Demystifying the Demand Planning Model Structure

A well-designed demand planning model structure—horizon, frequency, and granularity—is critical to an effective demand planning process.

Demand planning is a critical component of any supply chain operation. Accurately forecasting demand ensures that the right products are available at the right time, and the supply chain runs smoothly. However, one of the most important aspects of demand planning is often one of the least understood – the demand planning model structure. In this article, we will discuss why getting the demand planning model structure right is essential for supply chain leaders.

“The demand planning model structure is one of the most important aspects of getting the demand planning capability right.”

Chakri Gottemukkala —
Co-Founder and CEO of o9 Solutions, Inc.

The Horizon of Demand Planning

The horizon of demand planning refers to the period over which a company creates its demand plan. According to Chakri Gottemukkala, Co-Founder, and CEO of o9 Solutions, Inc.:

“The purpose of the demand planning process is to drive decisions. The horizon is dictated by the lead time, which in turn dictates the decisions you are trying to make. The lead times in the supply chain dictate the horizon over which you need to create a demand plan.”

However, companies often fail to synchronize the demand planning horizon with the longest lead times in the supply chain. This can lead to poor decision-making and demand forecasts that are not well thought out. As a result, it is essential to get the horizon of demand planning right.

The Frequency

The frequency of demand planning refers to how often a company updates its demand plan. This is dictated by how frequently the drivers of demand are changing. As highlighted by Gottemukkala:

“If you have demand drivers that are changing on a weekly basis, waiting until the monthly cycle to re-forecast the business might cause a lot of turbulence in the supply chain. If you’re forecasting only monthly and there are drivers that are changing weekly, then there’s going to be someone calling the supply chain saying, ‘Hey, my demand has changed. Can you do something for me?’ This will cause a lot of reactive processes in the supply chain, or we’ll have to create a lot of buffer in the supply chain.”

To ensure that the frequency of demand planning is right, companies need to assess how frequently the drivers of their business demand are changing. This will help them determine how often they need to update their demand plan.

The Granularity

The granularity of demand planning refers to the level of detail at which a company forecasts demand from the most granular at the SKU level to the least granular at the category level. Gottemukkala notes that:

“A lot of times, we find that companies are forecasting too much granular detail too far out, and just fake details. Forecasting an SKU level 18 months out is not really adding value. No one knows exactly what the numbers are. The granularity has to be dictated by the decisions you’re trying to make. The decisions dictate what granularity the forecast is required at.”

To ensure that the granularity of demand planning is right, companies need to assess the decisions they are trying to make. This will help them determine the level of detail at which they need to forecast demand.

Final Thoughts

By focusing on the horizon, frequency, and granularity of demand planning, companies can ensure that their demand plan is accurate and up-to-date. This will help them make the right decisions, avoid turbulence in the supply chain, and reduce the burden of demand planning.

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