For some retailers, acquiring new customers is easy. The hard part is delivering on promises you’re making to them—like having enough inventory to sell.
Carry too little inventory and risk turning away customers already wanting to give you money. But stock too much and you’ll turn your stockroom into an unorganized mess, pushing storage fees up and overwhelming store visitors.
Demand planning gives you back control. When you sense upcoming changes in demand, you’ll only stock the level of inventory each store needs.
If you’re one of the 55% of retail supply chain executives who plan to increase their investment in productive planning, you’re in the right place. This guide explains how retailers can prepare their stores for an increase in customer demand.
Table of Contents
What is demand planning?
Demand planning is a technique retailers use to strategically plan how they’ll meet customer demand, including resource and supply chain planning. The aim is to guarantee they’re able to sell to customers should demand change.
Entrepreneurs who go on Shark Tank, for example, need an accurate demand plan prior to the show’s airing. The plan covers how they’ll prepare for the influx in orders, from hiring temporary staff to pre-ordering inventory a few months ahead.
Why is demand planning important?
Ever been to a store and had the item you were interested in out of stock? These stockouts cost retailers an estimated $1 trillion every year, with Adobe reporting stockouts up 250% compared to pre-pandemic levels.
Demand planning helps you avoid stockouts, since you’ll accurately estimate how many units you will sell. If you’re forecasting a 75% increase in demand over Black Friday, for example, demand planning might mean renting an additional storage unit from August to December.
Demand planning goes further by considering other factors that could impact demand, such as seasonality, consumer taste trends, and even events like a global pandemic. This information is essential for meeting your customer demand while minimizing excess inventory.
Take the guesswork out of restocks
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Increase customer satisfaction
Stockouts don’t just wreak havoc on retailers. It’s frustrating for customers to hear a product they want is out of stock—a problem that can be rectified with demand planning.
A strategy that includes hiring seasonal staff, and restructuring your stockroom, for example, sets you up for success. There’s no last-minute rush to serve an influx in foot traffic, so you can focus on giving customers the exceptional experiences they’ve grown to expect.
Bloated inventory can be just as much of a problem as understocking. If you hold too much inventory in your stockroom, you’ll suffer with expensive storage costs, product expiration, and excess cash tied up in unsold stock.
Demand planning can help businesses avoid the dangers of overstocking, such as increased inventory carrying costs and financial situations that necessitate the use of product discounts or other temporary measures to alleviate overstocking by quickly selling inventory.
A plan of what you’ll sell, by when, helps optimize inventory levels. If you’re forecasting 500 extra monthly orders in your January sale, for example, part of the demand planning process might include reshuffling the stockroom so receiving inventory doesn’t get lost in the post-holiday clearance process.
💡 PRO TIP: Want to know how much stock to order from a vendor? If you’re using Shopify POS, install the Stocky app to get purchase order suggestions based on historical sales data or a product’s seasonality.
Demand planning vs. demand forecasting
Forecasting and planning often get confused. While both estimate the level of demand a store will experience, demand forecasting gives an estimate of how much you’ll sell.
Demand planning, on the other hand, is a strategy that precedes the forecasting process. It’s the plan you’ll put in place to prepare for the forecasted demand, such as:
- Staffing schedules
- Open-to-buy budgets
- Pricing and promotional strategies
- Stock levels by region or store
- Production and purchase schedules
Demand planning comes after forecasting, where management dives deeper into the step-by-step process of keeping the supply unhampered while avoiding surplus.
Demand planning methods
- Sales forecast
- Linear regression
- Moving average demand
- Seasonal trends
Let's take a closer look at each of these demand planning methods.
A sales forecast uses past performance, including historical revenue numbers, to predict future sales. If you compare sales over the past three years, for example, you may find that Q1 averages 25% more sales than Q2. It’s safe to assume the same will happen this year, so forecasting a 25% increase in sales for Q1 in 2023 acts as the foundation of your demand plan.
Linear regression is a tool that models future demand based on historical data. It uses a variety of data sources—such as past sales, GDP, and consumer spending habits—to find the causal relationship, helping retailers predict demand patterns in the longer term.
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Moving average demand
The moving average formula shows a trend in any data set. If you’re forecasting retail sales for the upcoming year, look at past revenue. For example:
- $10K sales in 2018
- $30K sales in 2019
- $75K sales in 2020
- $132K sales in 2021
Add those figures ($247K) and divide it by the number of years (4) to get a moving average demand of 61.75.
Some products are more popular than others at given times of the year. Anticipate these seasonal shifts in your plan and prepare for fluctuations in advance.
Take school supplies as an example. Google Trends data shows searches for “school bag” peak in August and September—the time when parents are looking for new supplies, ready for the upcoming school year.
Aspects of demand planning
- Statistical forecasting
- Trade promotion management
- Product portfolio management
- Demand sensing
Each of these various aspects of demand planning are critical to creating an accurate forecast or plan.
Statistical forecasting uses historical data to predict the future. It relies on quantitative data (i.e. numbers) such as sales, revenue, or number of customers. The moving average demand method is one example of statistical forecasting.
💡 PRO TIP: Only Shopify POS unifies your online and retail store data into one back office–customer data, inventory, sales, and more. View easy to understand reports to spot trends faster, capitalize on opportunities, and jumpstart your brand’s growth.
Trade promotion management
Trade promotion management defines how retailer partners, such as suppliers or wholesalers, promote inventory being sold in your store.
If you’re forecasting a busy Black Friday, for example, as a retail partner you need to know the minimum amount a given product can be resold for. This can maintain brand equity and reputation.
