What is demand forecasting? Fundamental techniques of demand forecasting in the supply chain?


The supply chain management begins with the raw product and ends with the finished product being delivered to the end user. It includes everything from supply chain planning to product production and demand forecasting. Demand forecasting is an essential process in supply chain management. Demand forecasting tools are used by businesses to study the demand (refers to customers) and supply (refers to companies) curves for all products and services.

The supply chain management team employs various demand forecasting techniques that can assist supply chains in multiple ways. By combining different tools and strategies, businesses can ensure a balanced supply chain that keeps price margins low and profits high. The demand forecasting process estimates future demand for your product or service based on historical data. Demand forecasting in supply chain assists in visualizing and evaluating revenue, cash flow, risk assessments, and other factors.

Key takeaways

  • Definition of demand forecasting
  • Advantages of demand forecasting
  • The disadvantage of demand forecasting
  • Components of forecasting supply chain
  • Key steps of supply chain demand forecasting

What is Demand Forecasting in supply chain?

Supply chain management refers to managing a product from its inception to its delivery to the end user. It includes supply chain, product production, and demand forecasting. Demand forecasting is a critical process in supply chain management. Companies use demand forecasting tools to study the demand (refers to customers) and supply (refers to businesses) curves for all products and services.

The supply chain management team employs various demand forecasting techniques that can benefit supply chains. Businesses can ensure a balanced supply chain by combining multiple tools and strategies. The demand forecasting process estimates demand based on historical data.

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Benefits of demand forecasting

Learn from Past Mistakes: It may allow you to correct past errors. Demand forecasting trains you to learn from the past and predict future demand for your products and services. If you noticed that your demand was higher than usual during the holiday seasons in the previous year and your supply couldn’t keep up in time, you could prepare for that situation in the future by increasing your supply to meet those expected demands.

Reduce costs by forecasting demand: Forecasting demand will help you understand what customers want and when they want it. When demand does not meet expectations, accurate demand forecasting can prevent a supply overabundance. This will save you money on inventory storage and unsold supplies.

Improved Labor Management: When there is a high demand, the amount of work also increases. If you’re short of staff, not only will your team suffer, but your revenue may also suffer. When you forecast demand, you’ll know when to hire more workers to boost production rates. On the contrary, hiring too many workers when demand is expected to fall can save both time and money.

The biggest disadvantage of demand forecasting

Demand forecasting has numerous advantages, but it is nearly impossible to predict with 100% accuracy accurately. One of the most significant disadvantages of demand forecasting is that only some situations are identical and predictable. This year’s COVID-19 pandemic is an excellent example. A global pandemic can devastate the economy and influence consumer purchasing decisions in various ways. This pandemic has impacted several factors, including the economy and supply chain, both of which play a significant role in demand forecasting.

Forecasting supply chain components

While distinct from forecasting alone, demand planning includes forecasting as a critical component, so the two processes are inextricably linked. Furthermore, intelligent demand planning can be a valuable tool in eliminating forecasting bias. Because people tend to overestimate demand, demand planning can provide a more realistic forecast by utilizing qualitative data.

Techniques for supply chain demand forecasting

There are numerous methods for demand forecasting in supply chain, but not all of them are universal. Here are the top five demand forecasting methods that a company should consider.

  1. Trend projection method

This method uses sales data from previous records to forecast future sales. It is one of the most basic and straightforward forecasting methods. Remember that sudden drops or increases in demand due to anomalies must be considered. For example, if your previous sales increased due to your appearance on a popular television show, this is unlikely to happen again.

  1. Market analysis

Customer feedback is used in the market research method. It takes time and money to send surveys and collect data, but it is worthwhile. This method can provide value that the first method cannot. Market research can help you learn more about your customers. When completing a survey, you will usually be asked additional questions that will provide information about their location, behaviors, and lifestyle. Your surveys can collect demographic information that will be useful in the future. It’s also something to think about for startups that are just getting started in the market and want a better understanding of their target market.

  1. Composite demand forecasting method for sales forces

This method is heavily dependent on your sales team. It uses feedback from sales professionals to anticipate future customer demands. Your salespeople should contact past and potential customers to gather information through conversation. This method is similar to market research, but as previously stated, it is more personal.

  1. Delphi technique

This method takes into account a variety of expert opinions. It enables you to assemble a group of knowledgeable experts in that field and industry. They will then complete survey questions and draw conclusions based on the information gathered. Because no in-person discussions are required, you can hire or seek experts from anywhere.

  1. Econometric methodology

This method necessitates the use of numbers. It combines sales data with information on external forces that have influenced demand. Then you can develop a mathematical formula to forecast customer demand in the coming years. The econometric demand forecasting method makes use of economic factor relationships.

You’ll be well on implementing an effective demand planning process if you follow these steps. This critical tool will ensure you can balance demand and supply, maximizing profits and streamlining operations. Furthermore, demand planning can strengthen your relationships with both customers and distributors.