Sales Forecasting, Demand Planning, and Profitability

Line Art

Sales forecasting and demand planning are closely related, and each can impact profitability. For instance, although sales planning and demand forecasting are both calculated with similar data points, like sales history, the results from a demand forecast that is based on algorithms may not be the same as a sales plan based on a sales rep. In fact, demand forecast results can go on to affect inventory replenishments, available inventory levels, anticipated inventory orders, and sales. Understanding how each is created and potential limitations is important.

To better understand the differences between forecasting and planning, it’s best to look at the benefits of each, as well as the potential limitations when they are not used together.

Sales forecasting

is generally performed by the sales team. This is typically done in Microsoft Excel and only captures what the customer purchased either last month or perhaps during the same period last year, plus some change. It may also capture potential new customer wins or losses. Utilizing sales forecasting is a critical part of any organization as it helps to develop resource strategies and analyze financial health and direction.

Limitations with sales forecasts

The downside of sales forecasting is that it measures market response but not always market demand. This is why there is a need for more advanced supply chain software vendors who can offer cutting-edge capabilities for special use cases. Essentially, events can create increases and decreases in sales units that increase or lower sales forecasts. However, this isn’t always correct.

For example, if there were zero sales in one month due to no inventory, the forecast might not factor in unavailable inventory all month long, thereby giving a false forecast that’s too low. If sales were high all month due to price markdowns, forecasts might be too high and not reflect an overstock. That’s the reason you should work with more advanced forecast software companies for forecasts that reflect situations like those above correctly.

Demand forecasting

Many demand planning teams use some form of a statistical forecast to generate their demand plan. These statistical models create the starting values over a selected time horizon. Demand history inputs are used, along with the sales team’s forecast to help determine the demand forecast.

To find demand history, you scrub sales history or auto-calculate it and filter (or identify) promos, events, regular sales and close-outs. If a business has zero sales and zero stock, demand history may show what could have occurred with available inventory.

Often sales forecasts capture new opportunities that are not available in historical data (such as new customers). Using demand planning software helps tie demand planning to sales forecasting. The result reduces the limitations with the sales forecast and the demand plan as non-integrated processes.

Potential limitations of demand forecasting

Limitations in some demand forecasting software (but not in Vanguard’s solution) that can cause confusion or inaccurate demand forecasts may include:

  • Products that are marked down (causing a temporary spike in sales)
  • Special promotions offered online
  • External changes, such as a competitor’s liquidation that can impact sales

A few advanced demand forecasting solutions let users model promotions and potential cannibalization from future sales, or even other products.

Finding software solutions

There are many factors affecting profitability, such as:

  • Inventory ordering policies
  • Communication between sales and supply chain
  • Customer service levels

All of these are important areas that affect your business’s bottom line. Inventory optimization software that includes integrated demand forecasts can help decrease the risk of lost sales and improve service, resulting in higher sales by connecting available inventory with relevant demand forecasts.

Since these technologies require less and less involvement from IT, forecasting and demand planning software is necessary for both large and small businesses, When looking for software solutions, some vendors offer a suite of supply chain planning software, while others offer add-on features or standalone features.

Look for integrated business planning software that includes historical analysis, data separation, demand shaping capacity, “What if” analysis, and supply chain communication in planning and forecasting software products. When both are used, they can help track trends for future demand and minimize waste with excess inventory or incorrect forecasting numbers.