The Do's and Don’ts of Demand Forecasting

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As an inventory-based business, one of the most important things you can do is engage in successful demand forecasting.

Demand forecasting is an essential tool that helps you make sure you have what you need to meet the demands of your customers. Demand forecasting is critical for the financial health of your business. Here’s what you need to do:

Step 1: Get a Baseline

If you’ve been in business for a while, you should have historical data available. The baseline needs to be at least monthly and shows the number of units bought, sold, and end inventory. Using this baseline, you’ll have a better idea of what to expect next year at the same time and can plan appropriately. This will give you an idea of what your customers want the most. Baseline numbers are critical for effective demand forecasting. Without baseline numbers, you’ve nothing to base your forecast on.

Gathering this information can leverage advanced intelligence, such as dashboards. This can help you in streamlining your process in general but is especially beneficial in developing historical data summaries that can help you in demand forecasting. The data you gather help create organized reports that show you exactly what you have, and what you need. The breakthroughs developed using advanced intelligence have led to victories in inventory planning because you’ll be able to respond to seasonality, find slow-moving items, and enable you to optimize your inventory.

Step 2: Follow the Forecast Formula

There are three important parts of great demand forecasting. The first is the actual demand forecast. The second is demand deviation. The third is the seasonal profile. Each of these needs to be considered to describe the demand for each item in the individual locations.

A: The Demand Forecast

You need the actual forecast value. It refers to the level of movement of your inventory and is the primary number of the equation. But it’s not the only part. In many cases, the software can be used to predict demand based on historical data. Remember that baseline, this is where it goes to work. While the demand forecast value is important, most companies stop here and then wonder why their purchasing behavior is too high.

B: The Demand Deviation

The demand deviation is important because it is a demand personality description. Most companies are missing this value when they transition from basic to advanced forecasting. It’s best understood in graphs and figures that can be presented in either units or percentages.

This demand forecasting metric is important because it is key in determining what your safety stock should be for each item you have. If your demand deviation is high, you will need higher safety stocks to meet those abnormal demand fluctuations. Items that have a high forecast often have a low deviation that is similar to the steady items.

If there are more sales for an item, it’s more likely they will have a stable demand pattern. Slower-moving items don’t have this type of experience, leading to erratic demand and is rarely steady. So, your steady items have a lower deviation and your slow items have a higher deviation. Profitability is highly influenced by the deviation because of safety stock inventory requirements. It should have a significant influence on merchandising decisions and service goals. Ultimately, demand deviation influences how and if your company delivers profitability.

C: The Seasonal Profile

Items that have any type of seasonal pattern aren’t complete unless they have a seasonal profile. Seasonal forecasting helps you guarantee you’ll have what you need to provide demanded services in season, even as the overall inventory of that item is reduced during other periods. If you distinguish seasonal movement from the deviation value, your safety stock needs will be lower, leading to lower costs. Seasonal forecasts help you maintain balance and help make sure that replenishment is steady. Your supply chain must have plans for seasonality, as well as the ability to identify seasonal forecasts.

Common Problems in Demand Forecasting

Old demand forecasting can become a habit, which means, as your company grows, your prior methods won’t be effective. This can lead to expensive fixes. You can avoid these problems if you have a process that relies on intelligence in dashboards. There are seven common problems you should avoid:

  1. Don’t use one demand forecasting calculation for all items when they have distinctive characteristics.
  2. Don’t overreact to spikes in demand by increasing the forecast. You’ll be left with too much stock that you can’t move

You can find the remaining problems on the 7 Common Problems to Avoid in Demand Forecasting.

If you have questions on how to engage in the best demand forecast processes, contact us today.


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