Demand planning is a well-established industry process for determining the level of future demand, so production, logistics, and other teams can plan their activities to meet that demand. However, what is perhaps less clear is how a process known as demand sensing is being adopted by progressive and innovative firms to complement demand planning and build a competitive edge in today’s fast-moving consumer goods market.
Imagine you could prevent likely out-of-stocks before they happen, avoid overstocks that lead to costly markdowns and returns, and further improve fill rates. These benefits, the result of responding quickly to true demand, exemplify the power behind demand sensing.
In this post, we’ll explain what we mean by demand sensing, and offer four reasons for building it out in conjunction with your demand planning capabilities.
What is demand sensing?
According to IBF, demand sensing is “sensing and evaluating demand signals,” such as consumption (POS) and order data, and then predicting demand. While we love the simplicity of it, we feel it’s missing a few critical components that differentiate demand sensing from planning:
- Demand signals are sensed, i.e., collected, in near real-time, ensuring the most current data is being used to predict demand. As Gartner describes it, “demand information with minimal latency” is the starting point.
- Next, those signals are automatically evaluated using structured models and/or machine learning algorithms to consistently analyze demand and update forecasts accordingly. No human intervention is required, further reducing latency and increasing agility.
- Finally, while accurately predicting demand is one goal, demand sensing can provide many powerful demand insights that have other applications as well, such as “who is buying the product, what attributes are selling and what impact demand-shaping programs are having," also per Gartner.
In contrast, demand planning relies on historical time series patterns to create a forecast of customer buying behavior, typically on a monthly basis. This approach is not very good at quickly taking into account less predictable ‘unknowns,’ like economic or political uncertainty or an unexpected celebrity endorsement of a new product, which impact demand.
Demand sensing reduces this uncertainty by using more current demand signals that incorporate the impact of recent events, whether weather changes, stock-outs, or market shifts, into account. So while demand planning effectively brings in high-level market trends and seasonality cycles, demand sensing complements it with more up-to-date and accurate forecasts and insights that enable better plans.
With this definition and context in mind, let’s take a closer look at why companies should invest in demand sensing capabilities and tools, in addition to demand planning.
Reason #1: Demand sensing significantly boosts forecast accuracy
Numerous reports and studies show that customers are experiencing significant reductions in forecast error through demand sensing. Nucleus Research has provided evidence to show this reduction at over 30% due to three key factors:
- Accurate demand signals, including point-of-sale data and downstream inventory levels
- The most recent demand signals, which support the best forecast for each day for each item-location
- Consistency across the observed or predicted level of demand and all observed pieces of demand signal data
Other sources, looking across industries, place the forecast error reduction offered by demand sensing at as high as 45%.
Reason #2: Demand sensing quickly leads to cost savings & increased efficiencies
That increased forecast accuracy translates into a number of operational benefits and cost savings, even in relatively short time frames (~1 month, depending on lead times and lock periods). Tapping into more real-time data enables teams to more quickly respond to current conditions, allocating inventory to avoid out-of-stocks and growing sales in the process. It also enables companies to better anticipate orders, leading to improved and more consistent customer service. From Nucleus Research, “customers find that the investment pays off quickly by reducing safety stocks and decreasing the need for expedited orders.”
Reason #3: Demand sensing frees up teams for longer-term strategic initiatives & planning
Demand sensing represents the adoption of more automation in short-term planning and better anticipation of short-term demand, both of which help reduce the amount of day-to-day “firefighting” that often eats up the team’s time. In turn, organizations can better focus on mid- and longer-term strategic initiatives. For example, Nike is a case study of a global company that has adopted demand sensing in sync with rapid prototyping and 3D printing to cut lead times and product time-to-market down to a matter of weeks.
Reason #4: Demand sensing drives “digital dexterity” & transformation
In the push for digital transformation and “digital dexterity” to exploit existing and emerging technologies for better business outcomes, demand sensing aligns with the needs of today’s most competitive supply chain organizations.
It provides more accurate, granular, and precise data, which is the bedrock for all today’s tools and technologies. And it immediately translates that data into valuable information, increasing the speed and agility with which teams can act upon it. Empowered by demand sensing, organizations can become more innovative and agile in response to a changing market.
Keeping pace with the massive changes in today’s competitive retail environment means that brands must constantly adapt to new consumer demands and behaviors. Demand sensing enables companies to keep up with this change, offering a powerful formula for improving forecast accuracy and responding more intelligently to demand, while providing an accurate picture of demand that also enhances traditional planning processes.
If you’re not yet investigating demand sensing tools and how they can help lower out-of-stocks and overstocks, increase the success of new product launches, and improve customer service, start your journey today.