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What is Demand Planning?

By Osmand Vitez
Updated Feb 19, 2024
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Demand planning is a business process companies go through as part of their supply chain activities. This activity has a twofold purpose: drive consumer demand and increase the company’s ability to meet increased demand. Companies spend money on advertising, higher-quality materials, or promotions to increase consumer awareness. As demand for goods or services increases, companies must move products through the supply chain swiftly to meet demand. Companies also look to increase profits and reduce expenses through demand planning.

In a free market society, an economy has supply and demand. Supply is the goods or services offered by businesses. Demand represents the desire for goods and services by consumers. Companies look to reach an equilibrium where the supply of goods and services meets consumer demand. This equilibrium point typically results in the highest profits for a company.

Companies can typically control their supply of goods and services. They can increase or decrease output based on the amount of materials they purchase and convert into goods. Demand is often out of their control, however. This leads to demand planning, where companies influence consumers into purchasing goods and services. Starting this process involves analyzing markets to find underserved consumers in terms of a company’s goods or services.

Advertising campaigns are a common form of demand planning. Companies present a message to induce consumers to purchase goods and services. In some cases, a company may send a large batch of goods to a region and sell them at a lower price than other markets. This induces demand because the company can claim inventory overstock requires the business to sell goods quickly. Companies can also saturate a market by selling goods at multiple retailers.

Demand planning may also result in creating different market strategies for different regions. For example, a company may sell goods at a high price with low stock in one region. This will increase demand because consumers believe the good is high quality and in demand due to low inventory. Another region may benefit from low prices due to high local competition. Companies need a large stock of goods there to avoid running out, which would drive consumers to substitute products.

Companies need to work supply chains differently based on their demand planning strategies. Low stock areas may require a just-in-time inventory model. This involves the ability to deliver goods quickly and without interruption. Other strategies require the use of distributors and warehouses. Each region has a system to ensure the right supply of goods at all times.

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