Supply chains based on demand are experiencing a fast growth, and the concept of Demand sensing is attracting the attention of many organizations. Every day, entrepreneurs are more aware of the importance of understanding the demand for their products and services in order to face a highly variable market, which makes it very difficult to make predictions. For this reason, it is common to see how experts, academics and specialized media talk about the need to implement the agility and effectiveness needed for implementing the demand sensing method in supply chains, as it allows organizations to control the growth of businesses through the proper management of unexpected sales opportunities, cost reduction and inventory reduction.
Why is it so important? First, because the increased market fluctuations and the evolution of customer behaviors allow a company to bring a rapid response in times of crisis; particularly when there has been a big number of changes in the supply network demand. It’s a twist in the game of any company, and it leads to new decisions.
For implementing demand sensing in your supply chain, you must understand the concept first. Demand sensing is a method used by companies to make forecasts about the demand for their products or services. These predictions are made by using mathematical techniques and real-time information on the current status of the supply chain is made. It’s also necessary to know the difference between demand sensing and demand management. While demand sensing seeks to improve the results of the management of short-term demand by forecasting, demand management aims to provide a manufacturing plan, required by all the elements of an organization through the use of its shipping history. The purpose of demand management is to formulate production plans by aligning supply and demand. In other words, it is a series of processes which includes demand planning, on the one hand, sales and operations planning on the other hand, as well as reconciliation plan sales and demand forecasting statistics.
Demand sensing is useful for certain organizations. In particular, for those that work hard to find alternative methods that enable them to enhance the accuracy of demand forecasts. Demand management is also an effective tool, but both are useful depending on the special circumstances of each organization. For example, if an organization does not have an adequate level of maturity, the implementation of demand sensing is not recommended, as it aims to increase forecast accuracy, and an organization under such conditions may be able to achieve major advances in forecast accuracy without the help of such tool. Demand sensing may be more useful when the demand planning processes of an organization are mature enough and the organization has been active for enough years to make accurate predictions based on the historical data.
How is that forecast developed? An accurate forecast needs a careful evaluation of the sales history of the company for several years. By applying mathematical techniques on this information, you can set a series of predictable seasonal patterns in terms of probabilities. Of course, the process of demand sensing is not an absolute prediction: anything can happen, because the demand for goods and services can be tremendously affected by external and unpredictable events: rises and falls of global currencies, oil crises, fluctuations in the stock markets or natural disasters of great magnitude. However, under normal conditions, such predictions are generally accurate, and very useful to evaluate the performance of a company and its possible reinvention in order to expand its sales in the market. “Demand Sensing is useful while companies may take advantage of them when they need to include such detailed information on demand in the short term”, says David Kiger, logistics expert from Worldwide Express. “Such data allows organizations to reduce their forecast errors up to fifty percent. These forecasts produce an increase in the inventory accuracy by twenty percent, and it helps to deploy the available inventory (even if it’s in transit), which comes from the DC or it’s sent right from the manufacturer.”
Another important feature of demand sensing is that the automatic creation of its provisions goes directly to the planning systems. That’s useful with the aim of making tough executive decisions. It is important to consider that having accurate forecasts is an essential requirement to reflect the realities of today’s supply chain in volatile markets. Thus, forecasts should be adjusted every day so that they can reflect all possible signs of demand. Nevertheless, to check such estimates for each sold item, everywhere, every day, is not possible from any point of view (at least not with today’s technology.) Subsequently, for avoiding adverse effects in the operations of the supply chain, forecasts must be very accurate, current and consistent.
If you wish to study this subject for implementing it in your organization, this article is highly recommended.