Demand planning and supply planning are commonly confused, or sometimes used interchangeably when discussing the overall optimization of inventory and supply chain management. While these two concepts are closely related (enough that a small business can combine the acts into one department), a growing distribution and/or manufacturing business will recognize the differences these two functions have and the importance their role plays.
To maximize the profitability of a business, any business in the world of supply chain needs to be efficient by finding the balance between supply and demand–which is usually accomplished via efficient inventory.
Demand planning aids in forecasting customer demand while supply planning manages inventory to meet targets of the forecasted customer demand. This means demand planning is meant to guide supply chain operations, while supply planning relies heavily on demand forecasts.
Demand planners take into account a larger amount of data from multiple sources, such as past sales data to distributors and retailers. This data can be created into both constrained and unconstrained demand forecasting, which shows the maximum demand potential with and without limitations in cash flow and production capability.
A standard logistics software tries to handle everything from the point of origin to the point of consumption–tackling transportation, warehousing, material-handling, and more. Using a more hyper-focused approach, demand planning software lets businesses estimate future sales to improve the accuracy of inventory management and it’s replenishment.
By better planning purchases, a business will ensure inventory stock levels are where they need to be. The goal is to increase inventory turns and fill rates beyond what a typical ERP or supply chain management software is capable of doing.
Supply planning is used to fulfill the demand plan while meeting the benchmarks of the organization, as it relates to inventory production and logistics. In short, it tries to meet the demand forecasts as efficiently as possible. Supply planning has a bigger focus on manufacturing lead times, minimum order quantities, leveling production, and managing safety stocks.
A supply plan can only work with a demand plan in place. This is because a supply plan will input the demand plan and all component data, which generates a master production schedule. Once in place, the supply planning reviews capacity and its impact on resources–making revisions as needed along the way.
Supply planning is just a cog in the sales and operations planning (S&OP) wheel. A supply chain planning system will help create needed forecasts, determine inventory to support the forecasts, determine the time to acquire this inventory, and figure out which factories are capable of completing these plans, before finally scheduling the work.
Sales and Operations Planning, or S&OP, integrates your supply chain planning processes to create a unified business plan surrounding supply chain demand. This information is usually pulled from data-heavy fields of your business, such as sales and marketing or manufacturing and distribution. Together, this data is used to improve inventory planning (or in other words, demand planning and supply planning).
By analyzing change history, annotations, and assumptions, S&OP can help your business make the final decision on adding products, changing your manufacturing process, or altering how you run your deliveries or overall distribution. In short, many consider sales and operations planning to be the one such process that can help align supply with demand. This is because the outcome of an S&OP process is a consensus-based operating plan that helps a company create supply against the expected demand of their products.
Demand planning and supply planning go hand in hand by following a process (or flowchart) of sorts that also brings in the company finances and sales. This helps create forecasts, determine necessary inventory levels, and determine the time and locations needed to complete these purchasing and production plans.
An S&OP flowchart looks like this:
Demand Planning > Inventory Optimization > Replenishment Planning > Master Production Scheduling and Procurement > Finite Scheduling
Demand planning forecasts customer demand while supply planning focuses on inventory control to meet the targets of a demand forecast. Supply planning relies heavily on the demand projections that a demand planning software (or department) creates, and supply planning usually takes the lead from the demand planning determinations.
While closely related, demand and supply planners must work together but still operate as separate departments in order to succeed. Demand planners will usually create constrained and unconstrained demand forecasts to analyze a business’ limitations in meeting demand or experiment on the maximum demand potential without limitations.
By having both demand and supply departments working together via integrated business planning, you’ll be able to arrive at a single plan both teams of planners can use in their long-term and short-term objectives.
Both types of demand planning allow the business to better manage client orders and keep supply costs low–accomplished by reducing the amount of inventory needed to his certain goals.