06 Dec How to Implement the Right Demand Forecasting Models for Your Business?
How to Implement the Right Demand Forecasting Models for Your Business?
Anticipating the future has always fascinated people. However, it is no longer a fascination but a strategic necessity of the hour. For businesses that are navigating the complexities of the modern market, demand forecasting emerges as the compass to guide them through uncertainty.
Steve Jobs said, “Our job is to figure out what they’re going to want before they do.” This is what demand forecasts exactly do to predict what customers would want in the future and make businesses ready to look after all the customers’ demands.
However, generating predictions is only the first step. Demand forecasting success depends on how efficiently you implement the right demand forecasting models. But before we discuss how you implement demand forecasting model, let’s understand demand forecasting in detail.
What is Demand Forecasting?
Demand forecasting refers to the strategic decision of predicting the customer demand for existing products or services, helping you determine the adjustments you should make and understand what new offerings may excite customers. It uses historical sales data, supply chain trends, potential sales, and predictive analytics to forecast customer demand.
In short, demand forecasting allows you to predict what customers will want and in what quantities. This also depends on timelines, such as “should we increase our production on Sunday or Monday?” or a particular period, such as “when should we ship more dresses, on Christmas or on New Year?”.
6 Types of Demand Forecasting
Selecting the right demand forecasting model helps you achieve the maximum benefits and a well-accurate dashboard of future sales. In fact, sometimes, considering more than one demand forecasting type helps in getting more accurate predictions. Let’s discuss different types of demand forecasting in detail.
1. Passive Demand Forecasting
Passive demand forecasting is the most easily adopted demand forecasting type because it depends solely on historical sales data for predictions. It doesn’t need other external factors or customized statistical modeling to implement. Passive demand forecasting is effective for businesses that are at a growing stage or facing seasonal fluctuations.
2. Active Demand Forecasting
Just as the name suggests, active demand forecasting is ideal for businesses that are growing rapidly as it has a very aggressive and competitive analytical approach. It considers several factors to predict the sales demand, such as growth plans, competitive environment, thorough market research, and past trends and projects. Even if the company has no past trends, active demand forecasting works best for the enterprises.
3. Short-Term Demand Forecasting
This short-team demand forecasting works well for businesses that want to stay on top of the fluctuating market and adapt to frequent demand surges. For example, companies like Uber and Lyft,
which have to manage the frequent surge in customer demand, can leverage short-term demand forecasting. This forecasting type has a timeframe of 3 – 12 months to capture changes quickly and use scenarios to create business plans.
4. Long-Term Demand Forecasting
Contrary to the short-term demand forecasting type, the long-term demand forecasting type works for a longer period of time, which may exceed a year. It serves as a roadmap, guiding companies toward their targets. Moreover, it identifies seasonality, annual patterns, and production capacity, considering that the company will expand and look for investments.
5. Macro & Micro Demand Forecasting
Macro demand forecasting examines overall market trends and economic factors, focusing on industry-level indicators. In contrast, micro demand forecasting delves into specific products, services, or market segments, analyzing detailed factors such as consumer behavior, competition, and trends. Micro forecasting is more granular and tailored to individual businesses, while macro forecasting provides a high-level view of economic and market conditions.
6. Internal Demand Forecasting
Internal demand forecasting predicts the future demand for products or services within a specific organization. It is crucial for effective inventory management, production planning, and resource allocation within the organization. It enables businesses to align their operations with expected customer demand, optimize their supply chain, and make informed decisions to meet market requirements efficiently.
8 Demanding Forecasting Methods
Implementing effective demand forecasting methods is crucial for businesses to predict market needs and streamline the supply chain. Here are the 8 best demand forecasting methods.
1. Statistical Method
The statistical demand forecasting method is useful for short-term forecasting, where you use historical sales data and mathematical models to understand the rapid behavior of the market. This method is suitable when you have extensive sales data organized chronologically, allowing you to forecast market trends effectively.
2. Econometric Method
The econometric method incorporates economic theory, statistical modeling, and historical sales data to predict future economic trends. This method is beneficial for forecasting in areas such as GDP growth and other economic indicators. For example, following a decrease in interest rates, home purchases tend to rise as lower mortgage rates make homeownership more accessible. This is an example of cause-and-effect relationships within an economic context.
3. Market Research
Market research is one of the demand forecasting methods that relies on customer survey data. All you have to do is send out surveys and organize the responses to get valuable insights directly from the customers. Usually, this method proves beneficial for startup companies in the early stages of understanding their customer base.
4. Sales Force Composite
The sales force composite method leverages insights from your sales team, as they have the most direct contact with the customers. They have a keen understanding of customer preferences and needs. Hence, the sales team is an excellent source of information about what customers want, what product trends are, and what your competitors are up to.
5. Trend Projection
The trend projection method is the simplest approach to demand forecasting, considering your previous sales data to predict future sales. Also, it is important to note that you consider unusual factors while creating forecasting demands. For example, if your previous spending was on paid marketing and now you have shifted to organic marketing, it’s unlikely that sales will align.
