Demand segmentation is a crucial element of effective demand planning because it recognizes that one size does not fit all.
Different products, customer segments, and sales channels behave in unique ways. That means your approach to forecasting, inventory management, and service levels also needs to vary.
By segmenting demand, you can create more tailored and accurate forecasts, which in turn improves supply chain performance and allows you to focus your efforts where they pay off most. Here’s how demand segmentation and classification can help:
Not every product is easy to forecast, or even possible to forecast at all. High forecastable products have stable consistent demand patterns. Simple statistical methods are usually enough to get these right. Low forecastable products, on the other hand, have erratic demand that’s tough to predict. These might need more complex models, or in some cases, they may be nearly impossible to forecast. Instead of spending too much time on these, you might rely on exception-based management.
Some products or customers carry more weight in your business and need more precise planning attention:
High-volume or high-value products: Forecasting errors for these categories can have a high financial impact. For example, if you get the forecast wrong for a high-volume product, you could end up with stockouts, lost sales, or too much inventory. A few high value products becoming obsolete can be worse than having ten times as many low-value products becoming obsolete, so make sure to look at value as well when segmenting demand.
Key customers: Certain customer segments might represent a big part of your company’s revenue. Segmenting based on key customers allows you to review these most important ones easily with salespeople.
One of the toughest parts of demand planning is dealing with low-volume or intermittent demand products. These don’t have enough historical data for a reliable baseline, and their demand patterns are often irregular.
Focus on category A products: Prioritize your efforts on A-class products (high value/high volume). These are critical to the business and where accurate forecasting can make the biggest difference.
Exception management: For products with irregular or low demand, instead of using traditional forecasting methods, focus on exception management. Monitor and flag these items when demand deviates from the norm, so you can react quickly without spending too much time on trying to predict the unpredictable.
A video of BSH with Lora Cecere and their forecastable and non-forecastable categories of demand. (watch from automatic starting point until min 4:17)