Demand Forecasting: Steps, Benefits and Influencing Factors

Running a business is not an easy task. You must anticipate how every aspect of your business will unfold. Accounting, inventory management, and financial projections are just a few of the calculations that must be completed.

 

Every business manager should be aware of the demand for your products. Demand forecasting is one of the most difficult metrics to master due to the fluctuating nature of demand.

 

 

What is Demand Forecasting?

 

Demand forecasting is a combination of two words, the first of which is demand and the second of which is forecasting. Demand is defined as the external requirements of a manufactured product or a useful service. Forecasting, in general, means making an approximation in the present for an event that will occur in the future.

 

These forecasts are used by all companies to shape their marketing and sales strategies. It makes a significant contribution to their profit margins. In this section, we will go over demand forecasting, its features, and its utility. Furthermore, we will see its applications.

 

Demand Forecasting is a technique for predicting future demand for a product or service. It is based on a real-time analysis of past demand for that specific product or service in the market that exists today. Demand forecasting must be done scientifically, with facts and events relevant to the forecasting taken into account.

 

Thus, if someone asks what demand forecasting is, we can answer that it is an attempt to analyze future demand after gathering information about various aspects of the market and demand that are dependent on the past.

 

Demand forecasting refers to the overall concept of analyzing and approximations. To grasp the concept of demand forecasting more easily, consider the following equation.

 

Forecasts can be classified into three types, which are as follows:

 

1. Forecasts for the Short Term

 

Refer to the forecasts, which are typically for one year and are based on the expertise of the experienced staff. Short-term forecasts are critical for determining the organization's production policy, price policy, credit policy, and distribution policy.

 

2. Long-Term Forecasts

 

Refer to the forecasts for the next 5-10 years, which are based on scientific analysis and statistical techniques. Forecasts aid in decisions regarding the introduction of a new product, business expansion, or the need for additional funds.

 

3. Forecasts for Extremely Long Periods

 

Refer to the forecasts that are longer than ten years in duration. These forecasts are used to determine future population growth, economic development, political situation in a country, and changes in international trade.

 

Among the forecasts mentioned above, short period forecast addresses deviation in long period forecast. As a result, short-term forecasts are more accurate than long-term forecasts.
 

 

Forecasting Level

 

The forecasting level has a great impact on demand forecasting. Demand forecasting can be done at three different levels: macro, industry, and firm. 

 

Forecasts for general economic conditions, such as industrial production and national income allocation, are made at the macro level. Forecasts are prepared at the industry level by trade associations and are based on statistical data.

 

Furthermore, forecasts at the industry level deal with products whose sales are dependent on a specific industry's policy. Forecasts are done at the firm level, on the other hand, to estimate the demand for those products whose sales are dependent on the specific policy of a particular firm.

 

Nature of Forecast

 

The nature of the forecast is a significant factor that influences demand forecasting. A forecast can be either specific or broad. A general forecast depicts the overall business environment, whereas a specific forecast focuses on the business environment in which an organization operates. 

 

Organizations generally choose both forecasts together because over-generalization limits accurate demand estimation and too specific information provides an inadequate basis for planning and execution.

 

Also Read | Different Types of Demand Forecasting 

 

Benefits of Demand Forecasting

 

Demand is without a doubt one of the most important, flexible, and volatile factors influencing a company's success. Forecasting demand is extremely beneficial when running a business. Here are a few of the advantages of demand forecasting :- 

 

1. Decision Making Is Easier

 

Forecasting demand facilitates critical management activities within a company. Decisions are easier to make, and performance evaluations, for example, are given adequate context. Companies understand how well the entire organization, departments, or employees can handle future expectations and make decisions accordingly.

 

It is also easier to determine how much resources are required for future demands and whether a business is ready for expansion. Companies now have enough information to estimate and plan for future financial and managerial requirements.

 

2. Creating a Budget

 

Demand forecasting assists in reducing risks and making efficient financial decisions that affect profit margins, cash flow, resource allocation, expansion opportunities, inventory accounting, operating costs, staffing, and overall spend. All strategic and operational plans are based on demand forecasting.

 

3. Aids in both Short and Long-Term Planning

 

Proper demand forecasting enables businesses to easily manage important long-term strategic plans. Long-term business plans, such as budgeting, financial planning, and capacity planning, are more difficult to develop without knowledge of your demand. These strategies are also prone to inaccuracies and inefficiency.

 

Short and medium-term plans, such as contract creation and supplier selection, are also difficult to make. Demand forecasting provides businesses with an idea of what to expect from customers in the future. It assists managers in setting financial goals, developing budgets, and allocating company resources efficiently.

 

4. Inventory Storage

 

Demand forecasting can help you save money on inventory purchase orders as well as warehousing because the more inventory you carry, the more expensive it is to store. 

