What You Need to Know About Demand Forecasting

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Demand forecasting is the process of estimating the number of products that customers will be willing to purchase in the future. It involves leveraging data and analytics about your product and the market to closely predict customer demand over a particular time frame. It’s a crucial aspect for many companies and inherent in more reliable demand forecasting is demand planning.

Demand planning refers to the use of forecasts and experiences in estimating demand for different items at different points in the supply chain. Therefore, demand planning should work as an active part of your company’s resource planning system in order to forecast purchase and inventory requirements, and predict customer buying habits so that inventory stock levels are optimised while meeting customer demands. Various information or inputs are necessary for effective demand planning so it can properly inform demand forecasting. There are several types of inputs required, including:

  • Historical sales data – using a two to five-year period is generally best practices for most systems in order to analyse sales activities and identify trends.
  • Manufacturer forecasts – knowing what your supplier trends have been and will help in the analysis.
  • Seasonal factors – carefully review all products for seasonal activity. Also, note if there are other factors besides the season that could be affecting the trend. For example, could a special event trigger a peak in sales?
  • Constraints or business rules – does your business always purchase at certain levels to take advantage of a discount or reduce freight expenses? Are there limitations in warehouse space to consider?

Once the inputs are available, in order to effectively maximise your demand planning system results, follow these five key practices:

Include customers in your analysis

By factoring customer planning and forecasting information you can reduce forecast errors and have a more predictable demand model. Best industry practices use monthly or weekly inputs regarding customer inventory stock planning and also knowing in advance about promotional opportunities.

Ask suppliers

Often manufacturers and suppliers have additional insights and information about product availability that can improve your insights, particularly new product information can be valuable.

Apply demand sensing and shaping techniques

This approach examines demand from a more holistic view, grouping items into segments with common demand requirements. The shaping process can influence downstream supply chain activities and help to balance your inventory stock for the best ROI.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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