There is a big difference between Demand Planning and Demand Forecasting, especially if you are running an aftermarket parts and service business and you are selecting and implementing a new system.
Even if you’re not currently looking for a new system but you are responsible for a manufacturing business with demand planning capabilities built in to your ERP system, you will struggle to grow the aftermarket parts and service side of your business effectively without a demand forecasting capability.
Whilst the difference in wording between planning and forecasting may seem subtle, the negative impact on your aftermarket business can be huge if you have the wrong system.
But I’m getting ahead of myself…because you’re probably still wondering what the difference is between planning and forecasting.
So let’s get some clarity on that first, then we’ll come back to why this matters.
Demand Planning versus Demand Forecasting – What’s The Difference?
The act of planning involves putting a plan together, obviously.
You make a plan by gathering together the information you have available and then making a decision regarding what you want to happen, before capturing that plan in some form.
So, a plan is something you construct yourself and then follow.
A demand plan is therefore a statement of what you want the demand to be and when you want it to occur, usually set out as quantities in daily, weekly or monthly buckets or more precisely as quantities with dates.
If you are running a manufacturing plant, for example, a demand plan is extremely useful for deciding how many products you want to make and when, and for calculating how many sub-component parts and materials to buy in advance so that you can produce to your plan.
As long as your plan is deliverable, you follow it as required, you have perfect supply of materials and components and your manufacturing plant stays operational; you will hit your plan.
That’s because the demand is determined by you i.e. it is planned demand.
Now let’s contrast this with the art of forecasting.
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A forecast is a foresight or prediction.
Much like forecasting the weather, a forecast is used when the thing we are trying to plan cannot be predetermined in advance by us and the best we can do is to try to predict it based on one or more variables.
The quality or accuracy of a demand forecast is therefore dependent on the number of variables required to explain the demand completely and the extent to which a combination of those variables is able to accurately explain the demand by following a repeatable pattern that can be extrapolated or projected into the future.
The more variables you have involved, the more difficult it is to forecast.
A good example of something that cannot be planned and is difficult to forecast is the weather.
Even after many years of trying to forecast the weather, spending money researching it, developing fancy computer systems and forecasting models and using lots of data capture mechanisms around the world, weather forecasting experts on the telly still get it wrong to some extent at best and spectacularly wrong on occasions.
The Nature of Aftermarket Demand
The demand for aftermarket parts is driven by multiple factors, just like the weather.
Obvious ones include the timing and occurrence of equipment failures and the timing of equipment maintenance events.
Less obvious are the timing and size of replenishment demands from stockists within the supply chain such as dealers, retailers, wholesalers, etc.
The further back in the supply chain you are, the more difficult it is to predict parts demand as these various re-stocking decisions become aggregated – each stockist potentially using different algorithms to calculate their replenishment frequency, timing and re-order size.
Also, some of these algorithms will be driven by a computer system and some will be driven manually by a real person.
Even if a system is used to automate replenishment, the decisions, timings and quantities can be overridden by a human being.
Hence an element of human behaviour creeps in to the demand pattern too.
This may be as simple as rounding quantities up or down, being inconsistent with timings and decision-making, being influenced by other factors such as stocking space or financial budget, for example.
Human behaviour can also factor into a demand pattern with the causes of demand failure, timing of when and whether to replace failed parts, timing of maintenance events, etc.
Behaviours and causes of demand can also vary by geographic region due to climatic differences, economic differences, cultural differences, legal or political differences, etc. depending on the equipment and parts in question.
I could go on but hopefully I’ve explained enough to convince you that forecasting demand for aftermarket parts is a much more complicated and imprecise act than planning how many parts will be used to make a piece of original equipment in a factory.
In summary, aftermarket demand is mostly unplanned non-deterministic demand whereas manufacturing demand is planned, deterministic demand.
Now that we’ve established the clear difference between demand planning and demand forecasting, let’s return to the question of why this matters.
Systems for Aftermarket Businesses
I began my career in 1987, developing and implementing demand forecasting systems in an aftermarket parts business and since then, I’ve been involved in selecting and implementing many modern supply chain software packages and ERP systems for many manufacturing and aftermarket businesses.
So I like to think that I’m suitably qualified to say that, even today, a lot of the best known ERP systems don’t do the kind of demand forecasting that is required for an aftermarket parts business.
Sure, they have some form of demand planning capability, the kind that is sufficient for planning a manufacturing facility, linked to MRP and bills of material.
The better ones even have some kind of safety stock management enabling you to enter your own safety stock targets, re-order points, min-max levels or similar.
That’s right – most of them still don’t calculate service level driven safety stocks for you – don’t get me started on that one!
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The problem here for manufacturers is that your aftermarket business is probably the poor relation to engineering and manufacturing, which means that the manufacturing side of your business ends up dictating the choice of ERP system and the aftermarket parts and service side of your business get stuck with your choice, even when it doesn’t do what it needs.
Which means that your aftermarket business will need a separate demand forecasting and inventory management system interfacing to your ERP system to enable you to manage your parts demand effectively.
The good news is that this is entirely possible – I’ve done this many times over the years.
If you don’t want to buy a new forecasting system, an alternative strategy is to deploy some kind of supply chain analytics solution as a managed service and whilst there are a number of providers that claim to offer supply chain analytics, there aren’t many that understand and specialise in demand forecasting for aftermarket parts businesses.
Whatever solution you choose, the most important thing is that you make sure you have the necessary capability in your people, processes and systems to be able to manage your aftermarket parts demand effectively, because the impact on your inventory investment, parts availability and ultimate customer service will be impacted negatively if you don’t.
How To Get The Right Demand Forecasting Solution For Your Aftermarket Business
Finding the right solution to manage your aftermarket parts business effectively is not easy and we’ve only been able to cover one particular aspect in the space available for this article.
In our experience, even the most modern and most popular ERP systems don’t have the specialist functionality required to support an aftermarket parts and service operation.
We’ve been specifying, selecting, developing, improving and implementing specialist aftermarket systems for almost three decades and for a variety of manufacturing sectors including automotive, aerospace, defence, electronics, industrial, marine and appliances.
If you’d like some help with your aftermarket systems, we would be happy to share some of our case studies and how you might achieve something similar with your business.
Here’s a few examples:
What’s been your experience with forecasting demand for aftermarket parts?
Leave us a comment below…