What is Demand Forecasting
Demand forecasting is a method of predicting future demand for a product or service. It estimates future customer demand and determines how much to produce when to produce it, and what price to charge. The overall objective of demand forecasting is to develop a set of values that describe the expected behavior of customers over time.
Demand forecasting can be used as a decision-making tool by business leaders to help them determine how much stock they need to hold to meet consumer demand. It also allows companies to allocate their resources more efficiently, which leads to increased profitability.
Types of Demand Forecasting
The most common type is sales forecasting, which is used to predict the sales volume for a company’s products or services in the future. Sales forecasts are created by analyzing past data, such as previous years’ sales figures, seasonal trends, and other factors that may affect expected sales.
In addition to sales forecasting, there are several other types of demand forecasting:
- Production planning – Used by companies that manufacture products or provide services to forecast production volumes for the coming months and years. This helps them decide how much raw materials need to be purchased and what staffing level should be hired.
- Capacity planning is used by companies that manufacture products or provide services to predict when they will need additional manufacturing capacity and where they can get it.
- Supply chain management – Used by companies that manufacture products or provide services to predict how much inventory they will need on hand at any given time based on current and anticipated sales volumes over a specific period (e.g., weekly).
- Statistical Forecasting uses historical data to create a forecast model that predicts future sales volume based on past events such as seasonality, product life cycle, economic conditions, etc.
- Judgmental Forecasting – Judgmental forecasting involves human intuition in predicting future sales based on experience with similar situations or products.
Methods of Demand Forecasting
There are many methods of demand forecasting. The following are some of the most common methods used by businesses.
- Regression Analysis: Regression analysis is a statistical technique that involves collecting historical data on factors that affect demand and then using statistical methods to predict future demand based on these factors.
- Time Series Analysis: This method involves analyzing historical data to find patterns that can be used to predict future trends in demand.
- Linear Programming: Linear programming uses mathematical models to determine how much of each product should be produced given constraints such as budget limitations and available resources like labor and raw materials.
- Trend Analysis: Trend analysis is used when previous years of data are available for comparison with the current year’s data. Trend analysis starts with comparing the current year’s data with last year’s data by plotting them on a graph where each point represents one month’s data.
- Market Research Analysis: Market research analysis is a crucial attribute of business planning and essential for making strategic decisions about products and services. Using quantitative data such as demand forecasts, a business can determine if the market will be able to satisfy its needs.
How Demand Forecasting Works
Demand forecasts are usually based on historical data about the demand for your products and services. You can use this information to predict future demand. You’ll need to track sales revenue by month or quarter for at least three years, including the average monthly increase or decrease in sales. You can also use statistical models to make predictions based on historical data alone.
Benefits of Demand Forecasting
The benefits of demand forecasting are numerous and include:
- Lower inventories: A company can reduce its inventory levels by ensuring that it has the right amount of materials for production. This means that the inventory cost is lowered and the risk of having excess inventory.
- Improved cash flow: Forecasted demand allows a company to plan for future sales and manage its cash flow accordingly.
- Improved customer satisfaction: If a company does not have enough stock on hand when customers try to place an order, they may turn to competitors who have the product available. This loss of business can be avoided by using a demand forecast tool to predict future sales and plan production accordingly.
- Reduced waste costs: Waste costs are reduced because excess inventory isn’t produced if there is no demand for it — meaning there will be less waste in terms of money and resources used up during production.
Challenges of Demand Forecasting
The demand forecasting process can be challenging to manage. Predicting consumer behavior is challenging, so knowing exactly how much product you need to produce isn’t easy.
Here are some of the most common challenges businesses face when it comes to demand forecasting:
- Your customers are not always predictable. Consumers spend money on different things depending on their mood, the weather, and other factors. This makes it difficult to predict how much of a particular product they will buy at a given time.
- There are too many variables in the forecasting process. The number of variables involved in forecasting is vast — from holidays, weather conditions, and economic factors to how long a customer spends looking at your website before moving on.
- Demand is constantly changing due to new competitors entering the market or existing competitors improving their products or services.
- Seasonal fluctuations in demand can also affect forecast accuracy, especially if they’re not considered during the forecasting process.
- There can be significant time lags between events in your company and when you realize this event took place (e.g., sales orders).
Demand Forecasting: How to Get Started
Start with what you know. Rethink how you define “forecast” and “demand.” Consider the difference between a forecast and a plan or strategy for how much of a product or service should be produced or sold.
One of the most important aspects of demand forecasting is understanding your customer base. If you know your customers, you can predict how much demand there will be for specific products and services.
Understand your data sources and limitations. To determine their strengths and weaknesses, a good first step is to review all available data sources — such as historical sales data and current orders.
Trends are generally easier to identify than seasonality because they tend to be more short-term. For example, if your business sells clothing and accessories, you may see an increase in sales after a new fashion line is released by a famous designer or brand.
You also want to consider other factors that might affect your demand forecast, such as market conditions, economic trends, competitor activity, new product introductions; price changes; natural disasters, technological developments, political events, etc.
Factors that Influence Demand Forecasting
The demand forecast is a crucial component of the overall sales forecast. It is a forecast of the future demand for a product or service under a set of conditions. It estimates how much product will be sold in a given time frame, at a specified price and profit margin, within a predefined market segment.
Various factors influence demand forecasting:
1. Sales Forecasting: Sales forecasting helps us estimate our sales volume for the next period or quarter. Sales forecasting is directly related to demand forecasting because sales forecasts help us understand how much we will sell in the future and tell us about our competitors’ activities.
2. Market Analysis: Market analysis helps us predict whether the market will grow or decline in the future. If your product is dependent on this market, then it becomes necessary for you to conduct a market analysis before doing demand forecasting for your product.
3. Competitor Analysis: Competitor analysis helps you know about your competitor’s activities which may affect your business even if they are not directly competing with you but operating in the same sector.
4. Technological factors: Technological factors such as technological advances can affect demand forecasting. For example, when smartphones were introduced into the market, there was a significant reduction in demand for personal computers because people could use their phones to access the internet instead of buying desktop computers at home or work.
5. Economic factors: Economic factors such as inflation, interest rates, gross domestic product (GDP), unemployment rates, and consumer confidence influence demand forecasting.
How Demand Forecasting Helps Ecommerce Stores
Demand forecasting is a tool that helps eCommerce businesses to plan for their business growth and manage inventory levels. It allows businesses to predict future demand, identify trends, and make informed decisions about their inventory management. It is an essential part of any business because it helps companies decide to order more stock or less, impacting their profits. If you’re an eCommerce store owner, you must know how demand forecasting works to make informed decisions about your business growth.
Demand Forecasting: Why Your Company Needs It
Demand forecasting is an integral part of any business. It helps you predict how much product you will need and when you will need it. Forecasting also helps you plan for upcoming events that might affect your supply chains, such as holidays, seasonal fluctuations, or economic changes. If your company doesn’t have a demand forecast, it can be not easy to stay ahead of your customers’ needs and ensure that they get what they want when they want it.