Demand Planning vs. Demand Forecasting: What's the Difference?

By Greg Silverman, Jul 27, 2020

Predicting consumer demand is essential for every business. It provides sales teams with a goal they need to achieve and ensures production, inventory, and revenue planning are all in sync.

In the current climate, however, the typical approach to demand planning that dictates crucial decisions is no longer complete. As important as gaining share, planning product launches, and reviewing media spending are to understanding demand, this process makes one critical mistake: It assumes demand is a given.

Demand is constantly changing with consumer preferences, seasons, and global events - but what if it suddenly stops or is otherwise drastically diminished? The next step in predictive analytics is demand forecasting that incorporates an understanding of human behavior to more accurately predict customer demand.

How is demand planning accomplished?

Demand planning is not a stand-alone process. Rather, it's a critical component nestled somewhere between sales and operations planning. As Michigan State University explained, it's about striking a balance between having enough inventory to meet customer needs without an expensive surplus. Once the business understands the magic number to profitably meet customer demand, a strategy is created to meet their goal.

It's relatively easy to plan for demand when purchasing behavior historically aligns with sales targets. Teams are able to articulate a practical number to accomplish and follow a clear plan to meet their target. Today, the demand planning process is aided by algorithms and artificial intelligence to transform manual steps into automated mechanics. While this approach needs enterprise data added to provide accurate recommendations for demand plans, it's altogether an effective system for presenting businesses with a path to the results they need.

However, this process remains mostly static. Plans are executed over a period of time where the market and consumers may once again shift, meaning the demand plan must be tweaked over time. Additionally, demand planning fails to accurately capture fluid variables, like consumer behavior, that drastically affect demand. As you will see, traditional demand planning crumbles when market routines are disrupted.

What happens when this process is shocked?

The world is still experiencing a significant emotional event that caused daily routines to come to an abrupt halt and shocked the market. Suddenly consumers are asked to practice social distancing, and non-essential businesses closed their doors - people and organizations are worried about their financial future, which inevitably impacts demand planning.

Consumers simply aren't shopping as much as they used too, and their focus is now on purchasing different goods and services. McKinsey highlighted that consumers in the U.S. anticipate spending more on groceries, household supplies, and home entertainment in the coming months while purchasing anything travel-related is almost completely out of the picture.

For many industries, like travel and transportation, the traditional demand planning methods they implement are simply not equipped to handle this sudden and drastic reduction in demand. This serves as an example for all businesses: Demand is not inevitable, and organizations must have models that are capable of acknowledging this reality.

In situations, like we are currently in, no matter how many discounts and promotions businesses offer, there's no way to sell off inventory when consumers are choosing to not make purchases. A traditional approach to demand planning is more akin to channel planning, and only demand forecasting aided by market simulation is able to more accurately help businesses plan for customer demand.

Demand forecasting: Acknowledging the consumer

While demand planning software aided by algorithms does a good job of charting a course of action, adding the consumer is what sets demand forecasting apart. By using predictive analytics, this method acknowledges how the consumer and market interact separately and as one to create demand. Instead of charting a path to reaching sales goals, demand forecasting actually determines if a consumer will come and purchase your product as opposed to an alternative or in light of different market conditions.

Combining the consumer thinking and market plan helps businesses best plan for demand and win participation in their category. Of course, to model a good demand forecast, businesses must understand the nature of consumer choice. Ultimately, consumers are looking to have a need fulfilled, and given two alternatives, will likely choose the one that better meets their expectations for its utility.

In times of uncertainty, however, consumers have heightened needs to feel comfortable making a purchase. Travel + Leisure explained this in regard to the cruise industry. Cruise lines were looking forward to a banner year; however, these unexpected events shocked their internal systems, and demand vanished. In the near future, cruise lines will not rebound back to business as usual but need to change their tactics to make consumers feel safe about using their services again. This includes improving safety and sanitary measures among a number of other actions. If a customer perceives that even one of these needs isn't being met, they will likely not make a purchase.

Demand forecasting acknowledges that the marketplace is not black and white - a consumer is not choosing one product over another - but are making their purchasing decisions based on a number of complicated factors. Market simulation accurately captures this volatility and allows business users to view and pull strategic levers to determine how their actions and other factors influence demand.

By comparing forecasts to in-market results, businesses gain confidence that the decisions they are making drive their strategy to stay ahead of market shifts and be responsive to consumer needs. Organizations have always known that demand is never consistent, but in today's market, it isn't always inevitable either. Demand forecasting builds on predictive tools and market simulation to provide business teams with the information they need to determine if your demand will help you survive in the market.

Concentric Market is the prescriptive analytics platform for strategic decisions. Simulation provides business users with insight into consumer behavior and market trends that allows organizations to manage uncertainty and forecast demand. Contact us today to learn more.

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