Demand forecasting plays a critical role in every business when it comes to inventory management. It has one simple objective: to ensure you hold the correct amount of stock to maximize sales potential and profit.
What is demand forecasting?
Demand forecasting is the result of an analysis to determine what demand a certain item will have in the future. These forecasts are determined using complex algorithms that analyze past trends, historic sales data, and potential events or changes that could become factors in the future.
How does demand forecasting work with supply chains?
Multiple parts of any supply chain can benefit from demand forecasting – let’s take your inventory as an example. The cost of running a warehouse can run high when goods and materials are sitting on the warehouse floor – with proper demand forecasting, you will have a lean inventory. This means that you keep the minimum amount of products in stock, without the risk of running out of inventory.
With demand forecasting, you can analyze past trends and use the information gathered to design an effective inventory model for the future.
How can you forecast your supply chain?
Seasonal demand is a trend that usually stays similar from year to year. Customers are more interested in buying swimsuits in the summer and Christmas decorations are in higher demand in the winter. These trends seem to be obvious, but sometimes they can be hard to predict precisely. Competitors know when to plan for seasonal demand shifts, so your supply chain needs to have a forecast as accurate as possible. Because the winter season is predictably busy, demand forecasting can be also used to predict how much extra staffing you’ll need and how to effectively distribute goods on time.
Tracking and analyzing buyer trends
Trends are constantly evolving and changing – everything goes in and out of style, often without any warning. These trends are very hard to track, but if you succeed, you will be able to cash in some serious profits. To meet the constantly changing demands of buyers, your supply chain needs to be flexible enough to add huge amounts of a certain stock in a short period of time. Predicting when a trend will end can also help you with avoiding static inventory – thus keeping the operating costs of your supply chain lower.
Sometimes you might get a feeling that something might affect your supply chain – and the best option, in this case, is to trust your instincts. As it turns out, trusting your gut often draws from your experiences – this is how seasoned supply chain specialists can find potential shifts in consumer demand just by feeling them out.
Let’s look at the following example – an eCommerce company might be thinking about purchasing one of their competitors in the following months – this is where you or the supply chain manager should have a feeling that you will experience an increase in buyer demand, thus you will have to increase your stock levels.
What are the advantages of Demand forecasting?
When done right, demand forecasting can maximize your profits by reaching the highest number of buyers. But making money isn’t the only advantage of demand forecasting:
It helps reduce the inventory cost
It helps you with preventing the accumulation of static inventory. Static inventory is made out of products that are not moving out of your warehouse (are not getting sold). This can eat up space and can drive up costs. Holding on to inventory for over 12 months can increase the cost of that item by as much as 60% thanks to taxes, insurance costs, and warehousing costs. The less time your inventory spends in the warehouse, the better.
It makes for better supplier relationships
With demand forecasting you can order your inventory in a timely manner – supply chain managers can show the information from demand forecasting to the vendors so they will know how much stock they will be needing in the upcoming period. This level of transparency is great for business and it keeps the suppliers happy.
Improved resource planning and scalability
Without demand forecasting, scalability can be tough, but when your supply chain takes demand forecasting into consideration, scalability can be a natural outcome. These supply chains, with the proper demand forecasting, can become flexible, meaning that they can scale up or down on a moment’s notice.
Helps increase customer satisfaction
The customer is the central part of your business. Customers know what they want, and the sooner they can get it, the better. Demand forecasting can help to keep your warehouse ready for changes in demand, so when a sudden spike in interest comes, you will be quicker to react.
Demand forecasting is an essential part of your supply chain – without it, your business won’t be able to scale or take on the competitors. It can help with avoiding many pitfalls that could render your business useless and when done the right way can increase the profits and overall performance.