Demand planning: definition, methods & examples for production and material management

The warehouse is bursting at the seams, yet the critical raw material for tomorrow's batch is missing. This scenario is a nightmare for many companies in the process manufacturing industry. Stock shortages lead to costly production downtime, while overstock binds unnecessary capital and increases the risk of spoilage.

The solution lies in precise planning. Particularly for SMEs in the chemical, pharmaceutical, food, or cosmetics sectors, balancing supply capability and cost efficiency is crucial. In this article, you will learn how to optimize your material flow.

Demand planning is a key aspect of materials management. Its purpose is to accurately determine the quantities of materials needed and when they are required, to ensure production or fulfill customer orders.

The terms are often confused: while demand analysis is more market-oriented and asks how much product could be sold, demand planning focuses on internal resources: What do we need to purchase or produce to meet this demand?

The goals of demand planning can be summarized simply: having the right material at the right time, place, and quality.

Why is this so critical in the process manufacturing industry?

• Readiness to deliver: Customers expect just-in-time deliveries.
• Cost minimization: Inventory holding incurs costs.
• Compliance & quality: Raw materials with best‑before / expiry dates must not be stored too long to prevent waste and regulatory issues.

To plan demand, it first needs to be categorized:

1. Primary demand: The quantity of marketable finished products (e.g., 1,000 bottles of cough syrup).
2. Secondary demand: The raw materials and components needed to produce the primary demand (e.g., active ingredients, syrup base, glass bottles). This is often determined using the bill of materials or formulation.
3. Tertiary demand: Auxiliary and operating materials (e.g., label adhesive, machine cleaning agents).

The sum of these requirements results in the gross requirements. Subtract current inventory to obtain the net requirements – i.e., what actually needs to be procured.

There are various methods of demand planning that vary depending on the product and industry. Here are the most common demand planning methods:

• Deterministic demand planning (program-oriented)
  This involves precise calculations based on specific production plans or customer orders.
  Example: For an order of 500 kg of color granulate, the exact amount of pigments according to the recipe is ordered.
  
  
• Stochastic demand planning (consumption-oriented)
  Future demand is forecasted based on historical data. This is suitable for minor parts or goods with stable consumption.
  Example: The consumption of gloves was consistent over the past 12 months. Reordering is triggered automatically based on the average.
  
  
• Heuristic (estimation)
  When no data is available (e.g., for new products), planning is based on the experience of the staff.

What does this look like in practice? Here are two scenarios for calculating demand planning:

Example 1: Deterministic with bill of materials
A cosmetics manufacturer plans to produce 2,000 jars of cream. According to the formulation (bill of materials), each jar contains 50 ml of emulsion.

Calculation: 2,000 jars x 50 ml = 100,000 ml (100 liters) of emulsion. This is the secondary demand.

Example 2: Stochastic with safety stock
A demand planning example for cleaning products: The average monthly consumption is 500 liters. To buffer fluctuations, a safety stock of 10% is added.
Calculation: 500 liters + 50 liters buffer = 550 liters order quantity.

Tip: Use ABC analysis to determine which method is suitable. High-value A items (active ingredients) should be planned deterministically, while less expensive C items (screws) can be planned stochastically.

The demand planning process typically follows well-defined steps:

1. Data collection: Check inventory, review orders
2. Method selection: Deterministic or stochastic?
3. Calculation: Determine gross and net demand
4. Distribution: Forward to purchasing or production
5. Monitoring: Compare planned and actual figures

In SMEs, key roles include production management, which reports the demand, and purchasing, which initiates procurement. ERP systems are key tools for demand planning.

The close integration of demand planning, purchasing, and logistics is essential, as simply placing an order for a specific quantity is not enough in the process manufacturing industry.

Specific requirements are:

• Batch purity: In some productions, raw materials from different batches must not be mixed.
• Hazardous substances: Storage capacity for flammable materials is limited.
• Cold chains: Demand must be timed so that chilled goods are processed or stored immediately.

Modern approaches to demand planning rely on robust data. Algorithms quickly identify seasonal fluctuations, such as illness waves for pharmaceutical companies. Additionally, regulations like GMP (Good Manufacturing Practice) demand complete traceability. Manual planning with Excel quickly reaches its limits.

An ERP system automates complex calculations. It manages recipes, current inventory levels, reserved batches, and open purchase orders. This turns a rough estimate into reliable planning. Learn more in the article: ERP demand planning.

For companies in the chemical, pharmaceutical, biotech, food, medical device, and cosmetics industries, our ERP solution for the process manufacturing industry, Yaveon 365, offers the features that standard solutions often lack: batch management, formulation management, and integrated compliance checks. This ensures that your demand planning is not only mathematically accurate but also tailored to your industry.