Forecasting is the process of making informed predictions based on aggregates of past and present data. It uses historical data as inputs to make informed predictive estimates to determine the direction of future trends. In the supply chain and logistics industry, forecasting is the process companies use to predict demand, supply, and pricing. It often involves researching the competition, collecting supplier data, and analyzing patterns to gain insight into future trends.
Demand forecasting is a subset of forecasting that refers to the ability to predict a customer’s future needs for your product accurately. Every supply chain manager should have tools to enable them to utilize historical data to predict when the peaks and valleys of demand will occur. This insight should guide supply chain planning and decision-making for everything from production planning, warehousing, transport logistics, and supply chain optimization. Managers can do demand forecasting periodically or in real-time, depending on the industry or specific organizational needs.
There as several ways to predict future demand for your products. They include:
- Passive Demand Forecasting: the use of detailed projections of historical data. Passive forecasting is utilized mainly by small businesses.
- Active Demand Forecasting: measuring competition, economic environment, and the need to expand product portfolios. Active forecasting is utilized mainly by rapidly growing businesses.
- Short-Term Demand Forecasting: considers seasonal demand patterns and possible decisions that could affect customer demand. Typically takes between three and twelve months.
- Medium- to Long-Term Demand Forecasting: informs strategy planning, sales and marketing planning, and financial planning. Typically takes between twelve and twenty-four months.
- Macro Demand Forecasting: helps in strategic planning by assessing large-scale shifts in consumer behaviors.
- Internal Business Forecasting: how internal operations could affect the ability to keep up with demand. Analyzes sales and finance and includes annual sales forecasts.
(1) Planning Processes
The scheduling and planning process is vastly improved through forecasting. Paying attention to the past and present demand for products allows a supply chain to stay on top of the game.
(2) Seasonal Demand Fluctuations
Among the many reasons that forecasting is needed in supply chain management is being able to predict and plan for seasonal variations in demand. In a similar vein, planning for promotional activity and product launches are just as important and benefit greatly from demand forecasting. With data to back up predictions, there is less guesswork to fret over.
(3) Predict Product Demand
In a broader sense of the term, demand forecasting allows for the prediction of product demand in even the most specific of situations. While no company can predict the future with complete accuracy, relying on patterns and making informed decisions based on past and present data will get a company as close as possible.
(4) Customer Satisfaction
A deep understanding of customer needs is essential in product-focused industries. The ability to predict demand contributes to shorter lead times, increasing trust between suppliers and their customers.
(5) Reduce Safety Stock
By definition, safety stock is the excess stock kept around as a safety net utilized when the demand for a product increases. With forecasting, however, this extra measure is not needed. This frees up storage space and saves time and worry.
(6) Reduce Inventory Shortages
Demand forecasting is essential in industries like healthcare, where just-in-time systems are critical. Demand forecasting allows for products to sit in storage for less time, reducing unnecessary costs. Forecasting demand is vital for long lead time suppliers to get their products to customers at the right time.
(7) Improve Shipping
Supply and demand affect every aspect of the supply chain process. For example, the ability to predict the demand for a certain product will allow supply chain managers time to ensure that enough workers are present to ship a certain amount of product. Not having enough workers results in orders not getting to customers on time. Likewise, having too many workers on the clock results in high labor costs.
(8) Pricing Optimization
Price forecasting puts the power back into the hands of a company. The impact price changes have on a particular area of a supply chain can be predicted and handled accordingly.
Demand forecasting is a valuable tool in supply chain management. Since demand is always fluctuating, it becomes important to have the tools to keep your organization ahead of the curve.
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