Demand forecasting is a process that takes historical sales data and uses it to make predictions (or forecasts) about future customer demand. For enterprises, forecasting demand allows estimating how many goods or services will sell and how much inventory needs to be ordered.
In 2014, Walgreens had a $1 Billion forecasting blunder that led to the exit of two executives. And in 2001, Nike also had Demand forecasting importance for demand forecasting software implementation failure that led to a $100 million loss in sales. These examples show how compulsory demand forecasting and having the right demand forecasting systems play in the overall advantage of businesses.
Demand forecasting creates an important component of the supply chain process. It’s the driver for almost all supply chain related choice. While demand forecasting is undeniably necessary, it’s also one of the most difficult attitudes of supply chain planning. Demand is often elusive making demand forecasting both an art and a science.
The demand Forecasting defined as the action by which the historical sales data are used to form an estimate of the expected forecast of customer demand. A demand Forecasting contributes an estimate of the of goods and services that clients will purchase in the foreseeable future.
Demand forecasting importance for effective Supply Chain Management?
Demand Forecasting promotes critical business action like budgeting, financial planning, sales and marketing plans, raw material planning, production planning, risk assessment and formulating mitigation plans. So, outlined below are the sign of Demand Forecasting on Supply Chain Management:
Improved supplier relations and purchasing terms
Because of demand Forecasting rides raw material planning process which addresses Purchasing Managers to release timely purchase plan to suppliers. So, visibility and transparency of raw material demand improve supplier relations and strengthens Purchasing Managers to negotiate favourable terms for their companies.
Better capacity utilization and allocation of resources
Based on the current inventory levels, raw material availability and expected client orders, production can be scheduled completely. Because this leads to improved quantity utilization and judicious allocation of manufacturing resources.
Optimization of inventory levels
A proper techniques for demand forecasting implements vital information for driving the desired raw material, WIP and finished goods inventory levels. So, this reduces the Bullwhip effect across the Supply Chain, leading to optimization of customary levels and decrease in stock-out or over-stocking situations.
Improved distribution planning and logistics
Apart from small works, this is particularly obvious in businesses dealing with multiple SKUs and wide distribution networks. Since distribution and Logistics Managers are permitted to balance inventory across the network and negotiate favourable terms with Transporters.
Increase in customer service levels
With optimized inventory levels and improved Distribution Planning and Logistics, client service metrics like on-time delivery (OTD), on-time in-full (OTIF), case-fill/fill-rate, etc. are enhanced due to right sizing and right positioning of inventory.
Better product lifecycle management
Medium to long area Demand Forecasts provides better visibility of new brand launches and old product discontinuations. This drives synchronized raw element, manufacturing and inventory planning to block new product launches and most importantly, reducing the risk of obsolescence of discontinued products.
Facilitates performance management
Management can set KPIs and aim for various functions like Sales, Finance, Purchase, Manufacturing, Logistics. Based on the medium to long range plans borrowed from the Demand Forecasting process. So, organizational efficiency, effectiveness, and improvement leadership can be designed for key areas of the company.
3 Main Roles of Forecasting in Supply Chain Management
- Pivotal in the strategic planning of Business: Because forecasting is the underlying hypothesis for strategic business activities like expansion planning, budgeting, financial planning, risk assessment, and mitigation. So, critical business assumptions like turnover, profit margins, cash flow, capital expenditure, etc. are also dependent on Forecasting.
- Initiating all push–processes of Supply Chain: Forecasting is the starting point for all push-processes of Supply Chain like raw material planning, purchasing, inbound logistics, and manufacturing. So, better forecasts help optimize the inventory levels and capacity utilization.
- Driving all pull–processes of Supply Chain: Forecasting drives all pull-process of Supply Chain like order management, packaging, distribution, and outbound logistics. Better forecast improves the distribution and logistics and increases customer service levels.