Demand forecasting is a means of estimating what customer demand will look like in the future, and how it will affect a business’ supply chain. It’s essential for business health, continuity, and growth, ensuring that leaders make the right decisions at the right times.
If you’re new to demand forecasting and keen to make it a fixture of your business, our guide can help. Here, we’ll be covering what demand forecasting is, why it’s important, and how to implement it alongside your ongoing supply chain management strategy.
- What is Demand Forecasting?
- How Can Demand Forecasting Benefit Your Business?
- What Internal and External Factors Have the Greatest Impact on Demand?
- Tips for Developing a Robust Demand Forecasting Strategy
What is Demand Forecasting?
As the term alludes to, demand forecasting is the process of ascertaining peaks and troughs in future demand. To do this, businesses must analyse all the internal and external factors which impact their supply infrastructure, giving them a clear view of any patterns and issues which might affect their demand forecasts.
Demand forecasting plays an important role in effective supply chain management, ensuring timely stock replenishment, enhanced capacity management, and optimal sales and revenue. It also improves decision-making and management, while accelerating prospective plans for growth and expansion.
Accurate demand forecasting relies on granular analysis of the factors which can impact a business’ supply infrastructure. From historical sales patterns to specific events in the retail calendar (e.g., Christmas); forecasting demand requires careful analysis of several variables to ensure business readiness, continuity, and an excellent end-user experience.
Typically, businesses that perform regular demand forecasting create multiple forecasts to predict the supply and demand of stock over different timespans. Using varying degrees of granularity as part of analysis, it’s possible to forecast future stock requirements from days to months in advance – allowing for enhanced planning, control, and business confidence.
How Can Demand Forecasting Benefit Your Business?
Demand forecasting brings a wealth of benefits to retail businesses whose long-term health and continuity depends on accurate stock predictions. And the benefits aren’t limited to maintaining excellent customer service levels; they can drive improvements across multiple functions, bolstering business confidence and helping a firm realise its ambitions for growth.
Below, we take a closer look at some of the benefits you could enjoy by embracing demand forecasting.
- Reduced uncertainty – Uncertainty is always a negative when it relates to supply chain management. It hampers decision-making, causes delays, and impacts stakeholder confidence. Demand forecasting can remedy uncertainty, ensuring that supply-related functions are adequately resourced, and that managers are better informed to make effective decisions that encourage growth and progress.
- Enhanced supply infrastructure – Anticipating highs and lows in demand is essential for the health of your supply infrastructure. Demand forecasting supports enhanced supply chain management by optimising capacity, stock replenishment, and the streamlined management of warehouse personnel.
- Increased revenue – Understanding when products are likely to sell, and in what volumes, can lead to significant increases in revenue. Demand forecasting also means optimal product availability, so you never miss a sale.
- Reduced need for safety and surplus stock – The more inventory in your warehouse, the slower the turnaround of stock and the greater the impact on your bottom line. Demand forecasting reduces the need for safety stock, so you can cut inventory costs while focusing on the most profitable products.
- Improved fulfilment = better long-term customer advocacy – Demand forecasting means more of your products are available more of the time, which can be a huge boon from a customer advocacy perspective. Improving order fulfilment through accurate demand forecasting can encourage repeat customer and word-of-mouth recommendations, boosting your revenue and customer base.
What Internal and External Factors Have the Greatest Impact on Demand?
When forecasting demand, it’s necessary to consider a broad range of factors that directly and indirectly affect supply. These include both internal and external variables, which together have a significant impact on sales volumes and required stock at different times throughout the year.
Let’s take a closer look at the factors you should consider when forecasting demand.
- Promotional sales periods – Consider how sale periods and markdowns could result in a spike in demand.
- Ongoing marketing activity – From SEO and paid media to display ads in local newspapers or billboards; how might ongoing marketing activity affect supply and lead to a rise in demand in the coming weeks and months?
- Price changes – Are product prices scheduled to change in the coming months? How might this affect demand in the short and long term?
- In-store promotions and displays – If you manage a physical store, how might promotional campaigns, displays, and POS promotions affect demand for certain products?
- Expiration and best before dates – Do you stock perishable items? Consider how expiry dates can lead to fluctuations in demand, and plan promotional periods accordingly to limit stock wastage within your supply chain.
