot to do with getting ahead of noticeable trends.
Let’s say a famous gamer starts playing a first person shooter on Twitch. Even though sales up to the point she started playing had been average, you or your planner might sense that they’ll start to pick up and account for that in your demand planning.
Statistical forecasting relies on quantitative data such as sales, revenue or customer numbers to predict the future. There are different models for this, including regression and moving average demand. To make the most out of statistical forecasting, it’s important to keep accurate data records on everything from price history to marketing and promotional activity.
Marketing and Promotion Management
When you’re scheduling your marketing, it’s important to have a good idea of what the return will be so you can plan your inventory. You also need to make sure you know the parameters of the products you can sell. Many suppliers set limits of minimum price, for example, in order to maintain brand equity and reputation.
💡Pro Tip: Get a holistic view of your inventory data with Singuli’s Reporting & Analytics. Track not only inventory data, but also marketing, promotions, site traffic, historical sales and customer behavior. You’ll have all of your information in one place, ready to use in inventory forecasting and planning.
5 Essential Demand Planning Steps to Follow
Let’s look at the steps needed to create a good demand plan:
1. Gather a Cross-Functional Team
Planning isn’t just the job of your planner. Far from it, actually. You need staff from every department to play a role so you can gather as much data and as many insights as possible.
Your purchasing department needs to make sure you have sufficient inventory, your marketing department needs to make you aware of possible spikes in demand and your finance department needs to stay on top of cash flow, for a start.
2. Agree on Metrics
You’ll have a lot of possible metrics to use in forecasting and planning. Not all of them are relevant to you and your business so once you have a cross-functional team in place, you all need to agree on the data sets you want to use.
Think about sales data, inventory turnover, stockout frequency and production lead times. Make sure you’re also making notes on relevant external data like trends, supplier performance and customer behaviors.
3. Create your Demand Forecast
Work with the best software available to create your demand forecast. You could use a spreadsheet but they’re often time consuming to build and inflexible when your business changes. The best software not only helps with identifying trends, eliminating obscure patterns and analyzing historical statistical data but also adjusts as your business grows.
Once you’ve created your demand forecast, challenge it. Does it make sense? Are there any anomalies that are skewing the results? Have you found new data that you weren’t aware of when the model was made?
📌Get Started: With Singuli’s Advanced Forecasts, it’s easy to analyze historical data, market trends and customer inputs, which saves you or your inventory planner time and increases forecast accuracy.
4. Compare Forecasts and Inventory
Now that you know what the demand will be, you need to make sure you can match it. The first step is to look at the inventory you currently have and compare it to what you need. Do you have enough safety stock? Does your supplier set minimum order quantities? Are lead times and logistics set up to meet your schedule and volume demands?
5. Measure Performance
Review performance against targets. Make your targets as specific as possible and check them frequently so you can determine forecasting accuracy. If demand isn’t matching your forecasts, ask why and fix it as quickly as possible. If you’re having mixed results across different departments, make sure you’re learning from the things that are going well and the things that aren’t.
Demand Planning Best Practices
Done well, demand planning for retail and e-commerce can set your business up for success so let’s review demand planning best practices:
Use Demand Planning Software
Demand planning software saves you time and increases accuracy. You can automate tasks, get more accurate forecasts, plan for multiple locations, keep track of purchase orders and a lot more. Not all software works the same so pick the one that’s right for your business.
Optimize Your Omnichannel Inventory
If you have more than one channel, you need to optimize inventory at every location and you need everything to link together seamlessly. If you have the right inventory across the business but it’s allocated incorrectly, it’s as useful as not having the right inventory at all.
💡Pro Tip: Use Singuli’s real-time, channel-aware forecasting to maximize sales in every location.
Hire a Demand Planner with The Right Skills
A demand planner needs to be organized and analytical. It’s important that they understand statistical data analysis and modeling, and can effectively work with cross-functional teams. That’s why one of the most important skills for a demand planner is strong communication.
Good software isn’t the enemy of a demand planner, it’s their ally. A demand planner should use software to advance their problem solving skills, they should think about problems using logic and they should appreciate different points of view. In fact, learning and taking on these points of view is another important skill.
Not every plan is perfect. A good planner understands this as is OK with a certain level of ambiguity. They take responsibility for mistakes and they use them as a learning tool. Their entrepreneurial spirit and their self awareness will make them stand out above the rest.
When you find someone with the above skills, hire them quickly and let them start to make a positive difference to your business.
Always Be Aware of Potential Supply Chain Issues
Suppliers aren’t always 100% reliable and even the best ones are affected by unforeseen events. You need to be aware of any potential supply chain issues and be ready for unexpected issues to happen. This means keeping your eyes open, adapting quickly and having backups.
Make Sure Everyone is Working Together
A good demand planner helps, but to really make a great plan, you need your whole team to work together. Make sure teams are communicating and everyone is pulling their weight. Different departments will have their own objectives so explain to them how supporting an accurate demand plan can help them.
Keep Data Accurate
What you put in greatly affects what comes out so make sure you keep accurate data. Put checks and balances in place so that nothing is allowed to slide through under the radar.
📌Get Started: With Singuli’s Purchase Orders & Shipments, you can track exactly who did what and when they did it. Every change is linked to a user and logged automatically.
Get Started with Retail Demand Planning
Retail demand planning is vital to making your business thrive so get started. You know what demand planning is, you understand why it’s important, you’re familiar with the factors that influence it and you’re armed with a list of best practices to follow. All you need to do now is get the right software and begin.
Forecast demand, issue and track POs, reorder on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.