Critical Demand Planning Metrics to Drive Business Growth

Critical Demand Planning Metrics to Drive Business Growth

Demand planning involves forecasting the demand for a product or service and aligning inventory and other resources to meet that demand by analyzing past results, changing market conditions, and expected sales. However, planning for the future effectively requires the right information, and that’s where demand planning key performance indicators (KPIs) come into play.

KPIs generally track a company’s progress toward its goals and inform decision-making processes. Specifically, in demand planning, monitoring KPIs can enhance ordering accuracy, reveal shifts in demand, and track sales performance. It’s crucial to understand that demand planning significantly impacts a company’s bottom line, a lesson many businesses have learned — sometimes the hard way.

Understanding Demand Planning

Demand planning is a vital business process that helps predict future sales and ensures that a company can meet customer demands efficiently. This aspect of supply chain management involves analyzing historical customer behavior, projected trends, and market and economic conditions, among other factors. The goal is to balance inventory levels and customer needs, avoiding both stockouts and excess inventory.

While demand forecasting focuses solely on predicting future sales trends, demand planning goes a step further by using these insights to optimize inventory and resource allocation. This comprehensive approach impacts every facet of a business, including sales, marketing, purchasing, supply chain operations, production, and finance. By integrating these elements, demand planning enhances overall operational efficiency and customer satisfaction.

What Are Demand Planning KPIs?

In the dynamic landscape of market fluctuations and changing demand, successful demand planning hinges on accurate, real-time information. Demand planning key performance indicators (KPIs) are essential tools designed to deliver up-to-date insights into critical activities. These KPIs help measure the effectiveness of demand planning efforts and provide foresight into future demand.

Some demand planning KPIs directly evaluate the outcomes of demand planning, such as the mean absolute percentage error (MAPE). Others, like Pareto analysis of customers and prebooking metrics, offer valuable predictions about future demand. Additionally, KPIs like the weekly item location forecast error can highlight the impact of supply chain and sales predictions on individual local outlets. By leveraging these KPIs, businesses can fine-tune their strategies to enhance accuracy and efficiency in meeting customer demands.

The Importance of Demand Planning KPIs

Demand planning KPIs are crucial because they provide insights that directly impact a company’s bottom line. For instance, if a KPI indicates that sales are underperforming in a specific market, it may prompt actions like initiating a flash sale or reducing prices to clear excess inventory. Conversely, a KPI showing a strong upward trend for a product could necessitate adjustments in the supply chain to ramp up production.

These examples highlight the importance of having real-time updates for demand planning KPIs. Accurate, up-to-date metrics are essential for making informed decisions swiftly, ensuring that businesses can respond effectively to market changes.

Neglecting to monitor demand planning KPIs can be costly. High-profile failures underscore this point. For example, Walgreens failed to anticipate rising generic drug prices in its 2014 forecasts, leading to squeezed margins, a $1.1 billion drop in earnings, and the eventual dismissal of its CFO. Similarly, in 2001, Nike’s errors in demand planning resulted in ordering $90 million worth of an unpopular shoe, costing the company an estimated $100 million in sales and causing a 20% drop in its stock price. These cases illustrate how critical it is to track and analyze demand planning KPIs meticulously to avoid significant financial setbacks.

infographic-bsa-branding-account

How to Choose the Right Demand Planning KPIs

Improving the accuracy of your business’s demand planning is a complex task with no one-size-fits-all solution. While there are several essential KPIs that most companies use to gauge demand planning effectiveness, such as forecast accuracy and mean absolute percentage error, other KPIs may be uniquely beneficial depending on the specific needs of your business.

Choosing the right KPIs often involves some trial and error. Each metric comes with its own set of advantages and disadvantages, and every business has its own unique goals, whether it’s achieving rapid growth or maintaining market share. Therefore, the “right” demand planning KPIs will vary from one company to another, but fortunately, there is a wide array of KPIs to select from.

Top 20 Demand Planning KPIs and Metrics for Your Dashboard

Demand planning requires a cross-functional approach, involving collaboration across disciplines like sales forecasting, supply chain management, and inventory management. To facilitate this process, a demand planning dashboard can be invaluable. Such dashboards aggregate KPIs into an easy-to-understand visual interface that can be shared and customized across different roles within the organization. The key is to select the demand planning KPIs that are most relevant to your business.

There are demand planning KPIs for nearly every aspect of business. Many industries and individual companies have developed custom KPIs to gain insights into their specific demand planning challenges. Nonetheless, some essential demand planning KPIs are universally applicable, whether your company sells shoes or develops pharmaceuticals.

Here are the top 20 demand planning KPIs, along with explanations and methods for calculating each one. Some of these require real math, so having a calculator at hand is a good idea.