6. Delphi
The Delphi Method is a group decision-making approach for demand forecasting, considering expert opinions to predict specific business demands. In this approach, experts selected for their subject knowledge provide input through questionnaires while maintaining anonymity. The process involves multiple rounds, with summaries of responses influencing subsequent opinions until a consensus is reached.
7. Expert Opinion
There are times when expert advice is crucial. Hence, expert opinion, a qualitative demand forecasting method, involves input from experts in various business areas. Sales representatives fill out questionnaires, and expert input is refined through repeated iterations until a consensus is reached. However, it’s recommended to combine this method with others for a more accurate demand forecast.
8. Barometrics
This forecasting method relies on three types of indicators to predict trends.
· Leading indicators: This aims to predict future events.
· Lagging indicators: This assesses the impact of past events.
· Coincidental indicators: This measures the events occurring at the moment.
Factors that Influence Demand Forecasting
Several factors impact forecasting. Therefore, it is essential to consider the following factors before making predictions.
1. Seasonality
Demand changes with the season. During peak seasons, such as holidays, consumer interest and purchasing tend to surge, resulting in high sales volumes as people engage in more shopping activities. Similarly, during the off-season, demand typically stays steady or experiences a decline.
2. Competition
The market undergoes significant changes when competition enters or exits. Consider a scenario where a new entrant joins the market. In such instances, established businesses may experience a decline in demand as consumers explore more options. In the same way, if a competitor exits the market due to quality or service issues, other businesses may witness a demand boost.
3. Geography
Where you manufacture your products and where you sell your products really matter in planning how much inventory you need. So, it’s wise to pick the right spots in your supply chain. For instance, if most of your customers are in Los Angeles, storing the majority of your products there ensures quicker and more efficient order fulfillment.
4. Economy
The economy has a significant influence on the product demand. For instance, in times of economic uncertainty or recession, consumers may prioritize essential goods over the need for luxury products. Similarly, during periods of economic growth, there might be a surge in demand for high-end products.
Beneficial Tips to Start Demand Forecasting
Governments across the Asia-Pacific region recognize the transformative potential of AI for SMEs and have introduced various initiatives to accelerate adoption:
For a confident start in effective demand forecasting, consider the following tips.
1. Regular analysis of data is essential
2. Use cloud-based software to store your sales data
3. Get connected with industry experts if needed
4. Demand planning tools like a sales forecasting calculator can be an added benefit
5. Don’t miss to track your findings and data
6. Finalize one or more methods for forecasting
Advantages of Demand Forecasting
Discover the importance of demand forecasting and how it yields tremendous results when properly embraced for strategic business planning.
1. Helps in Scaling Your Business
The pace of scaling is a critical determinant of business success. Slow growth may lead to the risk of failing to meet customer needs, while rapid growth can be expensive for the company. Accurate demand forecasts serve as a valuable tool in mitigating these risks and offering a balance to expand operational capacity.
2. Reduces Backorders
Backorders arise when the demand exceeds the product availability. This could lead to customer dissatisfaction or losing a potential customer. Accurate demand forecasting will help you minimize backorders and ensure that you are able to supply products on time.
3. Financial Management
Forecasting demand is essential for budget preparation. Overestimating inventory needs due to inaccurate demand forecasts can constrain cash flow when investing in new product lines or ad campaigns. Hence, forecasting helps you overcome budget preparation challenges.
4. Inventory Management
Stockpiling inventory is not only expensive but also loses its value with time. By estimating your inventory needs and timelines, demand forecasting becomes a cost-saving tool for optimizing purchase orders and warehouse expenses.
How to Choose the Right Type of Demand Forecasting for Your Business
Choosing the appropriate type of demand forecasting involves a careful consideration of your sales data and business goals. Here are the following factors that you need to consider:
· Data Availability: Assess the accessibility and completeness of your data, ensuring it aligns with your forecasting requirements.
· Data Characteristics: Understand the nature and quality of your data, considering factors such as accuracy, consistency, and relevance.
· Demand Patterns: Analyze demand patterns in the data to identify trends, seasonality, and any other patterns that can guide your forecasting approach.
· Business Goals: Align your choice with your business goals, ensuring that the selected demand forecasting method contributes to achieving your overall objectives.
These factors will help you tailor your demand forecasting strategy to suit the specific needs and dynamics of your business.
Conclusion
The importance of demand forecasting in navigating the complexities of the modern market cannot be overlooked. By understanding the trends, patterns, and predictions, businesses gain the ability to proactively monitor future customer demands and anticipate market dynamics. Not only do you need the best demand forecasting techniques, but also the right managed IT support provider, like Nuvento, to ensure optimal results of your forecasting strategy.
Additionally, AI readiness assessment plays a pivotal role here. Ensuring your organization is AI-ready to harness the potential of artificial intelligence in enhancing demand forecasting accuracy.
Incorporating AI into your demand forecasting models can provide advanced analytical capabilities, allowing for more precise predictions and proactive decision-making. Nuvento’s cutting-edge solutions and dedicated support empower your business with AI readiness assessment, enhancing the accuracy of the demand forecasting process.
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