Demand Forecasting- What is it and Why Does it Matter?

demand forecasting what is it and why does it matter

What is Demand Forecasting?

Demand forecasting is the process of using historical sales data in order to predict future customer demand. There are both qualitative demand forecasting methods and quantitative demand forecasting methods available for businesses to utilize.

Quantitative demand forecasting focuses heavily on data analytics while qualitative demand forecasting is focused more on feedback from experts and sales team members. Using a combination of qualitative and quantitative forecasting methods can create a more comprehensive demand forecast.

Examples of qualitative forecasting methods include the-

  • Delphi forecasting technique
  • Salesforce opinion forecasting model
  • Market research forecasting method
Examples of quantitative forecasting methods include the-
  • Trend projection method
  • Barometric forecasting model
  • Econometric forecasting model
There are many different forecasting methods and additional forecasting types to consider. Alternative common demand forecasting types include-
  • Passive demand forecasting
  • Active demand forecasting
  • Short term demand forecasting
  • Medium to long term demand forecasting
  • External macrolevel demand forecasting
  • Internal business level demand forecasting

The Importance of Demand Forecasting

Demand forecasts supply a wealth of information to businesses that can be utilized to increase profit margins and overall success. From decision making to business strategy developments, an accurate demand forecast is a reliable and valuable tool that business professionals should not underestimate.

Demand planning including demand forecasting techniques have significant short term and long term effects on business longevity and success. If customer demand is not accurately estimated, business processes from inventory management to financial planning can be severely negatively impacted.

Over time, inadequate demand forecasting can lead to huge financial planning issues. In the worst-case scenario, failure to accurately forecast demand can result in business closure.

On the other hand, an accurate demand forecast can provide a business with a competitive edge and notable financial success. Businesses can use demand forecasting to their benefit, positively influencing virtually every aspect of their company.

Benefits of Demand Forecasting

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Demand forecasting provides businesses with a huge array of benefits ranging from improved supply chain efficiency to financial planning optimization. Significant benefits include-

1. Employee Staffing-
Using the results of a reliable demand forecast, management can make informed decisions regarding staffing needs for various different time periods throughout the year. For businesses that have seasonal demand fluctuations, additional sales team associates may be necessary.

For example, a retail store demand forecast might indicate a strong short term demand for increased staff member availability during the holiday season. As a result, the retail store's human resource management professionals are provided with additional time to hire and onboard new temporary or seasonal employees.

Alternatively, demand forecasts may identify an opportunity to increase production capacity or better utilize available human resources. A business's labor costs are significantly decreased when human resource optimization is guided by demand forecasting methods.

2. Performance Assessments-
Demand forecasting supplies a very comprehensive representation of an expected business performance in comparison to actual business performance. With the information that demand forecasts provide companies, data analytics are enhanced, sales trends are more easily identifiable, and internal business processes are optimized.

Comparing real-time sales data with long term historical sales data helps business professionals to improve their forecasting techniques over time. Improvements in forecasting techniques result in better business strategy and business decisions being developed, updated, and executed.

3. Financial Planning-
Proper financial planning is a cornerstone of any successful business and accurate demand forecasting is foundational for financial planning. Beyond a master budget, businesses should create and maintain specific budgets for-

  • Cash flow
  • Overhead
  • Manufacturing
  • Labor
  • Marketing
Forecasting done incorrectly can have significant short term and long term consequences on financial planning initiatives. Both profit margins and cash flows are benefitted from financial planning improvements.

4. Customer Service-
Maintaining proper inventory levels is crucial to customer service and customer retention. Customers can quickly become disgruntled when the product they visited a store to purchase is unavailable.

Forecasting demand accurately decreases the likelihood of this unfortunate occurrence. Especially for seasonal demand and other irregularities, forecasting done correctly can make a significant difference in customer service capabilities.

Key Takeaways

  • Demand forecasting is an important part of the demand planning process. Demand forecasting utilizes historical data in order to predict future customer demand and estimated sales. Both qualitative and quantitative methods are used for forecasting important information.
  • Forecasting models range from the Delphi forecasting model to the trend projection method. Different demand forecasting models can be utilized collaboratively for increased demand forecast accuracy.
  • Incorrectly forecasting future demand can devastate a business's profit margins and cash flow both in the short term and long term. On the other hand, accurate forecasting helps companies with virtually every essential business process.
  • From inventory planning to planning sales and marketing iniatives, understanding future demand more accurately is incredibly beneficial for business professionals. Employee staffing, business performance assessments, financial planning, and customer service capabilities are also enhanced with reliable forecasting model use.