  1. Forecasted vs. Actual Sales (Forecast Error) This KPI measures the difference between forecasted and actual sales, providing a straightforward indication of whether sales targets are being met. It’s calculated as:Forecasted vs. actual sales (forecast error) = Actual sales – Forecast sales
    For example, if a quarterly forecast predicts $5 million in revenue for a consulting firm’s software division, but actual sales are $4 million, the forecast error is $1 million.
  2. Forecast Accuracy (FA) This KPI assesses how accurate your demand and sales predictions have been. A high forecast accuracy indicates better alignment of operational costs with demand and higher profits. The formula is:Forecast accuracy = 1 – [Absolute value of (Actual sales for time period – Forecast sales for same time period) / Actual sales for time period]
    For instance, if the forecast was 100 units and actual sales were 115, the FA would be 87%.
  3. Monthly Product Category Forecast Error (MPCFE) This KPI applies forecast accuracy to specific product categories on a monthly basis. It helps fine-tune sales and marketing strategies and supply chain adjustments. The formula is similar to FA but applied to monthly data for a product category.
  4. Bias Also known as mean forecast error (MFE), bias indicates the tendency for forecast errors to trend in one direction. It’s calculated as:Tracking bias helps correct persistent over- or under-forecasting.
  5. Tracking Signals (TS) Tracking signals measure the persistence of bias over time, indicating the accuracy of the forecasting model. The formula is:A TS of 1 indicates under-forecasting, and -1 indicates over-forecasting.
  6. Mean Absolute Error (MAE) and Mean Absolute Deviation (MAD) These KPIs measure forecast accuracy by averaging the magnitudes of forecast errors. The formula is:
  7. Mean Absolute Percentage Error (MAPE) MAPE expresses forecast error as a percentage, making it easier to communicate across departments. The formula is:Mean absolute percentage error = Sum of (Forecast error for time period / Actual sales for that period) / Total number of forecast errors x 100
  8. Symmetrical Mean Absolute Percentage Error (SMAPE) SMAPE addresses some of the limitations of MAPE by providing a balanced measure of forecast error. The formula is:Symmetrical mean absolute percentage error = 2 / Number of forecast errors x Sum of (Forecast sales for a time period – Actual sales for time period) / (Forecast sales for a time period + Actual sales for that time period)
  9. Weighted Mean Absolute Percentage Error (WMAPE) WMAPE weights forecast errors according to actual sales volumes. The formula is:
  10. Mean Square Error (MSE) MSE evaluates forecast performance by averaging the squares of forecast errors. It’s calculated as:
  11. Root Mean Squared Error (RMSE) RMSE is the square root of MSE, providing a measure of the severity of forecasting errors. The formula is:
  12. Actual Sales Conversions vs. Sales Assumptions This KPI compares actual sales conversions to sales assumptions in the marketing plan, helping adjust future production and inventory plans. The formula is:Sales conversion rate = (Leads converted into sales / Qualified leads) x 100
  13. Order Fill Rate This inventory management KPI measures how many customer orders are filled directly from available inventory. The formula is:Order fill rate = (Number of customer orders shipped / Number of customer orders filled) x 100
  14. Perfect Order Rate (POR) POR measures how many orders are shipped without incidents, reflecting the quality of manufacturing and logistics. The formula is:
  15. Weekly Item Location Forecast Error This KPI applies MAPE to measure forecast accuracy for each item on a weekly basis at each location, helping correct logistical mistakes and optimize inventory.
  16. Early Warning Indicators for Demand Variation By monitoring MAPE and forecast accuracy weekly at the product category or item level, businesses can take immediate action when actual sales deviate significantly from forecasts.
  17. Pareto Analysis of Customer Demand This analysis focuses on the top 20% of customers who generate 80% of sales, helping businesses prioritize demand planning efforts for maximum impact.
  18. Prebooking Orders for New Products Monitoring preorders against forecasted expectations can provide early insights into production needs, reducing the unpredictability of new product launches.
  19. Phase-out Products Accurately timing product phase-outs can prevent overstock and maintain pricing. This KPI uses MAPE or FA to monitor demand during the phase-out period.
  20. Marketing Intelligence of Competitor Activities Competitive analysis can inform demand planning by tracking KPIs such as new product launch performance, sustained stockouts, and quality issues of competitors.

By carefully selecting and monitoring these KPIs, businesses can significantly improve their demand planning processes, ensuring better alignment with market demand and enhancing overall efficiency and profitability.

Long-Term Capacity Requirement Forecasting Accuracy

Demand planners play a crucial role in a company’s long-term capacity planning, ensuring there are sufficient production resources—such as factories, personnel, and equipment—to meet future production needs. This long-term demand planning is vital for budgeting, capital expenditure planning, contract negotiations, and distribution strategies. Unlike day-to-day demand forecasting and planning, long-term capacity requirement forecasting involves predicting the future evolution of multiple product lines within the context of an ever-changing economy. It requires a strategic approach to anticipate market trends, technological advancements, and shifts in consumer behavior, all of which are critical for maintaining operational efficiency and competitive advantage over the years.

