At RPE, we often hear potential clients use terms like Demand Planning and Allocation Planning interchangeably. Some might even throw Replenishment in the mix too! Today, we are going to walk you through the differences so that you can have a better understanding as to what solution is best for your challenge. And we will even show you how all of this helps drive Merchandise Financial Planning (MFP).
Demand Planning and Allocation Planning are both critical components of supply chain and retail management, but they serve different purposes:
- Demand Planning focuses on forecasting future customer needs.
- Goal: To predict what customers will want, how much they will want, and when and where they will want it. This is based on historical data, market trends, promotional activities, and other insights. This is often done at the lowest level you are planning. So, it could be Store/SKU, but more likely Store/Class.
- Output: An accurate demand forecast that guides production, procurement, and inventory decisions. The Demand Plan is primarily done in Units which informs the supply chain, production, and purchasing teams exactly how many physical items need to be made, shipped, and stocked. This is the figure used in allocation and replenishment.
- Allocation Planning (often referred to as Merchandise Allocation) focuses on the distribution of existing inventory.
- Goal: To assign individual item quantities to specific stores or channels to meet the forecasted customer demand at those locations, maximizing sales and minimizing stockouts or surplus.
- Output: A distribution plan that details which items go to which locations and when, based on the demand plan and local store attributes.
In short, Demand Planning answers “What do we need?” (the forecast), while Allocation Planning answers “Where should the inventory we have go?” (the distribution). Allocation Planning is an operational activity that uses the output of demand planning to make final distribution decisions.
How Replenishment Fits In
Replenishment is the ongoing re-stocking process to keep up with sales after the initial allocation, using methods like reorder points to ensure continuous availability. In fact, the best way to think about the difference between each is summarized in this chart.
| Process | Focus/Goal | Key Action | Timing/Context |
| Demand Planning | Forecasting customer needs to inform all future decisions. | Predict how much product will be needed, where, and when. | Strategic (long-term) and tactical (mid-term). |
| Allocation Planning | Distributing an initial or limited pool of stock across locations. | Decide which stores get what amount from the current inventory. | Operational (in-season), often for new or fashion items with limited restock. |
| Replenishment | Restocking inventory to maintain optimal, ongoing levels. | Automatically or manually re-order or transfer stock to fill what has been sold. | Continuous and routine (in-season), mainly for fast-moving or basic items. |
Now, you might be thinking, “Great, so this is all I need to plan my products! Well, not so fast. While the above work is critical, businesses still need a Merchandise Financial Plan that ensures the company can hit the Sales, Inventory and Margin Goals.
Yes, they are not only compared but are fundamentally linked, forming the core of retail planning.
The Demand Plan and the Merchandise Financial Plan (MFP) are compared and reconciled because the Demand Plan acts as the operational foundation for the financial targets set in the MFP.
Here is how they relate and are compared:
- Merchandise Financial Plan (MFP): This is the high-level financial roadmap that sets the overall sales, revenue, and margin targets for the business. It determines how much money can be spent on inventory (the budget) to meet those financial goals.
- Demand Plan (Forecast): This is the prediction of customer needs—the specific number of units customers are expected to buy for each product. It serves as a primary input to the MFP. The Demand Plan’s unit forecast is converted to dollars to align with financial goals.
- Purpose: To align the operational plan with the Merchandise Financial Plan (MFP) and the company’s financial targets (sales, revenue, and gross margin). Finance and sales teams use dollar figures to check performance against budgets.
- Metrics: Total Sales, Gross Margin, and Forecast Error (revenue difference) are tracked in dollars to understand the financial impact of the forecast.
The Comparison Process
The comparison and alignment occur through a continuous process, typically involving two planning approaches:
- Top-Down Planning: Executive leadership sets high-level financial targets (e.g., $10 million in sales for a category).
- Bottom-Up Planning: Merchandising teams use the Demand Plan (the unit forecast), if available, to project expected sales, inventory needs, and margins at a detailed level. If a company is not using Demand Planning, then the Bottum-Up Plan is compared to the Top-Down Plan.
- Reconciliation: The bottom-up plan (what the forecast says will happen) is compared against the top-down MFP targets (what the company wants to happen). Planners collaborate to close any gaps, which may involve revising the forecast, adjusting the financial budget, or changing promotional strategies.
- In-Season Control: Throughout the season, actual sales and inventory are continuously tracked against both the Demand Forecast and the financial metrics in the MFP. The key control metric for this, the Open-to-Buy (OTB), is directly derived from the MFP to manage inventory investment and prevent over- or under-buying.
The core idea is that the Demand Plan provides the operational reality (in units) while the MFP provides the financial framework (in dollars). Allocation makes sure the units are going to the right stores, in the right quantities, at the right time to ensure you can make your financial (dollar) plan. And, Replenishment provides a continuous supply of those units so that basic items are never out of stock. When done effectively, and in harmony, Lost Sales are minimized and Margin is maximized.
