For some retailers, acquiring new customers is easy. The hard part can be delivering on promises—like having enough inventory to sell.
Carry too little inventory and you risk turning away customers ready to order products. But stock too much, and you crowd your stockroom, push up inventory costs, and overwhelm store visitors.
Demand planning gives you back control. When sensing upcoming changes in demand, you can stock the level of inventory each store needs. This guide explains the importance of demand planning for supply chain performance, and how retailers can prepare their stores for an increase in customer demand.
Table of contents
- What is retail demand planning?
- Why is retail demand planning important?
- Demand planning vs. demand forecasting
- Demand planning methods
- Aspects of demand planning
- Key steps in the demand planning process
- Effective demand planning tips
- Future of demand planning
- Optimize demand planning at your store
- Demand planning FAQ
What is retail demand planning?
Retail demand planning is a retail strategy used to assess and plan how to meet customer demand. It includes resource and supply chain planning, and is a key part of inventory management. When there are seasonal, cyclical, or other market fluctuations that can impact product supply levels and inventory, retail demand planning helps you prepare for these challenges so your inventory isn’t depleted or you don’t experience excessive surplus. The goal is to successfully forecast inventory and guarantee the ability to sell to customers, should demand change.
Why is retail demand planning important?
There are several reasons why demand planning is important for your business:
1. Avoid stockouts
Successful demand planning means factoring in multiple considerations to avoid being out of stock. Ann McFerran, CEO of beauty Brand Glametic, says, “Demand planning goes further by considering other factors that could impact demand, such as seasonality and consumer taste trends. This information is essential for meeting your customer demand while minimizing excess inventory.”
Ultimately, demand planning helps you manage logistical and other challenges, since you are better able to 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.
2. Increase customer satisfaction
Ever go to a store and discover the item you planned to buy is out of stock? Stockouts don’t just result in losing a transaction in the moment. They can also frustrate customers and degrade trust. Including demand planning into your business strategy can help you meet customer demand, and therefore, increase customer satisfaction.
A strategy that includes hiring seasonal staff and restructuring your stockroom, for example, can help set you up for success. If there’s a last-minute influx of foot traffic, you have already taken the necessary steps and can provide customers with great customer experiences.
3. Inventory optimization
Bloated inventory can be just as much of a problem as understocking. If you hold too much inventory in your stockroom, you may face 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,” says Daniel Hedegaard, head of press at the shipping and labeling company CoolParcel.
Inventory optimization is the process of planning what to sell, when to sell it by, and having the appropriate inventory levels on hand to supply customer demand—while minimizing operations costs. If you’re forecasting 500 extra monthly orders during your January sale, for example, part of the demand planning process might include stockroom reorganization so you can efficiently count inventory (including receiving inventory to minimize miscounts and return fraud), and set reorder points so you’re not overextended financially with holding costs.
💡 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
The terms forecasting and planning are often used interchangeably. While both estimate the level of demand a store will experience, demand forecasting gives an estimate of how much you are expected to sell based on historical data. The process also includes analyzing data points such as sales, inventory performance, and new product launches and discontinued items.
Forecasting is one aspect of planning. But retail demand planning goes further, encompassing all steps a retailer must take to meet the forecasted demand. “Demand planning comes after forecasting, where management dives deeper into the step-by-step process of keeping the supply unhampered while avoiding surplus,” says Luke Lee, CEO of Palaleather.
Planning may include the following:
- Staffing schedules
- Open-to-buy budgets
- Pricing and promotional strategies
- Stock levels by region or store
- Production and purchase schedules
Demand planning methods
Take a closer look at each of these retail demand planning methods:
1. Sales forecast
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.
2. Linear regression
Linear regression is a tool that models future demand based on historical data. It uses a variety of data sources—such as past sales, gross domestic product (GDP), and consumer spending habits—to find the causal relationship, helping retailers predict demand patterns in the longer term.
3. Moving average demand
Moving average demand considers prior sales periods (such as quarterly or annually) when determining future 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:
- $10,000 sales in 2018
- $30,000 sales in 2019
- $75,000 sales in 2020
- $132,000 sales in 2021
Add those figures ($247,000) and divide it by the number of years (4) to get a moving average demand of 61.75.
4. Seasonal trends
Some products are more popular than others at given times of the year. Anticipate these seasonal inventory shifts in your plan and prepare for fluctuations in advance.
For example, take school supplies. Google Trends data shows that “school bag” searches peak in July and August—the time when parents are looking for new supplies, ready for the upcoming school year.