Tracking Demand Planning KPIs With Software

Effective demand planning necessitates the integration of data from various business functions, including sales, marketing, inventory, production, and logistics. The ability to consolidate and coordinate this information within a single system is crucial for accurate demand planning. Businesses must aggregate this data to plan material purchases accurately, calculate inventory, schedule employees, and ensure timely deliveries. Automating data entry is essential to track KPIs in real-time and maintain accuracy.

For these purposes, a demand planning tool integrated with a cloud-based enterprise resource planning (ERP) solution, such as NetSuite’s demand planning module, is ideal. This module consolidates demand planning KPI data and automates statistical analyses, enabling demand planners to calculate optimal production and inventory levels more quickly and accurately than manual methods. The information is linked to a central database that stores other critical, related data within the NetSuite ERP platform.

Demand planning is vital to a business’s sales performance and overall profitability, affecting nearly every department, from purchasing and supply chain management to marketing. Unanticipated demand surges can strain suppliers and overburden shipping systems, while demand drops can result in excess stock and high inventory costs. Therefore, demand planning encompasses a wide range of information and requires continually updated data points. Monitoring the right demand planning KPIs is a crucial strategy for any product-based business, significantly impacting operational efficiency and financial success.

Demand Planning KPIs FAQs

What are the 5 key performance indicators?

There are many key performance indicators (KPIs) that monitor demand planning success. For most businesses, the five main KPIs are:

  1. Forecast Accuracy: The more accurate your forecast, the more efficiently you can run the business, leading to higher profits.
  2. Forecasted vs. Actual Sales: This KPI indicates actual performance compared to the organization’s expectations.
  3. Mean Absolute Error (MAE): This measures the average forecasting accuracy rate, helping identify the variability of forecasts.
  4. Bias: This tracks the tendency for forecast errors to consistently trend in the same direction, highlighting systematic errors.
  5. Perfect Order Rate (POR): This measures how many orders a company ships without incidents, reflecting operational efficiency.

What is KPI planning?

KPI planning involves making decisions based on the metrics used in KPIs. The choice of KPIs depends on business goals, such as increasing sales or reducing production costs. Typically, KPI planning also involves sharing these metrics with the entire organization to ensure alignment and transparency.

What are the KPIs for supply chain?

Supply chains cover all steps from building products to delivering them to customers. The Perfect Order Rate (POR) — a measure of how many orders a company ships to customers without any issues — is a key supply chain KPI. Other important supply chain KPIs include:

  • On-Time Delivery: The percentage of orders delivered on time.
  • Inventory-to-Sales Ratio: The proportion of inventory relative to sales.
  • Inventory Carrying Rate: The cost of holding inventory over time.
  • Weekly Item Location Forecast Error: The accuracy of forecasting at specific locations on a weekly basis.

What is a KPI in procurement?

Procurement is the process of acquiring supplies a company needs to manufacture or resell as part of its business model. Key procurement KPIs include:

  • Compliance Rates: The adherence to procurement policies and procedures.
  • Supplier Defect Rates: The frequency of defects in supplied materials.
  • Rate of Emergency Purchases: The frequency of unplanned purchases.
  • Supplier Lead Times: The time taken by suppliers to deliver goods.

How do you measure demand forecast accuracy?

Forecast accuracy (FA) compares predicted sales for a period to actual sales for the same period. The resulting percentage indicates the accuracy of the forecast. The formula to calculate FA is:

1 – [Absolute value of (Actual sales for time period – Forecast sales for same time period) / Actual sales for time period].

What does demand planning mean?

Demand planning optimizes a business’s ability to meet customer demand efficiently. It involves sales forecasting, supply chain management, production management, and inventory management to balance supply with demand, ensuring that customer needs are met without excess inventory.

What is the difference between supply planning and demand planning?

While both are closely related, demand planning involves predicting customer demand for a business’s products or services. Supply planning, on the other hand, involves managing inventory and supply chains to meet these predicted demands. Both functions work together to ensure that supply meets demand efficiently.

What are the key components of a demand forecast strategy?

Demand forecasting is a critical part of the larger demand planning process and forms the foundation for anticipated sales planning. Key components of a successful forecasting strategy may include:

  • Past Sales Data: Historical sales information to identify trends.
  • Seasonal Trends: Data on seasonal variations and their impact on sales.
  • Market Analysis: Insights into market conditions and economic factors.
  • Internal Data: Information from various departments, such as marketing campaigns and product launches.

The specific components included will depend on the demand planning goals, which may encompass increasing sales, minimizing excess inventory, and reducing supply chain disruptions.

Summary
Critical Demand Planning Metrics to Drive Business Growth
Article Name
Critical Demand Planning Metrics to Drive Business Growth
Description
Learn about essential demand planning metrics and KPIs to improve forecasting accuracy, optimize inventory, and enhance efficiency.
Publisher Name
ABJ Cloud Solutions
Publisher Logo