- What a supply plan is
- The differences between supply and demand planning
- Why a supply plan is important
- How to calculate a supply plan
Maintaining a well-oiled supply chain is challenging. You need to follow the links to discover pain points and what is impacting your sales and inventory. Mapping out your supply chain can be a game-changer. This process is called supply planning (also known as supply chain planning or SCP).
What is a supply plan?
A supply plan is a forecast of how much product you will need on your stores’ shelves. It forecasts the steps it takes to create a product, warehouse it, ship it, and stock it. Supply plans focus on production, procurement, and logistics.
You would use a supply plan in your warehouse and manufacturing strategies to determine how much product you need to create and store according to your previous sales data and forecasts. Supply plans are useful for predicting how much your customers will order from you.
Supply planning takes a long view of your supply chain. Supply plans should look six to twelve months in the future, although some supply chain experts recommend creating supply plans that extend as far as five to ten years.
That said, some retailers, such as Walmart, keep a rolling supply plan of only 13 future weeks. The reasoning behind this is that with a shorter timeframe, you can create a far more accurate supply forecast. Indeed, forecasting tools, such as machine learning, are often the most effective for short outlooks.
What is the difference between a supply plan and a demand plan?
Demand planning takes historical sales data and combines it with sales forecasts to create a cohesive supply chain model. Demand planning takes wild variables, such as regional preferences and viral marketing, into consideration, not just automated point-of-sales analyses.
Supply plans are typically a part of good demand plans. Demand planning sums up the data from a demand forecast (i.e., historical sales data matched with base predictions) and the data from a supply plan (i.e., individual product sales matched with customer demand) and combines the two into a fluid model for predicting future sales.
Demand planning looks at the larger picture of creating a cohesive supply chain, while supply plans focus solely on ensuring that products are available for stores at the right times and for the amounts they need. Supply plans consider production constraints and raw materials availability.
Supply planning also gives more granular insight into your supply chain. For example, production planning shows you how much you can manufacture, given your current capacity and circumstances (which is different from demand planning in that it has little to do with consumer behavior).
Demand plans can affect supply plans by looking at consumer purchasing behaviors. Higher demand for a product will necessitate more production and procurement of that product, which may change your supply plan.
Why is a supply plan essential?
Creating an effective supply plan can solve a great deal of inventory and replenishment issues. Supply planning can decrease production costs due to fewer changes in manufacturing methods, procurement costs due to fewer last-minute purchasing, and logistics costs due to fewer expedited orders.
Without a supply plan, production planning may place your focus just on your inventory levels, meaning you may be missing the bigger picture. Low inventory levels can lead to out-of-stocks, which will increase expediting costs. Additionally, focusing on inventory levels alone can increase logistical costs as your stock moves from one warehouse to another.
Supply plans reduce the bullwhip effect. Sudden supply and demand changes near the consumer level can cause significant changes to production. Even a small bullwhip event can have a massive impact on the supply chain, as far upstream as the manufacturer.
Having a proper supply plan allows you to put the right amount of inventory into the right place at the right time. Supply plans, consequently, increase customer service and, by proxy, consumer happiness.
A good supply plan will also lead to better compliance with customer standards. In Walmart’s case, the retailer now requires suppliers to be on time and in full for 98% of all cases ordered. Without a supply plan, these OTIF goals can be daunting and seemingly impossible.
A supply plan helps you get your inventory ready to go so that you can meet collect ready appointments, ship products within the delivery window, and deliver all of the items ordered. Supply planning allows you to be proactive with your compliance.
How do I create a supply plan?
First, create a target. Determine whether you are planning for a number of weeks’ supply or a number of units to keep in inventory. There are other targets you can use, of course. Look into calculating how long your stock will last in the stores and go from there.
Then, decide how far you wish to forecast.
- A further forecast horizon may increase your safety stock, as a longer view on your procurement strategy can lead to uncertain forecasts and, therefore, a need for a buffer against stockouts.
- Looking more deeply into your supply chain leads to more variability and less accurate forecasting because there are more links in the chain to consider, especially if you are shipping to a distributor, who ships to a wholesaler, who ships to a retailer, who sells to a consumer.
- It is critical to assess how much each level in your supply chain is holding in stock and compare that to how much the consumer ends up buying.
Next, determine how much inventory your stores have. Calculate the number of items “in pipe” (on hand, in transit, in the warehouse, and on order).
Then, create a store-level demand forecast to estimate how many units each store will order in a particular period. Again, there are two forecasting methods: weeks of supply versus a static number of units or cases per store. You can do select a forecasting method by analyzing the historical point-of-sales information for each store.
Finally, step through each store’s demand forecast and subtract the store’s inventory from the number of units that you have forecasted the store will sell. When that number drops below your target, you’ll know it’s time to create more inventory.
Sound complicated? SupplyPike can help.
SupplyPike has created a tool within our Retail Intelligence app that generates dynamic and customizable supply plans without digging through spreadsheets. This tool leverages your forecasts and point-of-sales data to show you how much inventory needs to go where based on your weeks’ of supply input.
Supply chain management depends on forecasts, such as demand plans and supply plans. Accurate forecasting leads to effective supply plans, meaning fewer out-of-stocks and better compliance.