In the past, supply chain management (SCM) relied on formulaic methods and processes. However, things have changed. SCM has to contend with globalization of businesses and consumers, demand fluctuations, complexity of sales channels and markets, and growing competition.
Also, disruptive companies, such as Amazon and Airbnb, cause drastic changes in customer expectations. Your company will succeed only if you quickly respond to ever-changing customer requirements and market conditions. You can do so by using technology and analyzing available data to forecast demand accurately.
Demand forecasting is the process of using historical sales data to predict customer demand. It provides an estimate of the goods and services customers are likely to purchase. If your demand forecast is accurate, you would be able to deliver the right amount, at the right place, at the right time, and for the right price.
It facilitates critical business activities, such as budgeting, planning, and risk assessment. Although demand forecasting sounds complex, it can be quite simple. You should use an integrated solution powered by latest technologies, such as artificial intelligence (AI) to estimate demand.
Benefits of Demand Forecasting
Demand forecasting uses supply chain information to plan the stock needed to meet expected demand. An accurate demand forecast helps you control and optimize inventory and costs. The following are the ways in which it does so:
Maintain optimal stock levels: Proper demand forecasting considers all factors that influence demand, such as inventory management data, supplier sales data, raw material availability and market conditions. Based on the demand forecast, you can optimize inventory levels of raw materials, works in progress, and finished goods.
You will be able to maintain optimal stock levels, irrespective of demand fluctuations. You can minimize safety stock and holding costs. All this helps reduce the bullwhip effect across the supply chain.
Prevent inefficiencies: A better demand forecast improves warehouse and inventory cost-efficiencies. You can avoid under- or over-stocked inventory, inflated inventory holding costs, congested distribution networks, unhappy buyers, lost sales, etc.
Improve purchasing terms: Your demand forecast drives raw material planning and purchasing. If your forecast is accurate, the purchasing department can order the required volumes of raw materials from suppliers in a timely manner. It brings visibility and transparency to the whole process and helps improve supplier relations. Moreover, the purchasing department will be able to negotiate favorable terms.
Ensure better capacity utilization and resource allocation: If inventory levels, raw material availability, and expected customer orders are known well ahead, production and staffing can be scheduled effectively. This leads to better capacity utilization, efficient resource allocation, and less wastage of storage space and inventory items.
Synchronize product lifecycle management: Demand forecasts help plan new product launches and old product withdrawals. You can accordingly synchronize all planning involved in the product lifecycle. You can also make better decisions about sales and marketing.
Reduce transportation costs: Improved demand forecasting helps you to expand your distribution networks and make them more efficient. Distribution and logistics departments will be able to use environment-friendly transporters and also negotiate better terms with them.
Enhance performance: You will be able to schedule staffing and production better if you have a demand estimate. Based on the estimate, you can set performance indicators and goals for all business functions. You can also develop initiatives towards organizational efficiency, effectiveness, and improvement in key areas of your company.
Maximize profits: Optimized inventory levels and improved distribution make your supply chain streamlined and efficient. This usually translates into improved customer service levels and customer satisfaction, which lead to increased sales and profitability.
You can accurately forecast demand by analyzing data, with the help of a software solution. An accurate demand forecast will make your decisions on production, inventory, and distribution efficient and help you to control costs. This will improve your company’s bottom line.