What is Demand Forecasting?
Demand Forecasting operation in which historical sales data used to establish an estimate of a conventional forecast of customer demand. So, businesses, Demand Forecasting provides an assessment of goods and services that customers will buy in the foreseeable future. Because critical business acceptance like turnover, profit margins, cash flow, capital expenditure, risk assessment and mitigation plans, capacity planning, etc. are dependent on Demand Forecasting.
Demand Forecasting types
Demand Forecasting broadly classified based on the level of detailing, time span considered and the scope of the market considered.
Outlined below are the major types of Demand Forecasting:
- Passive Forecasting: Passive Demand Forecasting took out for stable businesses with very quite growth plans. So, simple calculations of historical data carried out with minimal acceptance. This is a unique type of forecasting limited to small and civic businesses.
- Active Forecasting: Active Demand Forecasting took out for scaling and diversifying businesses with destructive growth plans in terms of marketing activities, product portfolio expansion and consideration of competitor activities and external economic environment. So, Active demand forecasting is very popular as the term.
- Short-term Forecasting: Short-term Demand Forecasting carried out for a lower term duration of 3 months to 12 months. Because in the short term, the occasional pattern of demand and the effect of tactical choice on customer appeal get into a discussion.
- Medium to long-term Forecasting: Medium to long-term Demand Forecasting occasionally carried out for more than 12 months to 24 months in advance (36-48 months in convinced businesses). Long-term Forecasting drive business strategy planning, sales and marketing planning, financial planning, capacity planning, capital expenditure, etc.
- External macro level Forecasting: This type of Forecasting deals with broader market progress. External Forecasting carried out for evaluating the strategic objectives of business product portfolio expansion, entering new customer segments, technological disruptions.
- Internal business level Forecasting: As the name suggests, this type of Forecasting deals with subjective operations of the business such as product category, sales division, financial division, and manufacturing group. This includes an anniversary sales forecast, estimation of COGS, net profit margin, cash flow, etc.
Some real-world practical examples of Forecasting are – A leading car maker. Refers to the last 12 months of authentic sales of its cars at a model, engine type, and colour level; and depend on the expected growth, forecasts the short-term demand for the next 12 month for purchase, production and inventory planning purposes.
Leading food construction company refers last 24 months of actual sales of highly seasonal stock like soups and mashed potatoes. An analysis carried out at the flavour and packaging size level. Then based on the market potential, demand is forecasted for the next 12 to 24 months for sourcing of basic elements like tomatoes, potatoes. And for capacity planning and evaluating the need for external co-packing.
Importance of Managing Forecasting
Demand Forecasting is the decisive business process around which strategic and operational plans of a company constructed. Based on the Demand Forecast, strategic and long-range plans of a business like accounting, financial planning, purchase. And marketing plans, capacity planning, risk assessment and mitigation plans are formulated.
Short to standard term tactical plans like pre-building, make-to-stock, make-to-order, agreement manufacturing, supply planning, chain balancing, etc. are execution based. Demand Forecasting also facilitates essential management activities like opinion making, performance evaluation, judicious allocation of resources in a constrained environment and business expansion planning.
Managing Forecasting methods
One of the most necessary steps of the Demand Forecasting progress the selection of the appropriate program for Demand Forecasting. Demand can forecast using Qualitative methods or Quantitative methods as explained below:
- The Delphi Technique: A panel of professionals appointed to outcome a Demand Forecast. Each professional asked to generate a forecast of their assigned necessary segment. So, after the initial forecasting round, each professional reads out their season and in the process, each expert influenced by other experts. A consequent forecast is again made by all experts and the process is repeated until all experts reach a near consensus scenario.
- Sales Force Opinion: The Sales Manager asks for results of expected demand from each Salesperson in their team. Each Salesperson calculates their various region and product categories and provides their single customer demand. Finally, the Sales Manager aggregates all the demands and generates the final version of Demand Forecast after the administration’s judgment.
- Market Research: In market research method, customer-specific surveys deployed to generate potential demand. Such surveys generally in the form of application that directly seeks personal, demographic, preference and economic advice from end customers. Since this type of research on a random sampling basis, care needs to be exercised in terms of the survey regions, locations, and demographics of the end customer. This type of techniques could profitable for products that have some no demand history.
- Trend projection method: Trend projection technique completely deploy businesses with a large buying data history of typically more than 18 to 24 months. This historical data generates a “time series” which noted the past sales and headed demand for a specific product. The category under normal conditions by a graphical plotting method or the least square method.
- Barometric technique: Barometric technique of Demand Forecasting is depend on the principle of recording events in the present to pretend the future. In the Demand Forecasting process, this completed by analyzing the statistical and economic indicators. Generally, forecasters deploy analytical analysis like Leading series, Concurrent series or Lagging series to produce the Demand Forecast.
- Econometric forecasting technique: Econometric forecasting produce autoregressive integrated moving-average and complex mathematical equations, to establish relationships between demand and factors that leverage the demand. An equation copied and fine-tuned to ensure a reliable historical representation. Finally, the projected data of the influencing variables are inserted into the question to generate a forecast.
Demand Forecasting objectives
Purpose of Demand Forecasting consists of Financial planning, Pricing policy, Manufacturing policy, Sales, and Marketing planning, Capacity planning and expansion, Manpower planning and Capital expenditure.
Demand Forecasting models
Based on the standard requirements of a business or a product category, a personalised Demand Forecasting model can be developed. So, a model is an extension or a sequence of different Qualitative and Quantitative Methods of Demand Forecasting. The task of developing a personalized model is often iterative, highly detailed and expertise-driven and can be accomplished by implementing an advisable demand management software