- Customer trends and buying habits – How might changing customer trends and buying habits affect demand? This is particularly important when assessing future, long-term demand.
- Competitor activity – What are your competitors doing to attract sales and drive demand? Perhaps they’ve recently launched a promotional period, or expanded their product range? Or maybe a new business has joined your market with plans to disrupt the sector? Assessing your competition’s state of play can help you identify gaps in your supply and introduce new initiatives to help drives sales and revenue.
- Calendar events – Over the course of a 12-month trading period, there are a handful of events that cause a peak in demand. Historic sales data can confirm when to anticipate these seasonal uplifts, giving you the opportunity to plan ahead and bolster your supply accordingly.
- Seasonal changes – Seasonal variations can have a huge impact on demand for certain products and services, so factor this into your supply chain management strategy. Season, weather, and amount of daylight can each drive or lower demand for specific products, so be sure to account for these general factors as part of your forecast.
Tips for Developing a Robust Demand Forecasting Strategy
Demand forecasting might sound simple on paper, but to do so accurately across a broad inventory of different products and services is no mean feat. And given that consistent and timely forecasting can have a huge impact on ongoing costs, growth, and business continuity, it’s important to get it right.
Below, we share some simple tips on how to develop a robust demand forecasting strategy, and highlight how supply chain management software can simplify the process.
1. Be Clear on Goals and Objectives
Forecasting demand is at its most valuable when it aligns with your goals and objectives. For example, if you’re looking to drive business growth through increased revenue, a demand forecast can help to highlight how and when an increase in revenue will start to have a real-world effect on growth.
2. Collect and Record Accurate Data
Accurate and actionable demand forecasting relies on consistent, full, and complete data. Many of your assumptions about future demand will be based on historic sales data and customer behaviour, so it’s essential that you and your team can rely on comprehensive data sets.
Consider, also, that business functions will utilise forecasting differently. Therefore, your data needs to be accessible and integrated, but free from duplication and inaccuracies. Utilising an ERP system with a centralised database is among the best ways to ensure usable, accurate data sets for the purposes of demand forecasting. It can also use your data to provide your team with demand forecast estimates that consider various internal and external variables in their calculations.
3. Don’t Forget Qualitative Variables
While historic sales data is one of the first things you should consider to ensure demand forecasting accuracy, you need to account for qualitative variables too. Think of these as future events which will impact demand and supply, but that you have no real means of predicting.
Of course, accounting for qualitative factors isn’t easy, but any sales and marketing insights you can include in your forecasts will ensure greater accuracy and credibility. Be sure to liaise closely with department leads to understand their take on what could affect supply and demand in the coming weeks and months and lean on the forecasting functionality in your ERP or business software system to help you drive accurate demand forecasts.
An Example of Demand Forecasting in Action
On paper, demand forecasting can sound like an ambiguous exercise whose benefits are only speculative. That’s why it can be helpful to see how such a practice works in the real world, as well as the positive outcomes it can bring.
Recently, we spoke to a customer who had leveraged the power of Intact iQ to make demand forecasting work for their organisation. This was during the coronavirus pandemic, when firms were keeping a speculative eye on the future in order to align their operations with changing demands and developments.
The business in question, a janitorial supplier, was keen to assess which of their customers would remain open during the pandemic, as well as what products they were buying and how healthy their stocks were. They then looked at the products they wouldn’t be selling, particularly to customers in the hospitality industry, and put a stop to buying them until such businesses were able to reopen.
Rather than relying on manual processes and predictions to inform this strategy, they leant on iQ for a quick and effective way to forecast changing demands. After all, it was important for them to be able to react quickly to changing demands and customer behaviour, to avoid wasted investment in unsellable products.
As a result of demand forecasting on the iQ system, the firm was able to bring in new services they hadn’t offered before, such as cleaning machine hires. Their system enabled them to do all this within a couple of hours – highlighting the power of demand forecasting when paired with the right automation solution.
Do you need help forecasting demand or managing your supply chain? Why not talk to Intact, and learn how our industry-specific ERP and business management solutions can elevate and strengthen your operations. For more information or to receive a free software demo, visit the homepage or contact us today.