Importance of Demand Forecasting

in Supply Chain- 9 Authentic

Reasons
June 25, 2016 muddassirismEducation, Inventory Management, Management Science, Supply
Chain Management

The importance of demand forecasting has been topic of discussion in economics and valuable
books have been written on it over the years. However, within the supply chain context there are
three types of forecasting, which are:

 Demand Forecasting: This is the investigation of the companies demand for an item or
SKU, to include current and projected demand by industry and product end use.
 Supply Forecasting: Is a collection of data about the current producers and suppliers &
technological and political trends that might affect supply.
 Price Forecast: This is based on information gathered and analyzed about demand and
supply. Provides a prediction of short- and long-term prices and the underlying reasons
for those ternds1.

Additionally, importance of demand forecasting can be short term, midrange, or long term.
Typically, firms would use all three types of forecasting.
  Long-term Forecast: usually cover more than three years and are used for long-range
planning and strategic issues. These will be performance in broad terms; that is sales by
product line or division, throughput capacity by ton per period or dollars per period.
 Midrange Forecast: usually range from one to three years and address budgeting issues
and sales plans. Again, these might predict more than demand.
 Short-term Forecast: are most important for the operational logistics planning process.
They project demand into the next several months and, in some cases, more than a year
ahead. These are needed in units, by actual items to be shipped, and for finite periods of
time- monthly or perhaps weekly

Importance of Demand Forecasting in Supply

Chain
1. Increasing Customer Satisfactions

In order to keep your customers satisfied you need to provide them with the product they want
when they want it. This advantage of forecasting in business will help predict product demand. So
that enough product is available to fulfill customer orders with short lead time and on-time.

The importance of Demand Forecasting is much higher in Made-to-Stock (MTO) , Assemble-to-

Order (ATO) or JIT Supply Business.

2. Reducing Inventory Stockouts

The interesting thing is you need realize the Importance of Demand Forecasting even if you are
working in JIT System or with long lead time suppliers like India or China. If you are buying
from long lead time suppliers then you need to send a demand forecast so that suppliers can
arrange raw materials in anticipation of actual customer orders.

In the case of JIT Systems, demand forecasting helps you to time your purchases to correspond to
when sales need to be fulfilled. The less time inventory spends in the warehouse, the less money
you’re paying to let it just sit there waiting to be sold.

3. Scheduling Production More Effectively

Forecasting is often compared to driving a car whilst looking in the rear-view mirror. The past
gives a few clues about the future, but not enough to stop you from driving off a cliff. But in my
opinion this is the best view you’ve got! If you look into the 5 Levels of Planning
Hierarches most business should need robust SIOP and Master Scheduling to schedule production
more effectively.
But I must emphasis the solution is not complex analytical software. The answer is this: Master
the present before trying to predict the future. There are signals everywhere that point to how
demand is changing. Adaptive manufacturers are watching and listening closely to the way
customers consume their product. Respond and adapt to these changes, and you will depend less
on prediction.

4. Lowering Safety Stock Requirement

A good demand forecasting process will have a direct impact in the planning of inventory levels,
Link:

 Developing production requests to manufacturing operations

 Planning for new product launches
 Planning for promotional activity
 Planning for seasonal variations in demand.

If a business is using forecasting to plan any of the above scenarios then you don’t need to carry
high safety stocks to manage those events.

5. Reducing Product Obsolescence costs

By identifying, repurposing or removing obsolete inventory the volume of inventory on hand will
decrease. With this, both direct and indirect costs of keeping the obsolete inventory will be
reduced. This closely links to reduced order sizes as a smaller volume of the inventory will be in
stock and demand forecast accuracy. Having a standardized reliable way of forecasting demand
will mean that excess stock is not ordered and this will reduce the chance of obsolete stock.

6. Managing Shipping Better

Nothing annoys me more than doing everything you can to make or buy a product so that it’s
available to ship on-time yet the warehouse guys won’t ship, as they don’t have enough people.
This drives me absolutely bonkers! For that reason the logistics guys are now part of the SIOP
process and they have to tell me how many people they need in the following 3 months. To
ensure we have enough capacity to ship material on time. This is one of the classic examples to
demonstrate the importance of demand forecasting.

7. Improving Pricing and Promotion Management

In some businesses, multiple promotions running concurrently may result in the cannibalization
of both promoted and non-promoted SKUs. Integrating distributor-level promotions and related
forecasts will allow you to improve the flow of goods. It also achieves better results in terms of
availability and stock fill rates. Similarly, improving the ability to forecast the impact price
changes will have on both revenue and gross margin dollars, when timed well!
8. Negotiating Superior Terms with Suppliers
This blog explains 7 Tips for Negotiating the Best Deal With Your Suppliers, even though I don’t
agree with heading “Sell Yourself as Someone Who Will Give Them a Lot of Business”, I do agree
with the point that, “When negotiating with suppliers, make sure they know you are someone who
will give them repeat business, over the long term”. And “And if you’re just starting out, provide
them with a sales projections plan that is based on logic and research”. By doing that you are
positioning yourself as a credible customer who wants to have a long-term relationship rather
than one-off spot buy.

9. Plan Sales Strategies

If you can use demand forecasting to get a handle on either future revenue, plan production
capacities or manage stockouts, you can also use the same information to help functions like
Product Management, Marketing and Product Design. This will enable them to make decisions on
promotions, pricing and purchasing. When working concurrently each will influences your
company’s results positively.

Conclusion:
You don’t need any special software or super algorithm to start forecasting, a simple Excel
Spreadsheet forecast will do to start with. But in my humble opinion no one can deny the
Importance of Demand Forecasting qualifications to benefit whatever business you are in.
Forecasting should not be a knee-jerk reaction of complaining to the supplier or shouting of the
VP, there are plenty of more productive reasons to get into trouble to gather data, getting it into
shape to analyze and create base demand forecast.
I have discussed few here. Which of these 9 reasons have you applied, and what results did you
get? Do share with me!
References

 Leenders and Fearon, Purchasing and Materials Management, p.457

 Allan F. Ayers, “Forecasting: Art or Reality?” Transportation and Distribution”, 35,
no. 6 (June 1994), pp. 29-30.

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