Aspects of demand planning
Each of these various aspects of demand planning are critical to creating an accurate forecast or plan:
1. Statistical forecasting
Statistical forecasting uses historical data to predict the future. It relies on numerical quantitative data 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.
2. Trade promotion management
Trade promotion management defines how retailer partners, such as suppliers or wholesalers, promote inventory being sold in your store.
3. Product portfolio management
Product portfolio management is the process of overseeing all stock keeping units (SKUs) of the products you sell. When preparing a demand plan, consider leaning on a product information system (PIM) to organize this data. Examples include:
4. Demand sensing
Demand sensing is a short-term forecasting technique largely based on instinct and noticeable trends.
If you’re selling women’s clothing, you might pick up on ’90s style corsets doing the rounds on TikTok. Awareness of that demand—and putting a plan together to capture it—is retail demand sensing in action.
Key steps in the demand planning process
There are four critical steps in the demand planning process:
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
Collect internal data needed for the demand forecast. Spokespeople and stakeholders can contribute key information from their respective departments, such as:
💡 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.
3. Challenge demand forecast
Challenge the demand forecast by having stakeholders review and critique your products’ future demand. This checks-and-balances system can be an effective way to check for projection inaccuracies and assess the quality of collected data. The more eyes you have on the demand forecast, the greater the chances of identifying any overlooked data points or other relevant analytics that must be taken into consideration.
4. Develop a final plan
Turn your insights into strategy and develop a final plan that includes sufficient resources to supply an increased volume of customer demand. You can create a solid plan by asking yourself the following questions:
- Can vendors supply enough inventory before demand increases?
- Is the logistics team prepared for a large volume of new orders?
- Are there enough retail associates to staff a busier store?
5. Measure results
Measure the results of your demand planning strategy to determine its effectiveness. To do this, set key performance indicators (KPIs) such as sales forecast accuracy or order accuracy. Then, benchmark these metrics to assess the success of your demand plan.
Know the answers to questions such as: How accurate was the initial forecast put together? Did you serve more or fewer customers than expected? Did the store operations run smoothly throughout the busy period? Such insights can help you create a more accurate forecast and demand plan for next time.
Effective demand planning tips
Effective demand planning takes focus, organization, and advanced planning. Here are three tips to keep in mind:
1. Leverage demand planning software
Demand planning software makes the process easier by collecting and analyzing data so you won’t have to do it manually. In fact, about 50% of US retailers have 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:
2. Hire a demand planning manager
Analyzing trends, preparing staff rotations, managing inventory budget—there’s a lot that goes into demand planning. Have someone, such as a demand planner, own the process. That way, there is a point person with the sole responsibility of estimating and preparing for fluctuations in customer demand. Make sure the person is skilled in data and analytics, industry trends, and inventory management.
3. Unify inventory management
Unifying inventory management can help make integrating, tracking, and strategic planning for inventory easier—minimizing the risks of missteps and inefficiencies (for instance, lowering the chances of overstocks and stockouts can result in cost savings thanks to streamlined order fulfillment and other processes).
“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,” says Sylvia Fountaine, owner and founder of the recipe site Feasting at Home.“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
Economic market fluctuations, natural disasters, staff shortages, and supply chain interruptions can throw even the most well thought-out demand plan off course. According to McKinsey & Company, significant disruptions to manufacturing production on average occur every 3.7 years, on average.
As supply chains are forced to become even more resilient, Shopify Plus merchants, for example, are diversifying their product sources and digitizing their supply chains.
For some retailers, that means integrating technologies into their operations such as 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 may feel like predicting the future—a near impossible task. But analyzing both internal and external data gives you the insight necessary to better predict changes in consumer demand.
Turn the information you find into a demand plan. From reassigning store associates to ordering advance inventory, take key steps to put your store in the best possible situation to handle changes in customer demand.
Take the guesswork out of restocks
Only Shopify helps you make smarter inventory purchasing decisions. See your most profitable and popular items, forecast demand, get low stock alerts, and create purchase orders, without leaving your POS system.
Demand planning FAQ
What is a demand planning process?
Demand planning is a process used by businesses to analyze customer demand and forecast future demand for products and services. It helps companies identify customer needs and expectations, analyze market trends and competition, and plan for production and distribution.
What are the four elements of demand planning?
What is the role of a demand planner?
The role of a demand planner is to create and maintain accurate demand forecasts for a company’s products. This person analyzes historical sales data, industry trends, and customer demand to create a forecast of what the company can expect in terms of sales volume.