Factors to consider for Demand Planning

We will cover the basics of Demand Planning in this article using a supermarket as an example. A company needs to ensure goods are stocked in the store at the right time for their consumers to buy. It needs to ensure vendors deliver goods in the right quantity at the right time at the right place before they expire. Stores need to ensure goods are visible to the consumer. Let’s discuss the parameters to optimize inventory at the store

• ROS — Rate of Sales is the forecasting of future sales. It considers parameters like past trends, weekday, weekend, festival, promotions, seasonality etc. To read more about ROS — “Sales Planning Factors — Game of Analytics”
• Vendor Fill Rate — You need to stock 100 units of Dettol Sanitizer. But, since the product is in high demand, the vendor might just supply 80. So, the fill rate is 80%. This needs to be considered by looking at past history and if the vendor defaults during a particular month or a season while ordering supply.
• Vendor Lead Time — Vendor will take a few days to provide the goods you have ordered. This time lag is due to production time, transit time in primary and secondary movement and even some administration and idle time. Lead time is generally part of the contract but look at the past history to identify if vendors actually meet the contracted lead time. This will help you plan better.
• Review Period and Order Days — Most SKUs are not ordered on a daily basis. It's cumbersome to manage. The thumb rule is fast-moving goods are ordered daily whereas slow-moving goods move to twice a week, once a week, bi-weekly or even monthly. ABC classification is a good way to identify how frequently an SKU needs to be ordered.
• Safety Stock — As with all statistical models, there are inconsistencies and unplanned exigencies. So, you build a safety stock in the store or depot nearby. If the stock of an SKU is depleting at a faster rate, sales will not suffer and you can dip into the safety stock. But, increase the safety stock parameters if it happens way too frequently with an SKU. Also, if this is frequent — its an indicator to look at the sales forecasting model which is under-predicting the output.
• Docking Plan — There are multiple types of docking which a store utilizes such as cross-docking, warehouse docking and direct store delivery. In a cross-dock plan, SKUs are collected at the depot/warehouse and assembled again to be shipped to the store. There is no storage of these SKUs in the warehouse. For such items, build the safety stock within the store itself. For warehousing dock plan — items are stored in the warehouse near to the store. For direct store delivery — goods are directly shipped to the store by the vendors. This is done in product category Dairy for items such as Milk and Curd.
• Lead Time from Warehouse — Vendors drop deliveries at warehouse/depots which then supplies to all stores in the city. This lead time is generally low compared to the vendor lead time.
• Minimum Order Quantity — Most vendors would not take order for 1 or 2 items. The shipping cost would be way too high. There is a minimum order quantity or minimum order value that the company would have to raise to their vendors. Most retail organizations pool in the demand from nearby stores together before raising a Purchase order to the vendor.
• Supply Unit Factor — Retail items are generally packed and supplied in cartons. This becomes the unit in which an order is placed. For example — 1 carton has 64 items. You place an order for 1 Case Pack and not 64 items. They can be further divided into the demand at stores. For example, 8 Supply Unit Factor constitutes 64 items. When supply would happen from a depot to the store, it would be in SUF and not no of items. This practice has been built for ease of use and efficient warehousing and logistics.
• Planogram — Add in the no of items required for display purposes. Empty shelves do not promote customer satisfaction.

The above factors can be used to decide inventory norms for each item in the supermarket or hypermarket. Inventory norms give a Min Inventory and Max Inventory for each item. When the inventory falls below Min Inventory, it becomes the reordering point(ROP). Your order is equal to Max Inventory — ROP Inventory. This can be rounded up or down in SUF and Case Packs for ordering purposes.

Demand planning has a lot of moving variables which makes it inherently complicated and paradoxical. You need to ensure availability while decreasing inventory!!