Supply Planning: Definition, Process, and Best Practices
Supply planning is a business management tool that impacts supply, demand, and inventory levels. Retailers use supply chain planning systems to provide projected demand for products and materials needed to support those demands.
The process is designed to balance plans for future demand with the availability of goods in inventory. Supply planning helps companies determine how much product they need to keep in stock. Order entry, review and release of orders with suppliers, and inventory management within warehouses and distribution channels are all factors that inform the supply planning function.
The lead times for supplier products to be received, the complexity of managing multiple vendors, the need for material handling equipment, and the availability of labor complicate the process. Let’s take an in-depth look at the supply chain planning process and its best practices.
What Is Supply Planning?
Supply planning is a process that involves analyzing demand forecasts, comparing the forecasted demand to existing inventory, and coordinating the supply chain activities needed to meet that demand. It determines the production level of goods or services, the materials that are required, and when they must be acquired.
Supply planning, also known as raw material or material planning, is often the cornerstone of optimized supply chain management. A supply chain planning strategy is designed to ensure that the right product is available at the right place and time while minimizing costs and risks associated with the supply chain. Inventory levels are intended to meet projected sales volume.
Inventory management is vital to sales and operations planning because it affects sales volume and product pricing. The inventory levels are adjusted as demand volumes change. When there is a change in demand, there must be a production adjustment to align with the change, which may require companies to adjust inventory levels.
Changes in sales volume directly affect inventory levels. Stores must control their inventories to meet customer demand. Doing these processes well can result in higher sales because inventory is available for customers when they want to make a purchase. They can support their companies by increasing sales and reducing costs by having the right amount of products on hand.
The Supply Planning Process
The supply chain planning process involves coordinating the movement of goods, from raw materials to finished products, in a supply chain. Here are the steps in the supply planning process.
Forecasting demand for products is the first step in the process. It involves analyzing historical sales data and market trends to predict the level of product demand in the future. It is important to develop these forecasts regularly because there are many external factors – such as inflation or the inability to get raw materials due to trade sanctions – that could impact sales of your products. These potential disruptions must be considered when planning for future inventory requirements to support an efficient supply chain.
Demand can be determined by analyzing sales levels, historical data, customer surveys, and past trends. The forecast relies on sales forecasts because they show how market demand will change over the product’s life.
Depending on the type of product you are selling, you must also project custom orders. You can project the custom order from various sources, and each custom order should be considered a separate demand element rather than a single lump sum for each item in the sale. It’s more efficient to handle your customers as individual buyers.
Determine Sources of Supply
Once the forecast demand is known, the next step is identifying the sources required to meet that demand. This process includes identifying suppliers, negotiating contracts, and establishing inventory levels.
For retail stores, this step involves identifying the supplier’s location and establishing a contract to buy products. For consumer goods producers, this step would include finding suppliers to provide raw materials for their production process.
With this step, you may also identify changes in payment terms, such as requiring immediate payment or accepting open account credit terms with your suppliers. Your objective is to set up a supply plan that supports your business strategy while managing cash flow and working within your company’s budget allocations.
Based on the forecast demand and the sources of supply, the company creates a production schedule based on the availability of goods necessary for production. Scheduling production affects the order of the usage of raw materials and the manufacture of finished products.
It involves setting up production schedules to meet demand and coordinating with suppliers to schedule plant production runs. For example, a manufacturer may set up a production schedule based on raw material and labor availability, known as manufacturing resource planning (MRP). MRP is a computerized system that schedules resources to meet demand.
Plan the transportation of goods from the supplier to the manufacturer and from the manufacturer to the customer. This requires selecting carriers, coordinating with multiple carriers, and determining the most efficient modes and routes to get the product where it needs to be when it needs to be there.
Inventory management involves allocating space and other containers required for storing materials in a distribution center. It determines the optimal inventory levels to maintain for production schedules’
A key component of inventory planning is understanding what drives demand for an item. Inventory monitoring is automated to identify trends in the market, order patterns, and sales history. This information determines how much product should be acquired to have sufficient supplies before selling at the optimum price.
Monitor and Adjust the Plan
The supply chain planning process is ongoing, and the plan may need to be adjusted as market conditions change or new information becomes available. Regularly review and update the supply plan to ensure that it remains effective.
Why Supply Planning Matters
Supply planning is a vital function to ensure a company has enough raw materials to meet production demands. If a company lacks enough raw materials, it can lead to production delays, which can be costly and disrupt the smooth operation of the business.
On the other hand, if a company has too much raw materials inventory, it can tie up valuable financial resources that can boost other sectors elsewhere in the business. Proper supply planning is, therefore, essential for maintaining an efficient and cost-effective production process.
An adequate supply plan helps a company strike the right balance between these extremes. It ensures enough inventory to meet customer demand while minimizing excess inventory and associated costs.
A supply plan is the foundation of a company’s entire supply chain, including coordinating the procurement of raw materials and scheduling production. The effectiveness of the supply chain can impact a company’s profitability and its level of customer service.
Supply Planning Best Practices
Through continuous improvement efforts, supply chain planners work to improve sales and operations planning performance. Here are a few best practices to consider when planning your global supply chains.
Collaborate With Suppliers
Establish strong relationships with your suppliers and work with them to ensure a consistent and reliable flow of goods. To communicate with suppliers effectively, you should use a single system to request, track, and manage all customer requests.
Use Technology to Improve Supply Planning
Use technology to support and improve the supply plan. You can use various software applications, such as inventory management systems or sales forecasting software, to track inventory levels, delivery schedules, and other key performance metrics.
Implement Demand Forecasting
Demand forecasting involves assessing market trends to determine the anticipated level of demand for your product. It helps set production volumes, track product introduction schedules, and plan for future on-hand inventory levels. Use real-time data and analytics to anticipate demand and plan accordingly to help avoid shortages or overstocking.
Build Flexibility Into Your Supply Chain
While the supply chain is your customer’s lifeline to product availability, you must ensure it is flexible enough to meet changing needs. The components of your supply chain should include various elements that enable production in different quantities at different locations.
You also need the flexibility to adjust production timing or manufacturing schedules when conditions warrant. Consider implementing multiple sources of supply and incorporating flexible manufacturing approaches to reduce the impact of disruptions.
Here are frequently asked questions regarding supply planning and supply chain processes.
What is the purpose of supply planning?
Supply planning provides a framework for managing supply and demand in your company. The supply plan is designed to identify the most cost-effective and efficient methods for acquiring, stocking, and distributing raw materials, components, and finished goods. You may experience shortages or overstock and incur excess costs without proper supply planning.
What is demand planning vs. supply planning?
Demand planning is forecasting the future demand for a company’s products or services and determining how much of those products or services the company will need to produce to meet that demand. Supply planning involves how to source, manufacture, and distribute the necessary products to meet the demand forecasted by the demand planning process.
The supply planning process is a critical component of effective logistics. Supply chain planning involves anticipating future demand and planning the most efficient methods of acquiring and distributing raw materials or finished goods. It ensures a timely supply of materials and finished goods.