Demand forecasting is an essential component of any supply chain management strategy because, without it, you’d have no way to estimate how to purchase material to meet customer demand and foresee future demand. In this guide to demand forecasting, you’ll learn how to forecast demand and the best practices for demand planning in the supply chain.
What is Demand Forecasting in the Supply Chain
Demand forecasting in supply chain management refers to the process of demand planning, or predicting the demand of materials to ensure you can deliver the right products and in the right quantities to satisfy customer demand without creating a surplus. Forecast error can result in creating a surplus, which is both wasteful and costly.
Why is Forecasting Demand Important in the Supply Chain
Accurate demand forecasting is important to the supply chain because it is the process by which strategic and operational strategies are devised. Think of it as the underlying hypothesis for strategic business activities and the starting point for most supply chain processes, like raw material planning, purchasing, inbound logistics, cash flow, and manufacturing.
Demand forecasting also facilitates critical business activities, like financial planning, production planning, risk assessment, and the purchase of raw materials. Most importantly, forecast accuracy enables retailers to avoid stock outs and over stocking, improve production lead times, minimize costs, increase operational efficiencies, and improve the customer experience.
How Does Demand Forecasting Work
We’ve thrown a lot of information at you very quickly but sales forecasting is little more than the use of sales data from the past to determine consumer demand in the future. The process can be broken down into qualitative and quantitative forecasting, both of which rely on different resources and data sets to extrapolate useful sales data.
The quantitative forecasting method, also known as passive demand forecasting, is used when there is existing historical data on specific products and a pre-established demand. Passive demand forecasting requires the use of mathematical formulations and data sets like financial reports, sales, revenue figures, and website analytics.
The qualitative method, or active demand forecasting, on the other hand, relies on emerging technologies (such as machine learning), pricing and availability changes, product lifecycle, product upgrades and, most importantly, the intuition and experience of those planning the forecast.
Demand Forecasting Techniques
Within the sphere of qualitative and quantitative forecasting, there are several different demand forecasting method options you can use:
- Collective Opinion, which leverages the knowledge and experience of a company’s sales team to aggregate historical data on customer demand.
- Customer Survey Method, which provide key information on customer expectations, desires, and needs. This data is useful for creating a sales forecast but is harder to predict actual demand.
- The Barometric Method, is an active demand forecasting method that involves using economic indicators to predict trends and measure current, past, and future activity.
- The Expert Opinion Method, which involves soliciting expert advice from external contractors to determine future activity.
- The Market Experiment Method, which utilizes market experiments carried out under controlled conditions to inform retailers on consumer behavior.
- The Statistical Method, is a demand forecasting method that allows a company to identify and analyze the relationships between different variables, establish performance history over time, identify trends and extrapolate potential future trends.
How To Forecast Demand
Accurate demand forecasting is valuable to all businesses but is particularly useful to e-commerce brands and retailers, where accurate forecasting can support product inventory management efforts and improve the customer experience.
But knowing how to approach something as complex as forecasting accuracy for an e-commerce store is no small task. Fortunately, there are some tried and true strategies that can make the process easier.
Collect the Right Data
For your demand forecast to be successful, you must ensure that you have the right kind of data to make informed business decisions. It’s important to hone-in on the numbers that give you the information you need to make decisions, like pricing trends and how many people visited on your sales channels in a given timeframe.
Try not to focus your data collection efforts on a complete product line. It’s better to concentrate on the products and categories that earn you the most income and are the most popular with customers.
Adjust for Variables
There are many factors that go into the daily interactions that affect sales data. For your demand forecast to be successful, you need to account for any variables that may sway your data one way or another, such as natural disasters or unexpected store closures. Another factor is if the product is seasonal or trendy, as intermittent demand or future demand can make it harder to create an accurate forecast.
Document Sales and Demand Trends
Whichever metric you choose, you’ll need a repeatable data analysis process that accurately depicts whether the forecast is getting better or worse; points to items that need the most improvement; measures accuracy at your procurement lead time and provides accurate information by customer, branch, brand, product and category.
Budget, Purchase, and Allocate Accordingly
Once your demand forecast is in place, the only thing left to do is utilize your collected data to draw up a strategy for how, where and when to allocate your resources and purchasing efforts.
Flowspace Makes Demand Forecasting Easy
To effectively increase profits and mitigate unnecessary costs, you need to improve demand forecasting and optimize your supply chain. Flowspace’s demand forecasting software uses advanced analytics and distribution metrics to inform business decisions, improve inventory flow and give you the resources needed to bring your e-commerce store to the next level. Get started today!
Written By:
Allison Champion
Allison Champion leads marketing communication at Flowspace, where she works to develop content that addresses the unique challenges facing modern brands in omnichannel eCommerce. She has more than a decade of experience in content development and marketing.
