Demand forecasting refers to the sales data of the past used to forecast an expected prediction of customer demands – services, products, and goods that customer purchases in the future. Business assumptions such as profit margins, capital expenditure, mitigation plans, cash flow, capacity planning, and turnover.
Types of demand forecasting
Active demand forecasting
Businesses can be diversified and scaled with growth plans such as product portfolio, competitor activities, economic environment, and marketing activities. It is categorized depending on the time, market scope, and detailing considered:
Passive demand forecasting
Local and small businesses with conservative growth plans need passive demand forecasting, in which historical data is performed with minimum assumptions.
Medium to long-term demand forecasting
This is performed for twelve hours or more up to twenty-four months. This considerably drives capital expenditure, marketing planning, capacity planning, strategy planning, financial planning, and sales.
Short-term demand forecasting
The following is performed for a shorter period, such as three months up to twelve months. Here, the transient demand, supply, and effect on the customer demand planning are considered for forecasting.
Internal business-level demand forecasting
This refers to the business’ internal operations such as sales division, manufacturing groups, financial divisions, and product categories. It includes cash flow, COGs estimation, forecast of annual sales, and net profit margin as well.
● External macro-level demand forecasting
This refers to broad market movements that depend on the macroeconomic environment. It evaluates the objectives and strategies in an organization, such as technological disruptions, product portfolio expansion, risk mitigation strategies, a shift in consumer behavior and new customer segments.
Why is demand forecasting important?
Today, demand forecasting has become a critical business process that works with a company’s operational and strategic plans such as financial planning, marketing plans, risk assessment, mitigation plans, sales, and capacity planning are formulated.
Plans that may be short-term or medium-term, such as make-to-stock, contract manufacturing, network balancing, make-to-order, supply planning, and others, are based on execution. It facilitates other management activities such as resource allocation, business expansion, decision-making, and performance evaluation.
Quantitative methods
Barometric technique
Based on recording current events to forecast the future, experts analyze the economic and statistical indicators. Forecasters deploy factors such as the concurrent series, lagging series or the leading series to generate the forecast.
Trend projection method
This is deployed for large-scale businesses with extensive data history for more than eighteen to twenty-four months. The time series represents sales in the past and projected demands for specific product categories under normal circumstances using a least square method or a graphical plotting method.
Econometric forecasting technique
This utilises autoregressive integrated and complex equations to determine the relationships between factors influencing the demand and the demand itself. The equation is devised and perfected to guarantee a dependable representation. Finally, these projected values are integrated into the equations to predict a result.
Qualitative methods
Salesforce opinion
The sales manager asks for the expected demand inputs from each sales team member, which is performed by analyzing the respective product categories and regions. Finally, the sales manager collates the customer demands and predicts a final demand forecast.
The Delphi Technique
A group of experts generate forecasts of an assigned segment and presents them, after which their fellow experts influence them. Later, the experts make a final prediction to reach a near-consensus scenario.
Market research
Consumer-centric surveys are deployed to determine the potential demand, usually as questionnaires that ask for personal, economic, and demographic information. Random samples are chosen, so experts exercise caution in survey location, demographics and regions of the customers.
What are the objectives?
Demand forecasting aims to include pricing policy, sales, financial planning, manufacturing policy, capacity planning, marketing planning, capital expenditure, and workforce planning. A customized model for demand forecasting is developed based on sales team members upon a company’s particular needs in a product segment. This is done by combining or using quantitative and qualitative demand forecasting methods. They are expertise-driven, detailed, and reiterative.
Therefore, demand forecasting plays several roles in determining customer demand. If you are looking for reliable and quality demand planning and forecasting software, please reach out to us at RK Foodland.