Demand forecasting has become absolutely essential in today’s business environment. The ability to project and anticipate what products your customers will want from you, when they want them, and in what quantities, should be a focal point of how you execute all of your operation’s processes, from raw material purchasing, to manufacturing, and all the way through to shipping product out the door. Here’s a look at some of the methods businesses utilize to arrive at effective, accurate demand forecasting.
Trend projection is demand forecasting at its most elemental. It is simply looking back at past sales figures, to determine where future ones will come in. Adjustments need to be taken into account, such as increased marketing and advertising initiatives, or cyclical anomalies to your business. Trend projection is a practical way of forecasting demand, based on hard data from the recent past.
Quantitative Demand Forecasting Vs Qualitative Demand Forecasting
The above example of trend projection, as it applies to demand forecasting, is known as a quantitative approach. It relies on the use of measurement of data which can be manipulated to arrive at a forecast of future trends. Past sales data is frequently used to determine how the future will look. Tweaking the data – for example, applying additional variables such as advertising expenditures, changing market conditions, etc., is used to further refine the forecast.
By contrast, qualitative demand forecasting relies on the analysis of non-measurable information. It is frequently used in situations where historical data is unavailable, such as with new companies or company initiatives just starting out. Rather than using hard data, an organization utilizing qualitative demand forecasting may harness its in-house expertise on a particular market segment to develop estimates of demand. It may also engage in market research to determine not only where opportunities may lie, but also to provide a projection of the market potential for a product or service. It could involve surveys and questionnaires to prospective customers, as well as competitor analysis to identify areas which could be exploited.
Finding the Right Type of Demand Forecasting Methodology
Every enterprise needs to come up with its own formula for demand forecasting, which should include the following:
- One that works for their particular business
- One that is accurate
- One that is cost-effective
It’s very important to determine the purpose of the forecast. They can vary from being very general, to very specific. The more specific a demand forecast you are seeking, the more time-consuming and therefore expensive it will be to calculate. One very good rule of thumb is to pick a methodology which works best with your available data. Once you have identified a technique that brings acceptable results, it’s best to stick with it, rather than attempting to further refine and complicate it, which again, will likely require additional time and resources, and may not result in a more accurate or useful forecast.
Demand planning and forecasting is an essential part of most business operations, as a way of achieving the best possible outcomes in efficiency, and ultimately, profitability. But as we have attempted to illustrate here, there are a number of methods and strategies to consider. It can often require considerable expertise.
We hope you’ve found this summary useful. Please contact us with any comments or questions. We’d be happy to hear from you.