Every business that maintains an inventory has to accurately forecast demand to stock the inventory optimally to meet consumer demand.Demand forecasting can be a challenging task to accomplish accurately, and you must be careful to consider all the aspects that influence demand.

What Is Demand Forecasting?

Demand forecasting is the method of predicting future sales for a particular period based on past sales data and current knowledge and experience. Accurate forecasting allows retail businesses to avoid overproduction or underproduction. No business can do without demand forecasting in the contemporary world, and demand forecasting acts as a reference point for all marketing efforts.

With future planning and forecasting, companies can make estimations and reduce risk and uncertainty. Demand forecasting depends on several factors such as sales data, customer behaviour, trends and patterns, seasonality, promotions and marketing plans.

Why Is Demand Forecasting Important?

Demand forecasting is a worthwhile investment for businesses and helps streamline manufacturing operations. Some reasons why you should be carrying out demand forecasting are listed below:

1. Inventory Optimization

A detailed analysis of demand for goods can allow you to recognize products with high demand and products that do not sell well. This analysis helps you decide which items to stock in a higher amount to avoid stockouts. Demand forecasting allows you to set the safety stock levels, and demand planning software automatically places replenishment orders when the recorder point is reached. Demand planning and forecasting also take into consideration the varying lead times.

2. Ever Changing Customer Demand

Demand depends on customer requirements, and manufacturers’ objective is to meet the increasing consumer demand. Offering your customers the product they want at the right time is essential for keeping them happy and ensuring that they do not shift to your competitors. It also enhances brand loyalty, and customers would return to you for their next purchase. Demand forecasting ensures that you have an optimally stocked inventory for meeting inventory demand.

3. Pricing and Promotions Planning

Price changes and promotions can enhance the demand for particular products. Demand planners should incorporate these factors to ensure they have enough products to meet the expected demand surge. Accurate pricing and promotion strategies can allow planners to increase the revenue and sales of an organization. Demand forecasting software can analyze the influence of promotions and predict how the demand will rise for goods and services.

4. Optimized Safety Stock Level

Demand forecasting considers past sales data, promotion campaigns, price changes, seasonal trends and other external factors. These factors allow you to understand which items you should stock more and when you can keep a low inventory.

5. Reducing Expenses for Expiring Products

Demand forecasting has practical uses for products with a short shelf life, such as the chemical and food industries. Without accurate demand forecasting, you might manufacture too many goods and sell them at a reduced price as the expiration date comes closer. Additionally, businesses have to bear extra expenses for storage when too many products are manufactured.

Steps to Demand Planning & Forecasting 

Demand Forecasting is a scientific process and involves facts and figures. There are several steps involved in the process, and businesses must make significant decisions at every step. The various steps involved in demand planning and forecasting are as follows:

• Product Type

The nature of the product or service for which the demand forecasting is done is a significant aspect. While forecasting demand, it is essential to consider whether the product is a perishable item, durable, consumer good or producer good. The stage at which the product is should also be considered, such as is it at the introduction stage, growth, maturity or saturation phase, obsolescence or decline phase. The kind of competition should also be taken into account.

• Contributing Factors

While analyzing statistical demand, it is essential to categorize the explanatory factors into trend, cyclical, random, and seasonal factors. Analysis of factors is crucial and helps in understanding whether the industry’s demand, the aggregate demand in the economy, or the company’s or consumer’s demand is forecasted. 

• Determining the Goal

Economists should be clear about the applications of data forecasts and how it is relevant to the future planning by the firm. Based on the scenario, the demand planner should select the type of demand forecasting method – short-run, non-conditional, conditional, passive or active. 

• Demand Determinants

Various demand determinants have varying degrees of significance in different demand functions, based on the kind of product and type of forecast. Moreover, it is crucial to consider socio-psychological determinants, such as sociological, demographic, and psychological factors that influence demand.

• Testing Accuracy

Numerous methods are available for examining statistical correctness in a particular forecast. Some are affordable and simple, whereas some are difficult and complex. This inspection is required to avoid and reduce forecasting mistakes and improve decision-making.  

• Selection of AI-based models

The demand planner has to select a specific technique from different demand forecasting methods based on the product type.

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Our flagship product, Kronoscope uses AI to accurately predict future inventory imbalances which lead to out of stock situations or wastage, and also recommends best ways of minimizing their impact to predict future inventory requirements and optimize prices.