KPI for demand planning: These are the key indicators to consider.

What Are Demand Planning KPIs?

KPIs, or Key Performance Indicators, are essential metrics in business management that allow measuring and evaluating the performance of different areas of the business. In the context of demand planning, KPIs play a crucial role in ensuring efficiency, accuracy, and adaptability to market fluctuations.

In this article, we will explore the most important KPIs in demand planning, how they are calculated, and why they are essential.

Why Are Demand Planning KPIs Essential?

Demand planning is a fundamental part of supply chain management and logistics for any business. An efficient focus in this area can result in lower inventory costs, higher customer satisfaction, and a significant competitive advantage.

Demand planning KPIs offer a quantifiable view of how this essential function is being managed, enabling companies to make informed decisions and adjust their strategies as needed.

Key KPIs in Demand Planning

• Mean Absolute Error (MAE):

MAE measures the average difference between forecasted figures and actual demand figures. A low MAE indicates high forecast accuracy.

MAE = Σ |Actual Demand - Forecasted Demand| / Number of Observations

• Mean Absolute Percentage Error (MAPE):

MAPE calculates the average error as a percentage of actual demand. It helps understand the relative accuracy of forecasts.

MAPE = (Σ |Actual Demand - Forecasted Demand| / Σ Actual Demand) * 100

• Forecast Accuracy:

This KPI measures the proportion of accurate predictions compared to the total predictions made. In other words, it measures how close forecasts are to actual demand.

It is generally calculated as a percentage and compares the forecast to actual sales data. High accuracy percentage indicates good demand planning.

Forecast Accuracy = (Number of Accurate Predictions / Total Predictions) * 100

• Bias Ratio (SES - Bias Error):

The SES evaluates whether predictions tend to systematically overestimate or underestimate demand. A SES close to zero indicates unbiased estimation.

SES = (Actual Demand - Forecasted Demand) / Actual Demand

• Inventory Coverage Rate:

This KPI measures how long current inventory can cover demand without new acquisitions or production. Longer coverage indicates better inventory management.

Inventory Coverage Rate = Current Inventory / Average Daily Demand

• Service Level:

It measures the company's ability to meet customer demand within promised timelines. It is calculated as the percentage of demand fulfilled on time.

Service Level = (Demand Fulfilled on Time / Total Demand) * 100

• Cost of Demand Shortfall:

It measures the costs associated with inventory shortages when demand exceeds planned supply.

• Supplier Lead Time:

It measures how long suppliers take to deliver products or raw materials after placing an order. A short lead time can help reduce demand planning uncertainty.

Supplier Lead Time = Receipt Date - Order Date

• Fill Rate:

It evaluates the proportion of customer orders delivered in full and on the promised timeline. A high fill rate indicates good demand planning and effective execution.

Fill Rate = (Complete Orders Delivered / Total Orders) * 100

• Backorder Rates:

This KPI measures the frequency or quantity of orders that cannot be delivered on time due to inventory shortages. It provides valuable insights into a company's ability to meet current demand and may indicate the need to adjust inventory management or production timelines.

Backorder Rates = (Unfulfilled Orders / Total Orders) * 100

• Average Stock:

Average Stock calculates the average inventory held over a specified time period. It helps determine the amount of inventory a company needs to effectively cover demand without incurring unnecessary storage costs.

Average Stock = (Initial Inventory + Final Inventory) / 2

These are some common examples of KPIs in demand planning, but it's important to tailor them to your business's specific needs and circumstances.

Practical Examples of Using KPIs in Demand Planning

We also provide concrete examples of how these KPIs are applied in demand planning. These practical examples will help you better understand how these indicators influence decision-making and contribute to more effective demand planning.

Practical Example #1 in the Fashion Industry:

Imagine a fashion company facing the winter season. To anticipate the demand for coats, scarves, and boots, they use KPIs like Mean Absolute Error (MAE) and Mean Absolute Percentage Error (MAPE). They record sales of these products during past winter seasons and calculate forecasts for the upcoming season.

If MAE and MAPE are low, they know their forecasts are accurate. If, on the other hand, they find a high MAE, this could indicate a need to adjust forecasts or reconsider their inventory strategy. Thanks to these KPIs, the company can avoid excess unsold inventory or shortages of popular products.

Practical Example #2 in Personal Care Product Distribution:

A personal care product distributor sources from multiple suppliers and sells products through various retail chains. To ensure they always have enough inventory and meet delivery deadlines, they use Inventory Coverage Rate and Supplier Lead Time.

If the Inventory Coverage Rate is high, it means they can meet demand smoothly over an extended period, indicating efficient inventory management. On the other hand, if Supplier Lead Time is short, they can react more quickly to demand fluctuations and make informed decisions about when to order from suppliers.

Real Example #3 in Electronic Component Manufacturing:

An electronic component manufacturer faces a highly competitive and seasonal market. They use Service Level and Inventory Turnover to stay agile and profitable.

If their Service Level is high, they can reliably fulfill customer orders, increasing customer satisfaction and brand loyalty. Additionally, they closely monitor Inventory Turnover to ensure components don't become obsolete, which could result in financial losses.

Example #4 in the Food and Beverage Industry:

A food and beverage company prepares for seasonal events like Christmas and the summer season. They use the Cost of Storage and Fill Rate to optimize their supply chain.

Reducing the Cost of Storage is crucial to maintaining profit margins. By calculating this KPI, they can identify opportunities to reduce storage expenses. Furthermore, by maintaining a high Fill Rate during key events, they ensure customer orders are delivered on time and in full, increasing customer satisfaction and sales.

In summary, these examples illustrate how demand planning KPIs are critical tools across various industries. They help companies manage their resources efficiently, stay competitive, and meet customer expectations.

Conclusions

Demand planning KPIs are essential tools for assessing and improving the performance of this critical area in the supply chain. By measuring forecast accuracy, inventory efficiency, and the ability to meet customer demand, companies can make informed decisions to stay competitive in a constantly changing market.

Effective implementation of these KPIs can lead to better demand management, cost reduction, and improved customer satisfaction.

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