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Supply Chain Planning: Demand Forcasting in SCM

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27th Jun, 2023
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Supply Chain Planning: Demand Forcasting in SCM

Introduction

Demand forecasting is the act of organizing and foreseeing the demand for goods and commodities to support businesses in remaining as profitable as feasible. Without accurate demand forecasting, businesses run the danger of carrying unnecessary and expensive excess or of missing out on opportunities because they didn’t account for the wants, preferences, and purchasing intentions of their customers. 

Our guide can be useful if you’re new to demand forecasting and want to integrate it into your company. In this section, we will discuss demand forecasting and its definition, significance, and application to your ongoing supply chain planning and management plan. upGrad offers you a vast variety of courses to help you understand and make a career in the field of the supply chain.

What is Demand Forecasting in the Supply Chain?

Demand planning, or anticipating the demand for materials, is demand forecasting in supply chain management. This process makes sure you can deliver the right items in the right amounts to satisfy client demand without producing a surplus. A surplus can be produced as a result of a forecasting inaccuracy, which could be more efficient and affordable.

To ensure prompt stock replenishment, improved capacity management, and optimum sales and revenue, additionally, it enhances management and decision-making while advancing future growth and expansion plans. 

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How Can Demand Forecasting Benefit Your Business?

Retail companies that depend on precise stock projections for their long-term survival and health might profit greatly from demand forecasting. Additionally, the advantages go beyond preserving high levels of customer service; they can spur improvements across several functions, boosting corporate confidence and aiding a company in realizing its aspirations for expansion.

Here, we examine some of the advantages that adopting demand forecasting could provide your business. 

  1. Reduced uncertainty – When it comes to supply chain forecasting and management, uncertainty is usually a bad thing. Decision-making is hampered, there are delays, and stakeholder confidence is affected. By ensuring that supply-related tasks are sufficiently resourced and that managers are well-informed to make wise decisions that promote growth and advancement, demand forecasting can eliminate ambiguity. 
  2. Improved supply infrastructure – The health of your supply-chain infrastructure depends on your ability to predict demand peaks and troughs. By maximizing stock replenishment, capacity, and the efficient management of warehouse staff, demand forecasting contributes to improved supply chain forecasting.
  3. Increased revenue – Knowing when and in what quantities products are expected to sell can result in large revenue increases. The best possible product availability ensures that you never miss a sale, thanks to demand forecasting.
  4. Less need for safety and excess stock – Demand forecasting lessens the need for safety stock, allowing you to concentrate on your most lucrative goods while reducing inventory expenses.
  5. Better fulfillment results in longer-lasting customer advocacy – Demand forecasting allows you to make more of your products available more frequently, which can greatly benefit consumer advocacy.

What Internal and External Factors Have the Greatest Impact on Demand?

It’s important to take into account a wide range of elements that both directly and indirectly influence supply when predicting demand. These factors, which include both internal and external factors, collectively have a big impact on supply planning and needed stock at different points during the year.

Let’s look more closely at the elements you need to take into account when forecasting demand in the supply chain.

Internal Factors 

  1. Promotional sales times – Take into account how sales and markdowns could cause a surge in demand.
  2. Ongoing marketing activity: How might continuous marketing activity affect supply planning and cause a surge in demand in the upcoming weeks and months? Examples include SEO, paid media, display ads in local newspapers, and billboards.
  3. Price Changes – Are there any upcoming pricing changes for the products we sell? How might this impact demand both now and in the future?
  4. Advertising and displays within the store – How can promotional campaigns, exhibits, and POS promotions impact the demand for particular products if you are in charge of a physical store?
  5. Best before and expiration dates – Do you stock perishable goods? Planning promotional periods by expiration dates can help you reduce stock wastage in your supply chain planning. Take into account how expiry dates can cause demand to fluctuate.

External Factors 

  1. Consumer trends and purchasing patterns – How might shifting consumer preferences and purchasing patterns impact demand? This is crucial when estimating long-term, future demand.
  2. Competitor behavior – What are your rivals doing to generate demand and boost sales? Maybe they recently started a promotion or broadened their selection of goods. Or perhaps a brand-new company has entered your market with intentions to upend the industry? By evaluating the current situation of your competitors, you can find supply shortages and launch fresh initiatives to boost sales and revenue.
  3. Calendar events – Throughout a 12-month trading cycle, a few occasions tend to trigger a spike in demand. When to expect these seasonal uplifts can be determined by historical sales data, allowing you to prepare ahead of time and increase your supply appropriately.
  4. Seasonal variations – Include this in your supply chain forecasting plan, as seasonal fluctuations can have a significant impact on demand for particular goods and services. Be sure to consider these broad aspects as part of your forecast because the season, weather, and quantity of daylight can all increase or decrease demand for particular products.

Tips for Developing a Robust Demand Forecasting Strategy

  • Be Clear on Goals and Objectives

When demand forecasting is in line with your aims and objectives, it is most beneficial. A demand prediction, for instance, might help to emphasize how and when an increase in sales will start to have a real-world impact on growth if you’re aiming to promote business growth through greater revenue. 

