Commendable articles have been written about the significance of demand forecasting in supply chain and it has been widely discussed in economics. However, there are three kinds of forecasting in the context of supply chain.
1. Demand forecasting: â€‹
The investigation is carried out about the demand of a company for a product or SKU which includes the current and projected demand by the end use of product.
2. Supply forecasting:
The data is collected about the political and technological trends and the current suppliers and producers that may affect the product supply.
3. Price forecast:
The information about demand and supply is gathered and analyzed. Prediction about short term and long term prices is provided and the underlying reasons for these trends are identified.
Furthermore, significance of the demand forecasting in supply chain can be short-term, mid-range or long-term. Usually all three types of forecasting are used by the companies.
- Long term forecasting: Generally spans over 3 years time period and utilized for strategic issues and long term planning. It includes the performance in broad sense such as sales by division or product line, capacity by ton per period or dollars per period.
- Mid-range forecasting: This type of forecast ranges from 1 year to 3 years time period and discusses sales plans and budget issues. It only predicts but does not demand.
- Short term forecasting: It is more important for the planning process of operational logistics. The demand is projected into next several months and, in some conditions, more than a year ahead. These are needed in units for fixed periods of time like weeks or months or by the number of actual items to be shipped.
Value of Demand Forecasting in Supply Chain
1. Enhancing Customer Satisfaction
The demanded product needs to be provided to the customers on time to keep them satisfied. The product demand can be predicted with the help of demand forecasting. This will make certain that the stock is available to fulfill the order of the customer on time. The significance of demand forecasting is much greater in Assemble To Order (ATO), Made To Stock (MTO) and JIT supply businesses.
2. Reducing Inventory Stock outs
It is fascinating to know that a supply chain manager needs to realize that how important demand forecasting is even if he is working with long lead suppliers like China or with the JIT systems. If the products are being bought from long lead suppliers then a demand forecast needs to be sent to them so they can arrange the raw materials in anticipation for the future orders. In case of JIT system, the purchases can be timed in accordance with the order placement in order to fulfill the sales on time with the help of demand forecasting. This will cause the inventory to sit for less time in the warehouse waiting to be sold and you will have to pay less for extra products.
3. Scheduling Production More Effectively
Demand forecasting is like driving a car while looking into a rear view mirror. The back view gives hints about what’s coming forward but not enough to stop you from falling off a cliff. Nevertheless, it is the best view you have got. Complex analytical software is not the solution. You must master the present in supply chain before you try to predict the future. Look out for the signals that provide hints about the future demand. Adaptive manufacturers keenly observe the way their products are consumed by the customers. Similarly, by observing, responding and adapting to these changes you will have to depend less on prediction.
4. Lowering Safety Stock Requirement
Inventory level plans will be directly affected by a better process of demand forecasting:
- Development of production requests to the manufacturers
- New product launch planning
- Promotional activity planning
- Planning of variations in demand of a product seasonally
You do not need to take high safety stocks to manage these areas of planning if you are using forecasting to plan any of these events.
5. Reducing Product Obsolescence costs
The volume of extra inventory will decrease by identifying, removing or repurposing the old inventory. Both direct and indirect costs of keeping the outdated stock will be decreased by working on it. Lower volume of stock will make the process of demand forecasting more predictable and accurate.
6. Manage Shipping Better
Nothing can be more annoying than doing everything on time to ensure that product is available to be delivered when required, but the employees at the warehouse cannot ship the products because they do not have enough workers. That is why the warehouse employees must be a part of SIOP process and they have to inform beforehand about the number of employees needed in the next 3 months. It’s imperative to make sure that a business has sufficient capacity to ship the products on time. The significance of demand forecasting is demonstrated pretty well by this classic example.
7. Improving Pricing and Promotion Management
Cannibalization of promoted and non-promoted SKUs will occur due to the multiple promotions in some businesses. The flow of goods can be improved by integrating the promotions of distributor level and related forecasts. Better results are also achieved in terms of stock fill rates and stock availability. Similarly, the ability to forecast the effect of price changes on gross margin dollars and revenue is enhanced too.
8. Plan Sales Strategies
If demand forecasting can be used to get a grip on plan production capacity, future revenue and management of stockouts then it can also be utilized for getting help in the functions such as marketing, product management and product design. This will also enable you to make decisions about product pricing, purchasing and promotions. Each will influence the company’s result in a positive way when used simultaneously.
Any special software or super algorithm is absolutely not required to start forecasting. A simple excel sheet will suffice but the importance of qualifications for demand forecasting cannot be denied in any business.