 

A good inventory management strategy includes keeping enough product on hand but not too much. Tracking inventory levels closely allows you to easily restock and forecast inventory over time.

 

5. Reduces Cost

 

Businesses can avoid massive losses or opportunity costs by accurately forecasting future demand for goods and services. Estimated forecasts keep production, inventory purchase, and marketing costs streamlined. 

 

Profit margins are determined by demand forecasting, and financial resources are not overspent in such a way that a profit margin is closed. Additionally, opportunity costs are avoided. 

 

A business understands the potential for future growth or increased demand for its products. Enough inventory is kept on hand in anticipation of this demand, saving the amount of profit that would have been lost in the event of a stock-out.

 

Steps for Demand Forecasting
 

Demand forecasting is an extremely difficult task. You must be adaptable enough to deal with sporadic influxes while also thinking long-term. Here are some of the steps of demand forecasting :

 

1. Establish Goals

 

Forecasting demand should serve a specific purpose. Its core function is to forecast what, how much, and when customers will buy. Select a time period, a specific product or general category, and whether you're forecasting demand for everyone or a specific subset of people.

 

Ensure that it meets the needs of your financial planners, product marketing, logistics, and operations teams in an unbiased manner. For proper demand capacity planning, you must first understand your goals, which will allow you to use decision-making forecasting processes to better understand online consumer behavior.

 

2. Data Collection and Recording

 

Integrating all of your sales channel data can provide a unified view of actual product demand as well as insight into sales forecasts. Knowing the time and date of orders, the SKU(s) ordered, and the sales channel will allow you to forecast growth and trend projections on a more granular level and look back to see how your forecasts matched up to reality.
 

You should also keep an eye out for ecommerce returns, which can be costly. Products with a high return rate should be evaluated and adjusted according to the reasons for the returns. If 10% of items are returned and you can reduce that number, your production may need to be adjusted as well.

 

3. Data Collection and Analysis

 

A repeatable data analysis process is required whether done manually or using automation and predictive analytics. This entails comparing your forecasted sales to actual sales to help you adjust your next forecast.

 

The graph below depicts four different ShipBob customers who all shipped 60,000 total orders in the same year. Measuring this helps track demand for various products at various times. 

 

If the brands had underestimated the volume, they would not have had enough inventory to ship orders and would not have had enough staff to fulfill them all on time. If they overestimated the volume, they would have wasted a lot of money on inventory that is now sitting and taking much longer to generate revenue than expected.

 

4. Plan your Finances Accordingly

 

Once you've established a feedback loop, you can make your next forecast (hopefully more accurately) and update your budget to allocate funds based on growth targets. Demand forecasting assists you in lowering inventory carrying costs, planning marketing spend, future headcount, production and inventory requirements, and even developing new products.

 

 

Factors Influencing Demand Forecasting

 

Forecasting demand is a proactive process that assists in determining what products are required where, when, and in what quantities. There are a variety of factors that influence demand forecasting.

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Factors Influencing Demand Forecasting

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1. Types of Goods

 

Affect the demand forecasting process more broadly. Goods can be either manufactured goods, consumer goods, or services. Aside from that, goods and new goods can be established. Established goods are those that are already on the market, whereas new goods are those that are yet to be introduced.

 

Only established goods have access to information about demand, substitutes, and the level of competition. On the other hand, forecasting demand for new goods is difficult. As a result, forecasting differs for different types of goods.

 

2. Competition

 

Influence the demand forecasting process The number of competitors in a highly competitive market influences product demand. Furthermore, in a highly competitive market, new entrants are always a risk. Demand forecasting becomes difficult and difficult in this situation.

 

3. Product Cost

 

Acts as a major influencing factor in the demand forecasting process. Organizational demand forecasts are heavily influenced by changes in pricing policies. It is difficult to predict product demand in such a situation.

 

4. Technology Level

 

It is a critical factor in obtaining reliable demand forecasts. Existing technology or products may become obsolete if technology evolves quickly. 

 

For example, the introduction of compact discs (CDs) and pen drives for data storage in computers has resulted in a significant decrease in the demand for floppy discs. In such a case, forecasting future demand for existing products is difficult.

 

5. Economic Point of View

 

The economic point of view plays an important role in determining demand forecasts. For example, if an economy experiences positive growth, such as globalization and high levels of investment, organizations' demand forecasts will also be positive.

 

Internal and external risks to an organization include high competition, technological failure, labor unrest, inflation, recession, and changes in government laws.

 

As a result, the majority of an organization's business decisions are made under risk and uncertainty.  An organization can mitigate the negative effects of risks by determining future demand or sales prospects for its products and services. 

 

Demand forecasting is a systematic process that involves anticipating future demand for an organization's products and services in the face of uncontrollable and competitive forces.