Demand Forecasting (E)
What is the Demand Forecasting? What is the reflection of demand forecasting to inventory management, stock-out and write off?
Posted: Aug 2009
Demand for the product is the basis for the sales plans, as well as supply chain planning. Once the demand is determined it is possible to estimate market share and potential sales volume. Demand forecasting is also basis for supply chain management. Procurement, production, warehousing and distribution depend on total potential volume, average cycle volume as well as maximum demand peaks.
The first point in estimating demand is estimation of macro economical trends. Second phase is estimation of demand of specific branch and consumer group that is the area of interest for company. Finally, estimation is done for the potential sales volume of the company. Sales estimate is based on historical sales, current market share and trends. The external data are acquired by market surveys, interviews and official governmental statistic. Since most of the companies sell many products in different product categories, analysis is done for the each category separately.
There are various inputs for calculating of the demand forecasting:
Following of major economic indicators
Economic models that includes factors of demand elasticity
Tracking the basic sales determinants ( prices, income, substitutes and preferences )
The estimation of sales demand is basis for setting the sales plan on the monthly and annual level. The sales plan is developed on the annual level. The sales plan is further developed by time period, usually weeks, months, quarters and annual. During the sales planning process the plan is developed for the every individual SKU. The factor of seasonal and periodical variation is taken into account. For example, the soft drinks have 3 times greater sales volume during summer than during the winter. The alcoholic beverages with high alcohol content usually have opposite seasonality. Commodities like bread or milk have significantly smaller fluctuation between different time periods.
Finally, the sales plan is the base for the whole process of business planning. Based on demand forecasting the procurement is developing the plan of acquiring raw materials, according the period volumes. The manufacturing is preparing capacities, machinery, production shifts and maintenance based on sales demand.
The warehouse is preparing capacities, forklifts, if necessary seasonal rented warehouses. The distribution is planning the vehicle fleet according the demand. If it is necessary, the part of the demand for the vehicle fleet is outsourced.
As it is obvious, the demand forecasting is starting point for the activities among the whole organization. Since inaccuracies can lead to overstocks and write offs on one side, or stock outs on the other side, the sales forecast is should be aligned on the cross functional level. The competitive advantage of the company may depend on forecast accuracy.