The Difference between Demand Planning, Forecasting and S&OP

What are the goals of business? To maximize profits! From a supply chain perspective, how do we accomplish this? Let’s look at some of the key aspects of how supply chain contributes to the goals of the company.

We know how important our demand planning function is to ensuring operations are timely, efficient, and cost effective. We want to ensure product availability to maximize revenues in the marketplace but also know inventory is a tradeoff as it ties up capital. Effective demand planning then requires a variety of information (timely, as accurate as possible, useable, qualitative and quantitative) in order to properly forecast the products we sell. The end goal is to provide usable information for the S&OP process to ensure we are properly planning demand.

As noted by Supply Chain Insights, “demand planning is the most misunderstood-and most frustrating-of any supply chain planning application.” For our demand planning and forecasting function to be successful, ­­­­­the following aspects are critical.

Understand the Demand for our Products

This goes beyond the basic of what type of demand are we seeing. For any given product, there may be independent demand, dependent demand, inter/intra plant demand, and service parts demand. We are usually forecasting independent and possibly service parts demand but all types of demand have to be planned for in our supply chain processes to ensure availability when needed.

One of the top pain points is demand volatility. In general, the more we know about the demand for our products, the better our forecasts will be. For example, the bullwhip effect creates demand volatility that becomes amplified as it moves through the supply chain. While this can be a big problem, it is also an opportunity for collaboration and information sharing, two ways to ensure a better understanding of what your demand really is.

Understand what Demand Planning is and how Forecasting Fits into the Process

Demand planning is defined as “using forecasts and experience to estimate demand for various items at various points in the supply chain.” In general, who is responsible for the forecasts, what are our products, where are they in their product lifecycle, what is their demand pattern, do we understand the variability/volatility seen in the marketplace, and who is providing the additional information required to ensure an appropriate forecast? Of course, depending on the individual company, there may be additional questions that need to be answered.

For example, a company consistently over forecasts several large product lines, leading to increased inventories and lower inventory turns. While the company may or may not view this as a problem, the demand planning process can aid in understanding what the inventory goals should be and why, as well as what an appropriate forecast should be through ongoing analysis and tracking of the forecast.

Understand how Demand Planning and Forecasting Tie into S&OP

Demand planning and forecasting are not stand alone processes. They must be integrated into other aspects of operations in order to provide value. One of these processes is S&OP. In an article by J. Jayaraman, D. Natarajan, M. Romeri, & T. Zych, Insights into supply chain operations strategy,  they define S&OP as “a process focused on ensuring a continuous alignment between demand, inventory, supply and manufacturing plans on the one hand, and between these tactical plans and the business plan on the other hand, in order to maximize operational performance.”

An Aberdeen Group study noted more than 60% of Best-in-Class companies see the S&OP process as a strategic priority within their organization. This process can be critical to a company’s success as it provides a decision-making tool to be used in managing sales and operations. But S&OP is important to more than just these areas of a company. In addition to supply chain, Tom Wallace, S&OP thought leader noted, S&OP is also an important aspect of Manufacturing, Finance, Sales and Marketing, R&D, and top management.

Demand planning, with the major output being the forecast, although critical is just one important aspect of the S&OP. We still need to balance our demand with our supply capabilities. Manufacturing needs to know what product to make, the quantities to make, and the timing of when it is needed. The supply side tells us what our capacity and capabilities are to ensure these needs can be met. Understanding those capabilities allows us to shape our demand to more closely match our supply.

This is an important aspect of demand planning as well as S&OP. R. Hirneisen stated in his article, Sales & Operations Planning , “a key concept of S&OP from a demand perspective is that we are building a plan or commitment of what the sales & marketing organization will deliver.” So, we need to understand the potential issues and relay the subsequent information to other parties within the company.

S&OP uses include a mid-range view (18-24 months), which provides a company with increased visibility of what is expected to happen. Incorporating a better understanding of the demand for our products, as well as improved demand planning and forecasting, will provide better inputs into the S&OP process as we move forward.

I will be discussing the topic of “The Difference between Demand Planning, Forecasting and S&OP” at IBF’s & APICS Best of the Best S&OP Conference in Chicago on June 16-17, 2016.

Project Manager – Supply Chain Improvement
Dr. Karen Pentz resides in Midland, MI. She graduated from the University of North Carolina at Greensboro with an undergraduate degree in Information Systems and Operations Management and a Masters in Business Administration. She received her Doctor of Business Administration from the University of Phoenix. Karen currently works for MEGlobal Americas, a subsidiary of the Kuwaiti petroleum company Equate, where she is a Project Manager for Supply Chain Improvements. She is an active member of APICS, the Association for Operations Management, holding the CPIM and CSCP certifications. Karen is currently serving on the APICS CPIM Master Planning of Resources certification committee. In addition, she is a Six Sigma Black Belt. With 20 years' experience in Supply Chain, Karen has worked in a variety of industries as a Planner/Buyer, Analyst, Demand Manager, and Project Manager. Karen began her professional career in Accounting, working for a number of organizations in Payroll, Accounts Payable, and General Ledger as both an Accountant and Accounting Supervisor. She had a mid-career switch to Operations Management (OM) after taking an introductory OM class as part of her undergraduate degree. She changed her degree and has been in Supply Chain ever since.

3 Responses to The Difference between Demand Planning, Forecasting and S&OP

  1. Hi Karin,

    Nice post. A recent study showed that close to 50% of respondent companies still use MSExcel as their primary demand planning tool and the percentage is even higher for companies using spreadsheets to facilitate their S&OP process. Considering the strategic importance of these two processes to a company’s success and the undeniable shortcomings of spreadsheets to support business processes why do you think so many companies still relay on spreadsheets?

  2. I am confused about “Demand planning is defined as using forecasts…” and later the article says that “forecast is an output of demand planning”. How can forecast be an output of demand planning if it is USED FOR demand planning?

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