Fundamental Demand Planning Techniques

by Tara Tarazi

June 17, 2021

Demand planning is a necessary practice to prepare your business for growth. It allows a business to predict future sales and revenue and helps set the foundation for a company’s yearly growth projections. It benefits your supply chain by determining how many units to produce, warehouse, and dispatch to your customers. By utilizing demand planning practices, your business will have a better understanding of where they are today and into the future.

Demand planning requires both a top-down and bottom-up approach to planning. The top-down approach involves understanding the overall growth that the company is expecting to achieve across all product areas. For example, the company could expect to grow at 15% per quarter. A top-down approach can also look like taking an overall category size, and then estimate how much your brand can capture. For instance, Energy Bar’s is a $6.5Bn category, and your goal is to capture 1%. This growth projection is critical for the demand planner to understand, but most of their work involves building the bottom-up approach. The bottom-up approach uses historical data and potential growth opportunities to build a yearly sales projection for each item. The demand planner uses individual product forecasts to produce a total sales revenue and growth projection. As we unpack the bottom-up approach, it is important to note that the demand planner’s total projections should always align with the company’s overall growth plan.

The demand planner’s forecast for each product accounts for historical sales, seasonality, growth and promotions. Below is a description of all these components of a demand plan.

Historical Sales

Historical sales lay the foundation for each forecast. Each major retailer provides access to sales data through consumption or scan sales reports. The data describes the number of stores selling each product and total units sold each week. With these two figures, you can calculate units per store per week (UPSW).

UPSW is an important factor to consider when laying out the demand plan. This variable does not differ per store. Instead, it’s an average of sales across all stores. This allows you to utilize the UPSW forecast to calculate total weekly sales even when the store count may increase or decrease. By plotting historical weekly UPSW, you can see the growth of your product over time. This will enable you to forecast the UPSW based on historical trends. The UPSW forecast multiplied by the weekly store count calculate to help predict total sales by product over the next few weeks, months and even years.

The UPSW is the foundation to developing the demand plan by item. Using this method also requires the demand planner to work closely with the sales team. The sales team will help the demand planner to incorporate market trends and insights from each retailer, such as potential store increases, into the forecast. For example, a retailer may disclose they are discontinuing a major competitor enabling your company to take some or all the competitor’s market share.

Seasonality

It is important to account for seasonal growth and decline in sales. Products such as ice cream and holiday flavors will experience dramatic growth increases and decreases throughout the year due to the seasonality of the item. Forecasting these changes in demand appropriately will allow you to ramp up or ramp down production and warehousing needs. The demand planner forecasts seasonality by accounting for year-over-year growth trends. The year-over-year approach is important when accounting for seasonality. It enables the planner to model growth curves in demand by season. The planner will also need to account for general growth trends. For example, if your UPSW has increased 10% year over year, the planner will also factor the 10% growth in addition to the seasonal growth. It is helpful to graph these trends to visualize the expected growth.

Growth

There are few factors to consider determining the overall sales growth of an item. First, the company’s product may grow organically as the product and brand establishes recognition through marketing. This growth trend is shown year-over-year and takes place over the course of a year. It is important to understand how your UPSW is trending to account for organic growth of your product. Second, the product can also grow by increasing distribution. This can include selling to new retailers as well as increasing the store count at an existing retailer. As mentioned above, it is important to be in communication with the sales team or representative to determine any secured or potential distribution increases. The demand planner must factor these opportunities into each item’s forecast.

Promotions

The final point to consider when creating a product’s forecast are the product promotions. Each retailer provides their promotion schedules. The demand planner can use this promotion schedule and historical data to help determine the percentage lift to take place compared to the base UPSW that was determined above. It is helpful to also track the type of promotion taking place when looking at historical data. For example, a buy one get one free sale will have more of a percentage lift than a 20% off promotion. The demand planner should account for these variations in their plan. A second item to consider are end caps or promotionally increased shelf spaces. The planner will need to ensure that they account for a dramatic increase in sales to help fill each stores’ end cap position. This is another example of the importance of maintaining close communication with the sales team. The sales team will inform the planner of the number of stores that will hold the end cap and they will collaborate on anticipated increased sales. The planner will then include this increase in their plan.

 

 

The above techniques will help create a solid foundation for each product’s forecast. However, it is important to note that the demand planner’s forecasts continue to evolve and should be adjusted as your business sees fit. For high growth organizations, a forecast may need to be adjusted weekly. Adjustments and significant changes should be communicated to the business because over time the total bottom-up number may start to vary from the company’s top-down growth number. It is the demand planner’s role to communicate that the company is on track to achieve its growth goals.

More From The Blog

This Week in CPG 02/17/25

News from Legally Addictive Foods, Confusion Snacks, Angel Margarita, Rejuvenation, Suru, Khalo, Santana Snacks, A Dozen Cousins, Olipop, Daddy’s Homemade, Every Body Eat, Paktli Foods and Rule Breaker Snacks.

Read More »

Restricted to Premium Members Only

Sign In

Not a Premium Member? Sign Up Here:

The online the community for food and beverage founders