  • Accurately gather and record data.

Consistent, thorough, and full data are necessary for accurate and proactive demand forecasting. You and your team must be able to rely on extensive data sets because many of your predictions regarding future demand will be based on historical sales data and client behavior. 

  • Keep Qualitative Variables in Mind

While taking into account historical sales data is one of the first steps you should take to enhance the accuracy of demand forecasting, you also need to take into account qualitative factors. Consider them as upcoming occurrences that will affect supply and demand but that you are in no actual position to predict. It’s difficult to account for qualitative elements, of course, but adding any marketing and sales insights will increase the accuracy and legitimacy of your forecasts.

Factors influencing demand planning and Forecasting

  • Forecasting seasonality and inventory

Everything that affects a customer’s behavior throughout the year is considered seasonal. This might refer to unforeseen weather conditions or even something like the epidemic, which made people stay indoors and at home more often than they often did in the summer.

  • In terms of demand forecasting, competition

Businesses now operate in a competitive and complicated market in the 2020s. Customers now expect a variety of things, including shorter product lifecycles, quicker deliveries, and more individualized services. 

  • Estimates of demand and product categories

Even inside the same product category, demand projections can differ greatly from one product to another. Not noticing the change itself, but rather the reason for the change is the secret. Average order value, product purchase combinations, and lifetime customer value also differ significantly and occasionally abruptly.

Why is Forecasting Demand Important in the Supply Chain?

Since demand forecasting is the method used to develop both strategic and operational strategies, it is crucial for the supply chain. Additionally, demand forecasting supports crucial company processes, including budgeting, scheduling manufacturing, evaluating risks, and buying raw materials. Above all, forecast accuracy helps merchants avoid stock-outs and overstocking while also reducing costs, boosting operational effectiveness, and enhancing customer satisfaction.

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How Does Demand Forecasting Work?

When there is historical data on certain products and a pre-established demand, the quantitative forecasting method—also known as passive demand forecasting—is applied. The utilization of mathematical formulas and data sets, such as financial reports, revenue numbers, sales, and website analytics, is necessary for passive demand forecasting.

On the other hand, the qualitative approach, or active demand forecasting, depends on cutting-edge technologies (such as machine learning), adjustments in pricing and availability, product lifecycles, product upgrades, and—most importantly—the judgment and experience of people who are creating the forecast.

Demand Forecasting Techniques

  • Collective Opinion collects historical data on consumer demand by utilizing the expertise and experience of a company’s sales force. 
  • Client survey methods offer important details about client needs, wants, and expectations. Although it can be challenging to foresee actual demand, this data is useful for establishing sales forecasts.
  • The Barometric Method is a technique for anticipating active demand that makes use of economic indicators to gauge past, present, and future activity and forecast patterns. 

How To Forecast Demand?

All organizations can benefit from accurate demand forecasting by using demand forecasting software like SAP Integrated Business Planning, but e-commerce companies and physical stores can benefit most because they can support inventory management efforts for products and enhance customer satisfaction. There are a few tried-and-true tactics that can simplify the procedure. 

  • Gather the Correct Data

You must make sure that you have the appropriate type of data to make wise business decisions for your demand forecast to be successful. Focus on the statistics that provide you with the knowledge you need to make decisions, such as price patterns and the volume of visitors to your sales channels during a specific period.

  • Adapt to the variables.

The daily interactions that affect sales data are influenced by a variety of factors. You must take into account all potential factors, such as unanticipated store closings or natural disasters, for your demand projection to be accurate.

  • Budget, buy, and allocate funds appropriately.

The only thing left to do is use the data you’ve gathered to develop a plan for how, where, and when to distribute your resources and purchase efforts once your demand forecast is in place.

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Conclusion 

Spending, as well as activity in this area, are noticeably expanding as businesses leverage their supply chains to compete and take market share. It is abundantly obvious from technology and process improvements at forward-thinking businesses that supply chain excellence is increasingly seen as a component of overall business strategy and that enhancing customer value is everyone’s business, not just management. Choose Advanced Certificate in Supply Chain Management from IMT Ghaziabad and rapidly gain excellence in the field of supply chain management.

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Frequently Asked Questions (FAQs)

1What does supply chain management demand forecasting entail?

Demand forecasting is the act of organizing and foreseeing the demand for goods and commodities to support businesses in remaining as profitable as feasible.

2What are the four supply chain management forecasting techniques?

The techniques include Simple moving average, integrated moving average, barometric, and adaptive smoothing.

3What goals does demand forecasting seek to achieve?

Financial planning, manufacturing policy, pricing policy, sales, capacity planning or expansion, marketing planning, manpower planning, and capital spending are all objectives of demand forecasting.

4What are forecasting's three advantages?

Forecasts assist companies in preparing for change, reducing uncertainty, and determining the best strategies for achieving their objectives.

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