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What is the Best Organizational Design for Demand Planning?

Demand planning is the process of predicting future market demand for a company’s products. It’s a combination of art and science, nuanced market knowledge, and advanced statistical analysis, as well as a balance of supply chain pragmatism and sales optimism. Given this balance of roles and skills, a common question we encounter is, “What is the best organizational design for demand planning?” While there are numerous possibilities, the two most common organizational structures have demand planning reporting into either supply chain or commercial (sales and marketing) departments. In this piece, we’ll discuss some of the pros and cons of each. 

Supply Chain 

Supply chain organizations are built around number-crunching and utilize sophisticated software solutions to support their work. Over the years, supply chain organizations have grown in capability, supported by improvements in planning software. Supply chain planners who have used advanced planning solutions to calculate distribution plans and production plans are often sufficiently system-savvy to learn and embrace statistical forecasting algorithms. Since demand is so closely tied to production and distribution planning, it would seem a natural fit to have demand planning be part of the supply chain organization.  

However, there are blind spots and risks for demand planning teams situated within a supply chain organization: 

  • A significant potential blind spot is visibility to customer activities and initiatives. Supply chain planners focused on statistical forecast creation use historical demand, including events, to predict the future. This can be very powerful, as properly applied algorithms can effectively identify demand patterns and trends and apply them to predictions accordingly. But history doesn’t always repeat, especially when we consider activities designed to drive sales. Promotions, sales deals, and advertising campaigns are all examples of ways in which we intentionally shape future demand that is likely to differ from historical results. If supply chain planners don’t receive information on these activities, the forecasts will be missing key market intelligence and likely be less accurate. 
  • Another risk for demand planning teams within supply chain organizations is relying too heavily on their existing processes and past results. Demand planning needs to generate a forecast of what customer demand would be without considering constraints or feasibility of fulfilling the forecast. Without this unconstrained forecast, the company will never see the total demand of the market, nor associated missed opportunities or signals to invest in expanded capacity. If a supply chain planning team is adding demand planning capability, it’s critical to recognize that, while connected, creating a forecast is a separate process from supply planning.  

Commercial (Sales and Marketing) 

We’ve seen some of the challenges of demand planning within the supply chain organization, so maybe demand planning should be part of commercial (sales and marketing)? There are certainly some advantages to demand planning being part of the commercial organization; connection with customer teams enables more organic insight into customer behavior and promotional activity, which supports including those market activities in the demand plan.  

But housing demand planning within the commercial organization is not without issues: 

  • Commercial teams may not have the quantitative analytical skills and planning solution experience that exist within supply chain. After all, sales professionals usually pursue their career path because of their skills and interests in building relationships with customers and, well, selling – not so they could spend their days at a desk, poring over data and algorithms. Furthermore, time spent by the commercial team analyzing data and creating forecasts is time that is not spent selling. Hiring/developing someone with these specific skill sets is a must. 
  • Sales teams have targets that support company goals and incentivize individual selling behavior. While these targets are valid, they’re not necessarily aligned with actual market demand. It’s imperative to differentiate between sales targets, company budgets, and financial targets, and demand plans. Remember, demand plans need to be an unbiased view of the unconstrained market demand – situating the demand planning function under the commercial team has more risk for optimistic bias. 

The Answer Is Collaboration 

There is no obvious “right” answer for where demand planning should reside organizationally. Both supply chain and commercial are valid options with plusses and minuses, and the specific solution is dependent on the structure and dynamics of the particular organization. If an organization has a supply chain team with established quantitative analysis and planning capabilities, then supply chain might be the best fit. Conversely, if an organization has a commercial team that has both established processes around promotional activities and quantitative planning capabilities, perhaps commercial is a better organizational home. In either event, it’s key to maintain the connection and communication between supply chain and commercial organizations.  

If demand planning is part of the supply chain organization, there needs to be a focus on developing rigorous processes to include sales and marketing intelligence in the consensus forecast. This includes regular meetings between demand planning and commercial teams to gather and assess market intelligence and adjust the forecast accordingly, clear definitions of the types and format of market intelligence data to be included, and a robust consensus process to ensure alignment. Particularly important is a consistent process to capture not only adjustments to the baseline forecast but also the assumptions that support those adjustments.  

If demand planning is part of the commercial organization, it’s important to confirm that the forecast is unbiased and based on verifiable data. Commercial organizations have the best view of future market activities, but these must be enhancements to an algorithmically created baseline. Robust Trade Promotion Management and Trade Promotion Optimization tools and processes can help improve the quality of promotional lift projections by measuring promotional effectiveness.  

More Than Just Organizational Design for Demand Planning

In any organizational structure, a healthy tension exists between the supply chain and commercial organizations in the creation of a consensus forecast. Intentional process design is needed to ensure that forecast assumptions are valid, clearly documented, and generally agreed upon. Commercial and supply chain teams need to be diligent in challenging and testing assumptions around key forecast components, such as baseline forecast, promotional effectiveness, and new product introductions.  

Demand consensus is one crucial step in an effective S&OP process, which verifies that operational decisions are aligned with corporate strategy and objectives. And while organizational design for demand planning can help to facilitate this consensus process, it’s not the entire picture. Data-based decision-making is an organizational muscle that builds strength over time through repeated application and cross-functional discipline!  

Reach out to learn more about our Supply Chain Consulting Services. 


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Tags: Supply Chain Planning & Execution, S&OP, Demand Planning