Demand Forecasting: Everything You Need to Know About
02 Apr 2021
Demand Forecasting is important for all e-commerce business owners. Using demand forecasting helps to predict future sales. Any business faces risks and uncertainty. These factors include both internal and external ones. Accurate forecasting and demand management systems reduce cases of risks. This is to say that keeping inventory accurate is possible with demand forecasting. Here is why we want to give more information about it.
There are several models and types of demand forecasting. This article will help you to understand the essence of demand forecasting.
Demand Forecasting Definition
Demand forecasting is the procedure of predicting customer demand for future sales. It helps companies to make smart decisions about their supply chain operations. Apart from it, demand forecasting helps to understand both the current and future customers’ needs. It is carried out via using historical sales data and other useful information.
The historical sales data helps to estimate an expected forecast of customer demand. In that way, companies produce the right products which have demand. The demand planning system reduces the options of ending up with an obsolete inventory in hand.
Let’s now discuss each model one by one. Later we will figure out the importance of demand planning in supply chain.
Six Types of Forecasting
There are multiple methods that companies use for demand and supply forecasting. Therefore not in all cases the forecasts work with great accuracy. That’s why businesses use multiple demand forecasts at the same time. It is good not to rely on only one method. In that way, they can have an overview of the effectiveness of those methods.
The use of multiple forecasting models will help to find out the discrepancies quickly. As a result, companies can highlight the main differences in predictions as well.
Take a look at the factors influencing Demand Forecasting:
The passive forecasting method uses sales data from the past. The past data is used to make comparisons and predictions for future sales at the same time. This method is a traditional approach to forecasting. The main reason is that businesses use the data from the same season to predict the future sales for that same season. The passive forecasting type is suitable for those who have seasonal fluctuations. Besides, it doesn’t require using statistical methods or economic trends. That’s why it’s the easiest method.
This model is the ultimate choice for everyone having growth phases. Similarly, the same is true for anyone starting to increase their sales volumes. With the help of this model, businesses make market researches a lot. Apart from it, you can use marketing campaigns and expansion plans.
The short-term type is suitable for those who manage just-in-time (JIT) stock. However, most companies use this type of forecasting with longer-term projections. This method limits the sales predictions from 3-12 months. Subsequently, short-term forecasting works well for anyone depending on seasonal sales.
The long-term type provides data for a more extended period than a year. Consequently, it helps to plan for a long-term business production capacity. The long-term type projects sales from one to four years into the future. Besides, this type works great to plan out your marketing, capital investments, and supply chain operations. This forecasting method act like a roadmap for companies.
External macro forecasting
This type of forecasting triggers the use of external factors. These include economic conditions, competition and consumer trends, for example. Using the mentioned data helps the companies understand the product or service expansion opportunities. Moreover, it can support predicting the financial challenges. In addition, it can help to predict even the raw material shortages.
The companies who seek stability other than growth underestimate the value of this forecasting type. However, the external market factors can help to figure out how those trends will affect your goals.
The internal capacity of the companies plays an important role. And here is why internal forecasting is helpful. Imagine a situation when your customer demand doubles. There comes the question of whether your company will have the capacity to meet the customer demand or not. While using this type to forecast you will find out the limitations that hinder the sales growth.
The Benefits of eCommerce Demand Forecasting
No matter the size of your eCommerce store, demand forecasting is always essential. Above all, it gives you predictions like the sales forecasting types do. And No matter the choice of the demand forecasting type, even if it’s a basic one, your company will always benefit from it.
Here are the main benefits of demand forecasting.
There are many businesses that depend on seasonality. Seasonal fluctuations may influence the growth of sales rapidly. Here is why it’s important to know which months may be beneficial and which ones have less customer demand. For example, if your sales grow higher every January, you can offer discounts to keep your customers engaged. In other words, demand forecasting helps to reveal the seasonal trends.
Demand forecasting helps to provide an accurate price for products. However, it requires a good understanding of the marketplace and competitors. And it is by no means effective. Demand forecasting helps to have accurate budgeting as well. In that way, it’s possible to reduce the discrepancies in the cash flow of the companies.
Accurate Inventory Management
There is no big news that inventory storage matters the most. Most of the businesses fail as a result of not understanding the real demand of their stock in the marketplaces. Inevitably they end up with dead stock. Both the demand and sales forecasting types help to prevent it.
However, it is not advised to rely on the forecasting methods only. Using inventory management software solutions like eSwap is will be the best solution to prevent overstock or understocks. It becomes possible with software features like order management, inventory management and workflow automation.