The importance of demand forecasting has been topic of discussion in economics and some 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, as well as technological and political trends that might affect supply.
- Price forecast: This is based on information gathered and analysed about demand and supply. Provides a prediction of short- and long-term prices and the underlying reasons for those ternds.
1. Increasing customer satisfaction
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 fulfil customer orders with short lead times, 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
Businesses need realise 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 while 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 emphasise 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 standardised 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. 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 three 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 cannibalisation of both promoted and non-promoted SKUs. Integrating distributor-level promotions and related forecasts will allow you to improve the flow of goods and achieve 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!
You don’t need any special software or super algorithms 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 at the VP, there are plenty of more productive methods including gathering data, getting it into shape to analyse and creating a base demand forecast.
Dr Muddassir Ahmed is a Manufacturing Operations, Procurement and Supply Chain leader with experience in international multi-site manufacturing in the electrical, hydraulics and internet industries. With considerable experience in deploying continuous Improvement best practices in Europe, the Middle East and Africa.