Business Finance

Demand Planning vs. Supply Planning

Dec 09, 2022 • 5 min read
financial forecasting for small business
Table of Contents

      Demand and supply planning are types of supply chain planning that focus on different phases of the supply chain. Demand planning projects future demand: how much of a product you expect to sell, if you can obtain it. 

      Supply planning, on the other hand, looks at the processes you’re implementing to meet the anticipated demand. A successful logistical operation depends on successful planning in both phases. 

      Supply and demand planning might seem complex, but they don’t have to be. With the right tools, you can forecast your way to logistical success. Here’s everything you need to know about demand planning vs. supply planning.

      What is Demand Planning?

      Demand planning is the art of predicting future market behavior based on limited data. To produce a reliable forecast—within a margin of error—you need to consider a variety of data. 

      This often includes previous sales numbers, but it can also factor in things like marketing efforts, retailer behavior, and even geopolitics. For example, few parts of our economy remain unaffected by the war in Ukraine.

      Demand projections fall into two main categories: constrained demand planning and unconstrained demand planning. Here is an overview of both:

      • Constrained demand planning Constrained demand planning accounts for real-world limitations on how much demand the company can meet. Planning within the bounds of these limitations allows a company to deliver more products at the best possible price.
      • Unconstrained demand planning Unconstrained demand planning is a bit more imaginative. Forecasters predict the maximum possible demand if there are no constraints—in other words, how much demand the company could meet if it had unlimited capital and production capacity.

      At first glance, unconstrained demand planning might not make sense. Why forecast a level of demand that’s impossible to meet? Many companies use constrained demand planning because it gives them an attainable target to shoot for.

      Demand planning is essential for logistical organizations for a couple of reasons. To begin with, it allows them to estimate how much inventory they need to stock and the required capacity to ship it, which keeps costs low for consumers. Furthermore, supply chain organizations can operate more efficiently, further reducing costs.

      What is Supply Planning?

      Supply planning is the inverse of demand planning. Instead of trying to forecast the level of demand, you must determine how best to meet that need. 

      Supplies can come from existing inventory, outstanding orders, planned orders, or new manufacturing. You may have to seek out alternative suppliers to meet spikes in demand or oversee reductions in stock if demand falls short.

      The main challenge lies in keeping the supply and demand planning teams on the same page. If there’s a disconnect between the two, the business won’t have a coherent plan. Supply will either fall short of demand or outstrip it, which could be costly.

      Integrated business planning is the solution. This method uses data from both teams to build a unified supply chain plan. This ensures that both teams are working towards the same short-term and long-term goals.

      Supply Planning vs. Demand Planning: What’s the Difference?

      Demand and supply planning are two sides of the same coin. Without supply planning, demand planning has no purpose. Without demand planning, supply planners have no forecast to base their decisions on.

      That said, there are significant differences between the two. Fundamentally, demand planning is about making predictions—what will consumer demand be over the next quarter or fiscal year? Supply planning is about maintaining the right inventory level to meet those projections.

      Both types of planning have the same best practices:

      • Utilizing metrics from multiple levels—product, location, and customer
      • Balancing between past statistical data and future forecasts
      • Breaking down forecasts by country, time period, and product

      Using metrics from multiple levels can provide more information about market trends. For example, overall demand for a product may remain flat overall. But at the same time, it could increase in one geographic area and decrease in another. This information would let you know how to allocate inventory across regional warehouses.

      Similarly, past data and future forecasts are both integral to planning. Without past data, you’re not basing your estimates on anything concrete. But it makes sense to plan for future events like seasonal changes in demand or customers upgrading to new technology. 

      Artificial intelligence and machine learning are also factors in supply and demand planning. These technologies can identify patterns and trends that could fly under the radar of a human planner.

      The Bottom Line

      Supply and demand planning are both core elements of a successful logistics operation. Demand planning is vital because it allows organizations to gauge future demand and plan accordingly. 
      Supply planning is just that—the follow-up planning to meet projected needs. If you need help with your company’s financial forecasting, Lendio provides software that can help.

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      About the author
      Jamie Johnson

      For the past five years, she's dedicated more than 10,000 hours of research and writing to more than 2,000 articles about personal finance topics, including building credit, mortgages, and personal and student loans.

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