Demand forecasting cheat sheet
Making good business decisions can be the difference between profit and loss. Between surviving and thriving. To stand the best chance of making the right decisions, effective demand forecasting is the best tool you can have in your armoury.
It doesn’t matter whether you’re looking at inventory levels, or the wider scope of your entire business, demand forecasts are crucial. Demand forecasts underpin everything from setting annual budgets to tax planning.
Reliability is the key word here
Any business can take a stab in the dark. But those companies are unlikely to be around for long. Those who place forecast reliability at the top of their considerations will be the ones who see long-term success.
The main objective in product demand forecasting is to attain a robust picture of future demand.
That much is simple.
But, the difference in results between those with accurate forecasts, and those without, is huge.
Research suggests that businesses with accurate forecasts see significant performance improvements against that struggle to anticipate what’s on the horizon.
To put it in numbers, 79% of businesses with high-performing supply chains achieve above-average revenue growth.
Despite the overwhelming evidence for the importance of demand forecasting, however, a staggering 69% of companies admit to having limited visibility over their supply chain.
If you’re keen to avoid becoming one of those negative statistics, keep reading.
How can you improve your forecast process?
The million-dollar question. It might even be worth more than that.
Regardless of the exact figure, improving your approach to demand forecasting will make you money. It’s as simple as that. So over the next few paragraphs, we’ll look to answer it as well as we can.
- How to define demand forecasting in your business.
- What steps you should include in your demand forecasting process
- Which features are present in all great forecasts
- How to spot a good demand forecast
- What tools & techniques do you need in your demand forecasting toolkit
What is demand forecasting?
Forecasting can mean different things to different teams.
However, when we talk about “demand forecasting”, we’re talking about the method of estimating the future demand for a product or category. As such, this is a critical part of your wider demand planning and S&OP process.
To create an accurate demand forecast, you’ll need to analyse historical data, market trends and any other indicator at your disposal to make your predictions as informed as possible.
The aim with those predictions is to make better decisions. Decisions about order quantities, production, pricing and marketing. However, the list could go on..
There’s no use guessing you’ll need “a lot” of product A. You need an estimation as close to the actual number as possible.
Doing so will mean you can avoid overstocking, stockouts and loose production schedules.
And, in a world where your customer’s number one, failing to align your internal efforts to their demand is risky business.
Why is demand forecasting so difficult?
For some businesses, guessing what their customers might want in 6 months time is like trying to predict winning lottery numbers.
This is why it’s so important for you to use every tool at your disposal to improve your chances.
But with so many variables that can affect demand, which factor do you focus on the most?
How do you gauge demand in emerging markets or for new products?
And what if the master data you’re relying on is incomplete or unreliable? What if things change and your data becomes quickly out of date?
The burning questions above implore you, and any business looking for an edge, to continuously gather and analyse as much data as you can to improve the decisions you make.
Demand planning isn’t something you do in January and then rest easy. It’s an ever-present, ever-important activity which should form a huge part of your planning process.
After all, if you don’t understand your customer’s behaviour today, how can you predict what they’ll want tomorrow?
What are the benefits of demand forecasting?
If you need more evidence of the benefits of demand forecasting, see below.
The positives are plentiful and aren’t limited to bottom-line calculations or simply staying afloat.
Not that that’s not reason enough to take your demand forecasts seriously.
1. Better inventory management
The more accurate your demand forecasts are, the better you can manage your inventory levels. Which means greater efficiency, less waste, lower costs and higher profits.
2. Improved production planning
Good demand planning can dramatically increase your ability to match production with demand.
Doing this will give you a greater ability to manage time and resources and further minimise waste.
3. Joined up planning
Are all your teams singing from the same hymn sheet? By providing a unified picture of future demand, you can ensure that your sales, marketing, finance and operations teams are all working from the same numbers.
4. Improved supply chain management
It’s hard to make good supply chain management decisions about what materials you need, which suppliers you work with and even where you should invest your time without a clear picture of where your business is heading.
A good demand forecast will provide your team with the clarity and direction they need to take the best supply chain actions.
5. Strengthen your financial position
The better your demand forecasts, the better your ability to forecast cash flow, revenue and overall financial health. Something which should be music to the ears of your finance team!
6. Greater awareness of risks and opportunities
Blind luck will only get you so far. Knowing when to stick and when to twist will make moves into new opportunities easier and more fruitful.
It’ll also help you highlight risk sooner than other businesses, giving you a constant edge over your competition.
7. Unlock opportunities for continuous optimisation
With the right insights, setting meaningful KPIs also becomes easier. More importantly, you’ll have a deeper insight into the levers you can pull to hit your business goals.
8. Empower your people
Lastly, there’s no one you employ that can’t improve their success with a better forecast. That extends to those stakeholders outside the perimeter too, like customers and suppliers.
The greater transparency you have, the more you’ll make informed decisions, reduce costs and improve efficiency, which can only result in better profits.
The demand forecasting process
Hopefully, you are fully sold on the advantages of demand forecasting. But now it’s time to take this to the next level. In the next section, we will explore how you can optimise your approach to demand forecasting.
Like many things in the supply chain, implementing the right process is the best place to start. But, to create a seamless and successful demand forecasting process you need to consider the following steps:
1. Define your objective
What’s the purpose of your forecast?
Will it be used for financial planning? Inventory management? Sales planning? Marketing activity? Or a combination of all of the above?
2. Think about who’ll use the forecast
Your CEO, whether that’s you or someone else, will need different levels of detail in the forecast than your planning team.
CEOs by nature need high-level insights. They need big-picture analysis to make decisions about the business for the next 12-18 months. This means they need a demand forecast that captures a broader group of products, business division or time horizon.
The demand planning team however needs to analyse a forecast in microscopic detail. They need enough information to make short-term decisions about replenishment, order quantities and inventory allocation.
3. Define the characteristics of your forecast
Once you know who’s going to use your forecast, you’ll have an increased ability to define it.
To make it as useful as it can possibly be, make sure you look at:
- Forecast hierarchy
- The types of product
- The various locations and sales channels you need to plan
- Measurement units, like sales turnover, volume or order lines.
4. Select the best forecasting system for you
There’s a number of different ways to forecast demand. We’ll look at them all in detail later on, but consider:
- The availability of data
- The planning horizon
- The complexity of demand
- The level of accuracy needed
- The knowledge, expertise and resources you have available
- The time needed to create the forecast
5. Capture all the data you can
Once you’ve completed the steps above, you can think about data.
Whether you look within (internally, not existentially), externally or from the market, the more data you have, the better equipped you’ll be. But you also need to know which data to consider and which to ignore.
Historic sales, customer behaviour, market trends, seasonality, supplier forecasts, big data sources are all useful. But some may be more so than others.
Collect the right data and you’ll be more likely to see higher profits and beat your competition.