In a world governed by finding the best deal and speediest delivery, Ecommerce retailers need to leverage the tools at their disposal to meet or surpass customer expectations. The ability to accurately predict and plan for upcoming demand while being dynamic enough to react to changing conditions is vital and, as such, two tools that you’ll rely on most (if you’re not using them already) are Demand Planning and Demand Forecasting.
If this is your first encounter with Demand Planning and Forecasting or if you’ve heard the terms thrown about interchangeably in your circles, it is important to note that there are some key differences between the two.
Planning vs Forecasting: The Big Difference:
Demand Forecasting refers solely to the act of predicting future demand, often relying on historical sales data (and other variables, depending on the complexity of your forecasting method).
Demand Planning is a sub-process of sales and operation planning that focuses on making decisions regarding demand.
As such, forecasting makes up a pretty big component of Demand Planning, but it can also include the management of product portfolios and trade promotions.
Together, Demand Forecasting and Planning can be utilized for two key planning process:
Inventory Management - think keeping stock on hand and managing supplier lead times
Driver and Staff Planning - helping you avoid understaffing (and backed-up deliveries) and overstaffing (and wasted money on wages)
Want to find out more about Demand Forecasting? Head here for our in-depth explainer.
Why Ecommerce Needs Demand Planning and Forecasting
Just like brick and mortar retailers, Ecommerce businesses need to balance of customer satisfaction with revenue optimisation to stay afloat. But, Ecommerce retailers also face unique challenges (and have some unique tools to deal with them) in comparison to their brick-and-mortar compatriots. Specifically, Ecommerce retailers face three key challenges:
Shipping and order fulfilment
The ability to forecast at a granular level - think weekly rather than quarterly or monthly - can help you determine which products are quick to run-out (and costly to lose sales for) and which ones you can afford to order less urgently. This is especially relevant for Ecommerce retailers with international suppliers with long lead-times for deliveries. Having an idea of how much stock you’ll be selling for a given period of time means you can order well in advance and even negotiate costs with your suppliers (since you’re avoiding the risk of last-minute, panicked ordering or can leverage economies of scale).
Demand Planning can also help you optimize your buffer stock levels. By understanding the buffer stock levels for each of your products, you can avoid overstocking your warehouse, which helps:
Reduce warehousing costs,
Reduce wastage (especially for products with short shelf-lives),
Avoid lost revenue from needing to discount stock
Balancing availability and space
On the opposite side of the Stock-Level Spectrum (a spectrum this author just made up), Demand Planning and Forecasting can help you avoid the costly consequences of being out of stock. This cost can be in terms of revenue, where you might prioritise restocking of a product that would otherwise cost you $10,000 in (forecasted) losses per day over one that sets you back $100 a day. Or, you might be concerned about the cost to your brand. For instance, frequent stock-outs are likely to see your customers go elsewhere, whereas an occasional stockout might contribute a sense of product scarcity to your customers, which can increase future demand or lead to a lost customer - and not just once, a stock out can mean a lost customer forever. The lifetime value of a customer can be difficult to calculate, but it is common knowledge that a repeat customer is cheaper than acquiring a new one.
Although stock-outs are never ideal, there is bound to be a time where you’ll run out of stock for a given product. Demand Forecasting can help you identify the products with the biggest impacts on your sales, brand, and revenue, as well as those where a stock-out wouldn’t be the end of the world, while Demand Planning can enable you to implement this information effectively. In doing so, you can take advantage of the fact that when products are in stock and customers can expect their arrival within 30 days, many Ecommerce retailers see a bump in conversion rates of up to 70%.
Take Advantage of the Data at Your Fingertips
We’ve touched on some of the challenges that Ecommerce retailers face, so let’s consider some of the advantages. Unlike brick-and-mortar retailers, Ecommerce businesses have access to all kinds of data that can be incredibly insightful when it comes to predicting and planning for future demand, including:
Including conversion rates, a granular understanding of peak times, customer journey throughout the site etc
Featured products on your homepage
These data streams can also be integrated into your forecasting models (if you choose to use an AI-driven method). This information can also help identify risks. Whether that’s highlighting new products that aren’t becoming as popular as you would like (and adjusting marketing strategies to remedy this) or helping you plan for sudden changes in demand in response to new competitors, seasonal effects, or recessions and global crises such as COVID-19 (to clarify, the link for COVID-19 pertains to Remi’s advice on how to respond, not a definition of the virus - we’re quietly confident you know what it is).
Hopefully by now you can see the upside. So you might be wondering how do you actually implement Demand Planning and Forecasting? Let’s get into it.
How to Get Started
Successfully implementing Demand Planning (and Demand Forecasting) involves several key steps:
Collect data and ensure that it is accurate and trustworthy. Whether your data is qualitative or quantitative, the last thing that you want is for dodgy data to cast doubt on your demand plan.
Set realistic goals - i.e. the reason why you’re forecasting and planning demand in the first place. Deciding on the length of your forecasting period and what levels that you need to plan demand at - whether that’s at the product family, customer, or geographic level.
Choose forecasting method/s - this can depend on your data, goals, and other factors (and you can read more the forecasting methods available here).
Review and adjust the forecast. You can test the accuracy of forecasting models using MAPE (to learn about that, click here) and other accuracy checkers and use forecast errors to set an appropriate safety stock level. Plus, manually tweaking the forecasts to include knowledge that the model can’t know also helps improve the accuracy of your forecasts, leading to more accurate demand planning and inventory management. This gives you the opportunity to influence demand through marketing and promotions to align forecasts with your company plans.
Integrate results into business planning or sales and operations planning. While having all of this information at your fingertips is great, the real value comes from being able to utilise it to achieve goals and make customers happy.
As simple as this might look, Demand Planning is a collaborative process and needs to be integrated across your company’s planning processes.
As customer expectations continue to drive how Ecommerce retailers operate and succeed, Demand Planning and Forecasting will only continue grow as a crucial aspect of operations. Not only does Demand Planning and Forecasting help you optimise your stock management and other aspects of your business, but it can enable you to satisfy your customers and generate loyalty to your brand.
Want to find out more about Demand Planning and Forecasting? Why not have a read through of our case studies, and find out how we’ve used Demand Forecasting to help increase stock availability and improve the accuracy of forecasts. Once you’ve had a look through those, why not check out our blog for the latest AI reads. Or, if you’re looking to implement Demand Forecasting for your business or improve your current forecasting methods, drop us a line here.