Product portfolio management
Product portfolio management is the process of overseeing all SKUs you sell. Consider leaning on a product information system (PIM) to organize this data when preparing a demand plan, such as:
With greater oversight on your existing arsenal of products, you’ll easily spot which need attention prior to increased demand.
As the name suggests, demand sensing is a short-term forecasting technique largely based on gut instinct and noticeable trends.
If you’re selling women’s clothing, for example, you might’ve picked up on 90’s style corsets doing the rounds on TikTok. Being aware of that demand—and then putting a plan together to capture it—is retail demand sensing in action.
Key steps in the demand planning process
- Build a team
- Organize data
- Challenge demand forecast
- Develop a final plan
- Measure results
Let's examine each of these critical steps in the demand planning process more closely.
1. Build a team
Virtually every retail employee has experience they can bring to the table when preparing for customer demand. Gather one spokesperson from each department to conduct your forecast, and assign responsibilities to each when executing the demand plan. For example:
- Finance teams prepare the forecast.
- Logistics teams hire seasonal staff to fulfill an influx of orders.
- Retail buyers adjust open-to-buy budgets to secure sufficient inventory.
2. Organize data
Next, collect internal data needed for the demand forecast. Rely on the spokespeople and stakeholders to contribute information from their department, including:
- POS sales data
- Marketing results
- Inventory data
- Product lifecycle
- Production lead times
💡 PRO TIP: With Shopify POS, it’s straightforward to track sales per store location without manual calculations or building custom spreadsheets. To get started, view Retail sales reports in Shopify admin.
Things happen outside your control, impacting demand for reasons you didn’t expect (COVID-19, for example. Improve the accuracy of your forecast by integrating external demand signals, such as:
- Market conditions
- Unemployment rate
3. Challenge demand forecast
Have key stakeholders weigh in on the forecast you’ve put together. What you’re really looking for, here, is sense-checking. The more eyes on the demand forecast, the greater the chances of something being picked up that hadn’t already been taken into consideration.
4. Develop a final plan
Regardless of how much you expect demand to change, turn your insights into strategy and make sure you have enough resources to supply an increased volume of customers. Using the new forecast, ask yourself:
- Can vendors supply enough inventory before demand increases?
- Is your logistics team prepared for a large volume of new orders?
- Do you have enough retail associates to staff a busier store?
Set key performance indicators (KPIs) at this stage—such as sales forecast accuracy or order accuracy. You’ll benchmark these metrics later down the line to show whether your demand plan is successful.
5. Measure results
As you inch closer to the season you’ve predicted an increase in demand for, check in with your retail team to make sure the strategy is still on track.
Similarly, report back after the busy season passes. How accurate was the initial forecast you put together? Did you serve more or fewer customers than expected? Did the store operations run smoothly throughout the busy period? Use those insights to create an accurate forecast and demand plan for next time.
Effective demand planning tips
Leverage demand planning software
Demand planning software makes the process easier by collecting and analyzing data on your behalf. However, half of retailers say they’ve implemented a demand planning and forecasting system that needs improvement.
Make yours work harder by integrating the software with your online store. Demand and operations planning apps that work with Shopify stores include:
Managing a huge network of stores? Integrate demand forecasts into your enterprise resource planning (ERP) software. It’s one dashboard designed to store everything related to business planning and operations—including changes in demand.
Hire a demand planning manager
Analyzing trends, preparing staff rotations, managing inventory budget—there’s a lot that goes into demand planning. Have someone own the process, such as a demand planner, whose sole responsibility is to estimate and prepare for fluctuations in customer demand.
Unify inventory management
Over half of small businesses use offline inventory tools or no inventory tools at all. That’s a recipe for disaster, especially if you’re promising inventory to customers that you can’t actually sell.
With Shopify POS and Stocky, you’ll see detailed inventory reports that will help you confidently forecast, track, and count stock from several sales channels. Never unexpectedly run out of stock again.
Knowing which products sell out right away versus sit on our shelves for months until Christmas is important, so we can not only have adequate and appropriate inventory, but are able to order ahead so artisans have time to produce inventory.
Fountaine continues,“We also import from some international artisans, so product lead time accuracy was crucial for keeping our shelves well stocked.”
💡 PRO TIP: When you use different platforms to run your online and retail stores, inventory discrepancies are more likely to happen as a result of both systems not being in sync with one another. This can lead to more frequent inventory counts to reconcile differences between your ecommerce platform and POS system’s inventory quantities and ensure stock levels are accurate.
Future of demand planning
The COVID-19 pandemic has demonstrated that even the most well thought-out demand plans can be thrown off course. McKinsey reports that significant disruptions to manufacturing production now occur every 3.7 years on average.
As supply chains are forced to become even more resilient, 38% of merchants we surveyed plan to integrate technology to help their company anticipate disruptions in demand.
For some retailers, that’s demand planning software with artificial intelligence and machine learning capabilities. These algorithms take large economic and market factors into consideration, resulting in more accurate forecasts and demand plans.
Optimize demand planning at your store
Demand management often feels like predicting the future—a near impossible task. But analyzing both internal and external data gives you the best possible shot at predicting changes in demand.
Turn the information you find into a demand plan. From reshuffling store associates to ordering advance inventory, you’ll stand your store in the best possible stead to handle changes in customer demand.
Manage your inventory with confidence
Only Shopify POS helps you manage warehouse and retail store inventory from the same back office. Compare inventory costs to revenue, see which items are selling out or sitting on shelves, forecast demand, and more.