Businesses today are grappling with a slate of economic pressures. Inflation-driven increase in supply and labor costs, lingering effects of supply chain disruptions and rising interest rates are forcing many businesses to raise their prices — just as customers are tightening their wallets in response to inflation.
Faced with the dual challenges of unpredictable costs and fluctuating demand, businesses must take steps to anticipate how factors like inflation may impact their business. Demand forecasting — modeling how different scenarios may affect your business in the short-, medium and long-term — helps companies do just that, and provides an opportunity to map out your next steps.
Here, we’ll delve into what demand planning is and why it’s important, as well as steps business owners can take to begin scenario planning for the future.
What is demand planning?
In a nutshell, demand planning looks to the future, mapping out different scenarios and how they may affect your customers and your business.
Demand planning is critical for managing inventory. It helps businesses prevent the burdensome cost of holding excess inventory in times of falling demand, and also helps companies predict when business is likely to ramp up, so they can procure supplies and hire labor accordingly. It also helps businesses design a dynamic pricing strategy to maintain profitability — or minimize losses — as demand fluctuates.
Perhaps most importantly, demand planning helps businesses create a road map to navigate challenges that may arise in the short-, medium- and long-term. Mapping out future scenarios in advance allows businesses the opportunity to act strategically — rather than scrambling to react to events after they occur.
How to forecast demand for your business
As you begin demand planning, keep an eye to the following tips to set yourself up for success.
Consider your customer first
Predicting demand requires anticipating how economic trends impact your target customer, so begin by researching how your market shifts in response to market trends. While many customers cut their spending in times of inflation, the impact varies across categories[1]. A deep understanding of your target customer, and the issues affecting them, can serve as a compass to guide your planning.
Map out multiple scenarios
Demand forecasting doesn’t mean making one plan for the future — it means creating several. Responding to inflation, for example, calls for multiple plans for drastically different scenarios, since inflation could continue to rise, remain elevated, or plunge during a recession[2]. Identify the key variables most likely to impact your business, brainstorm the potential outcomes, and create a plan for each scenario so your business is ready to respond.
Lock in prices and rates
With interest rates — and supply costs — continuing to rise, now may be the time to secure financing and procure supplies you need to weather the storm. Shoring up capital ahead of rate hikes lowers the cost of borrowing, and provides a cash buffer to help navigate times of uncertainty.
And, with suppliers facing their own demand volatility, purchasing key supplies now may help you prevent shortages later and secure the most favorable pricing.
Plan for delays
The backlog from pandemic-era shutdowns and shortages are still hitting suppliers hard, so build longer-than-average lead times into your demand forecasting to help ensure you have inventory when you need it.
Now may also be the time to diversify your supply chain — both to find back-up sources for key supplies, and to reach out to smaller suppliers that may be more flexible and agile. Finally, consider the impact the competitive labor market may have on hiring, and start the candidate search early to help ensure you can secure the talent you need.
The bottom line
As volatility continues to impact consumers and businesses alike, demand planning can help companies create a roadmap for the future. Solid planning prepares businesses to address challenges and overcome obstacles as they pop up — and sets businesses up to succeed.
