Demand Forecasting in Supply Chain Management

Demand Forecasting in Supply Chain Management

Demand forecasting means guessing how much customers will buy in the future. It helps businesses plan how much to make, store, ship, and sell. It also helps them set prices and make money. In this article, we will discuss what is Demand Forecasting in Supply Chain Management, and why  Demand Forecasting is important.

Why is Demand Forecasting Important?

Demand forecasting is important for supply chain management because it helps businesses to:

  • Match supply and demand: Businesses can make sure they have enough products available by anticipating how much and when customers will purchase. They can avoid having too much or too little stock.
  • Reduce expenses and waste: By maintaining the proper level of inventory, businesses can save money on storage and prevent losing money on goods that spoil or become dated. They can also reduce waste by throwing away fewer products or taking back fewer returns.
  • Make customers happy: Businesses can keep customers devoted and content by providing the appropriate goods at the appropriate time and location. They can also change their products and prices faster to meet customer needs and wants.
  • Beat the competition: Businesses can find out more about consumer behavior and demand patterns by utilizing smart forecasting techniques like artificial intelligence and machine learning. They can also use this knowledge to create new products and services that customers love.

How to Do Demand Forecasting?

Demand forecasting has four main steps:

  • Set goals: Decide first what you want your forecast to accomplish and what information you require. For instance, a brand-new fitness technology startup might not have a lot of historical data. Instead, it may need to look at the economy, market trends, and competitors in the health tech industry.
  • Find data: Next, gather information from a variety of sources, including your inventory software, sales history, market research, sector reports, etc.  To produce a reliable forecast, the data must be accurate, consistent, and reliable. 
  • Utilize techniques: After that, use techniques like statistics, polls, professional judgment, etc. to arrive at predictions using your information. Choose methods that fit your data and goals. For instance, historical data is a good source for statistics. Surveys work well with opinions from customers.
  • Check results: Finally, evaluate how accurate your predictions were by contrasting them with what actually transpires. Utilize metrics such as mean absolute error, mean squared error, mean absolute percentage error, and others. Regularly revise and update your predictions in response to comments and new data.

What are the Types of Demand Forecasting?

Demand forecasting can be different types based on things like:

  • Time: This means how long your forecast is for. Based on time, demand forecasting can be:
    • Short-term forecasting: This is for less than a year, usually a few weeks or months. It is for things like making schedules, managing inventory, and filling orders.
    • Medium-term forecasting: This is for one to five years. It is for things like planning capacity, making budgets, and planning marketing.
    • Long-term forecasting: This is for more than five years. It is for things like developing products, entering markets, and expanding business.
  • Data: This means how much and how good your data is. Based on data, demand forecasting can be:
    • Passive forecasting: This means guessing that the future will be like the past. It uses data from the past and simple methods. It works well for stable and old markets with little or no change.
    • Active forecasting: This means guessing that the future will be different from the past. It uses data from now and complex methods. It works well for dynamic and new markets with a lot of change.
  • Demand: This means how much or how little you group your demand. Based on demand, demand forecasting can be:
    • Macro-level forecasting: One type of demand forecasting is macro-level forecasting. This means guessing the total demand for a product type or a market part. It helps to know the whole market size and potential.
    • Micro-level forecasting: Another type of demand forecasting is micro-level forecasting. This means guessing the single demand for a specific product or a customer group. It helps to make customized products and services.

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