How to: Demand Forecasting

How to: Demand Forecasting

How to: Demand Forecasting

Procurement employees utilise tools to monitor a company’s demand forecasting, a crucial aspect of maintaining optimal inventory levels and managing cash flow for business success. Accurate demand forecasting is essential, as out-of-stock items may lead customers to competitors, while excess inventory can occupy valuable space and capital.

Despite the critical nature of precise calculations, reports indicate that a significant number of small and medium-sized businesses either employ manual methods or neglect inventory tracking altogether. Implementing an improved system can position your organisation at the forefront, providing insights into product movement and enhancing demand forecasting.

Understanding Demand Forecasting

Demand forecasting is a systematic approach that involves analysing historical data to anticipate the future demand for your product or service among customers. By leveraging demand forecasts, you can strategically plan your inventory, making informed decisions on when and what to purchase, thereby ensuring that you maintain adequate stock levels without unnecessarily allocating capital to slow-moving items.

Precise forecasting contributes significantly to several key aspects of a company’s operations, including:

  • Budgeting: Accurate demand forecasts play a pivotal role in shaping effective budgetary plans, allowing businesses to allocate resources judiciously.
  • Production Scheduling: Forecasting assists in scheduling production activities, enabling companies to optimise their manufacturing processes based on anticipated demand.
  • Pricing Strategy: Informed by demand projections, companies can devise strategic pricing approaches that align with market dynamics and consumer expectations.
  • Inventory Management: By anticipating demand, businesses can make well-informed decisions about storing inventory, preventing both stockouts and excess inventory challenges.

Proactive demand projections are instrumental in sustaining and enhancing the vitality of a business, ensuring it not only survives but thrives in the marketplace.

Categories of Demand Forecasting

The approach you take in creating your forecasts is contingent upon the timeframe and objectives you’re aiming to achieve. To enhance accuracy, a comprehensive understanding of the market can be attained by combining and comparing various methods.

  • Short-Term Forecasting: Short-term demand forecasting is geared towards predicting customer needs within shorter time frames, spanning days, weeks, or a quarter or two. This type of forecasting is valuable for managing just-in-time supply chains or planning for upcoming promotions. Especially relevant for products with frequent rotations, short-term forecasts are typically used in conjunction with more extensive projections shortly before placing orders.
  • Long-Term Forecasting: Looking beyond a year into the future constitutes long-term demand forecasting. These projections guide future business strategies, such as those related to growth and expansion. While long-term numbers may lack precision, they offer valuable goals and benchmarks.
  • Macro-Level Forecasting: External factors impacting consumer demand on a large scale fall under macro-level forecasting. Influences like monetary policy, trade disputes, and global climate change are considered. This perspective acknowledges the broader dynamics that affect industries.
  • Micro-Level Forecasting: Micro-level forecasting delves into industry-specific and customer-segment factors, including internal considerations like historical sales, sales team projections, and financial metrics. This approach explores elements that can either limit capacity to meet demand or present growth opportunities.
  • Active Forecasting: Newer businesses or those experiencing rapid growth rely on active demand forecasting. In the absence of consistent historical data, factors from expansion plans, market research, and marketing campaigns are compiled to make projections.
  • Passive Forecasting: The passive model, the simplest method for forecasting demand, utilises historical internal data from previous seasons to predict future sales. However, its efficiency is contingent on the availability of quality data and may become a liability in the absence of such data.

Key Points To Consider when Demand Forecasting

  • Enhancing Budgets and Inventory Planning: Demand forecasting contributes to the development of more effective budgets and facilitates strategic inventory planning.
  • Diverse Forecasting Models: Various forecasting types and models can be employed to predict outcomes, accounting for both internal and external factors across short and long-term timelines.
  • Emphasis on Organisation and Data Reliability: Successful forecasting necessitates exceptional organisational skills and the collection of reliable data.
  • Incorporating Variables for Actionable Insights: Projections must encompass variables and offer actionable information to guide decision-making.
  • Unified System for Data Processing: Implementing a unified system for teams to process and review data is crucial in overcoming the challenges associated with demand forecasting.

Challenges in Demand Forecasting

The challenges associated with demand forecasting are multifaceted. Accurate predictions prove difficult, primarily due to a scarcity of usable historical sales data. While new companies grapple with the absence of sales history, even well-established entities may face challenges in organising extensive data into an analytically accessible format. Compounding this, the rapid pace of change renders data potentially outdated by the time it reaches decision-makers. Departmental silos further exacerbate the issue, making the consolidation of information a formidable task.

Misunderstandings regarding warehouse inventory can lead to inaccurate forecasts, impeding the precision of projections. Additionally, ineffective inventory management poses a barrier to accurate forecasting. Since demand can often be unpredictable, the resilience and efficiency of the supply chain hinge on addressing these challenges comprehensively, necessitating not only precise forecasts but also the elimination of bottlenecks and the establishment of contingency plans for seamless transitions to alternative resources.

Optimising Demand Planning through Demand Forecasting

The utility of demand forecasting only materialises when reliable data is transformed into actionable initiatives through demand planning. Demand planning involves translating findings into actions that are not only executable but also yield profitability.

Given the inherent unpredictability of the future, forecasts inevitably deviate from reality. Real-time variables can alter outcomes, necessitating the development of contingencies. Both demand forecasting and planning necessitate scenario planning, allowing for the consideration of “what-if” scenarios. This capability enables companies to remain agile, adjusting swiftly to minimize negative impacts or capitalise on opportunities.

Benefits of Investing in Procurement Solutions

The meticulous steps of recording, calculating, modelling and formulating a viable plan demand a substantial investment of time. When different branches within a procurement team utilise diverse formats and projection models, the challenge of conducting coherent analysis intensifies. The adoption of Intelligent Spend Management software addresses this complexity by establishing a unified system for compiling and comparing varied projections. Beyond time savings, this approach delivers an accurate representation, allowing teams to dedicate more attention to strategic discussions and less to deciphering numbers.

An adept demand forecasting modeller, fortified by robust artificial intelligence, can unveil concealed demand patterns. Consequently, supply chain teams can identify root causes of issues, and the use of more dependable predictive models facilitates organizations in optimising their operations. The augmentation of external data access empowers businesses to leverage technology for a forward-looking perspective, enabling the crafting of a long-term strategy for financial stability spanning up to a decade.

At CJV Partners, we specialise in automating your spend processes through SAP’s Intelligent Spend Management solution. This not only enhances the overall buying experience but also minimizes risks, contributing to superior spend management.

To know more, get in touch with our experts.