Several companies need to calculate future events affecting their services or products. Although no one can predict the future, many try to forecast it. But what is demand forecasting? And what is its importance to a business?
What is demand forecasting?
Demand forecasting is the process of understanding and forecasting or predicting customer demand so the company can make efficient and smart decisions concerning profit margins, cash flow, supply chain operations, capacity planning, capital expenditures, and more. It often helps the business estimate the total sales and revenue for a short future period by basing it on historical data.
Although there are several methods to obtain trustworthy predictions, demand forecasting usually uses predictive analytics of historical data so they can understand their customers’ possible demands. However, there are two categories of demand forecasting methods: qualitative and quantitative.
The quantitative methods use analytical tools and data to create predictions, while qualitative methods are based on information gathered from the field and opinions from experts. It is usually used when it is minimal or no available data to study and analyze.
What is the importance of demand forecasting?
Demand forecasting can be used in inventory management and production planning to avoid underproduction or overproduction of a certain product. It allows companies to make smarter and better-informed decisions concerning their products and services based on what their clients may want in the near future.
Many digital tools and software can help companies to make smarter analyses, including the operations offered by John Galt Solutions. Check their website to see how they can help you with your company’s needs.
What factors affect demand forecasting?
Several factors can affect demand forecasting since it attempts to predict the future. Let’s understand them:
1 Geography
First, where your customers live and where you produce or offer your services can affect their demand. Also, where you manufacture, fulfill orders, and store products deeply impact your inventory forecasting and shipping costs, of course. All of this can affect your future clients’ demands. Therefore, it is necessary to study the location of where you want to put your company and your manufacturing industry.
2 Economy
As happens with any sphere of our lives, the economy plays a huge role in demand forecasting. If the economy enters a stage of recession or depression, such as happened in 2008, the demand for high-priced and luxury products will probably fall. However, if the country is entering a stage of a good economy, people will likely buy more.
3 Seasonality
Not all products can be properly sold every season of the year. For example, swimsuits are not exactly the product people hope to buy during autumn or winter. It is important to analyze the seasons and what is happening during them to check what your clients hope to get.
4 Competition
Competition can make your clients pay more or less for a product. It affects the whole market, so keeping an open eye on your competition is essential.
