A Comprehensive Guide to Demand Forecasting Models for Industry Professionals

Do you know how much inventory you need to fulfill the customer’s demands or how much capital you will need in your next fiscal year to invest in stock?

Nobody can predict the future with certainty. However, using a forecasting model can assist you in making an educated guess about the future.

Integrating demand forecasting in your business will give you a comprehensive picture of potential opportunities and pitfalls. Businesses that have utilized demand forecasting increased their profits by 60%, reveals Gartner.

In this article, we’ll cover everything you need to know about demand forecasting methods and how they can help your business reach its maximum potential.

Understanding the Fundamentals of Demand Forecasting

What is Demand Forecasting and its Types? 

The process of predicting future demand for goods and services is known as demand forecasting. Forecasting demand tries to answer questions like “when,” “where,” and “how much” demand by utilizing previously collected and saved data.

Forecasts can be produced using a demand planning process or mathematical forecasting models based on historical data. Also, qualitative methods such as management experience, expert opinion, or a combination of the two is used to forecast demand. You must understand that predictions are not targets but educated guesses helpful in making important business decisions.

6 types of demand forecasting

The demand forecast may differ depending on the forecasting model used. Let’s look at the various types of demand forecasting models so that you can decide which model to use based on your scenario.

1. Short-term demand forecasting

Short-term forecasting is limited to three to twelve months. It will help you in supply chain management and react quickly to changes in customer demand.

2. Long-term demand forecasting

It will help you prepare for future demand by making predictions for the next one to four years. It can assist in active demand planning, which is marketing campaigns, capital investments, and internal supply chain operations. This forecasting model helps to determine the growth trajectory of your company.

3. Passive demand forecasting

Passive forecasting is the most fundamental type of forecasting. It uses past sales data to forecast the future, which is beneficial if your business has seasonal demand or fluctuations. Furthermore, passive demand forecasting is a great model for businesses prioritizing stability over growth.

4. Active demand forecasting

It is a good option if your company is growing or starting. The active demand forecasting approach considers aggressive growth plans such as marketing or product development and the overall competitive environment, including the economic outlook, market growth projections, and other factors.

5. Macro demand forecasting

Macro-level demand forecasting model considers broader economic trends. An external macro demand forecast can address raw material availability and other factors affecting aspects of the supply chain. It will also point you in the right direction for achieving your accurate demand forecasts.

6. Internal forecasting

This forecasting model is helpful in finding out limitations and making realistic future projections. Internal demand forecasting helps review your operations and uncover the areas of opportunity within the organization. It will also help identify consumer trends so that things run smoothly to fill consumer demands. 

Now that we have learned the demand planning methods, let us find out its importance for any business.

Why is Demand Forecasting so Crucial?

Forecasting demand is important for businesses because it can help determine expected demand levels for your product or service. Forecasts can be imperfect to be highly useful.

Even slightly inaccurate forecasts can be helpful; knowing whether demand will fall or rise significantly or remain roughly the same allows you to make accurate plans accordingly, whether that means tightening your belts, expanding a production line, or staying the course.

1. Pricing for your product

Demand forecast helps determine the appropriate pricing for your product while keeping current market activity and future customer demand. It will help you predict when your products will be the most popular using demand forecasting. Then make price adjustments and capitalize on opportunities when demand is high and supply in the market is low.

Simultaneously, you can lower your prices and sell some of your inventory if you expect a drop in demand. This can improve your flow of cash and reduce your overhead costs over a period of time.

2. Optimizing your inventory

Insufficient inventory will not only dissatisfy customers but cost you money. But if it happens frequently or on a significant enough occasion for a customer, it may result in a loss of future business.

Demand forecasting will allow you to plan better when to order items with long or varying production lead times, ensuring that you always have enough on hand. This will save you from incurring rush fees and placing items on backorder as you rush to fill orders.

3. Fulfilling customer expectations

Providing your customers with the product they want on time will increase their satisfaction and make them more likely to buy from your company again. Forecasting is helpful in this situation because it ensures you have enough inventory to meet customer demand quickly, leading to a better customer experience.

Mastering Demand Forecasting Techniques

Choosing the type of forecasting is only the first step. The next step is to decide how you will create the forecast.

Here are some of the most popular types of forecasting methods:

1. Market research approach

Market research is based on customer survey data and can provide valuable insights that internal sales data cannot. Sending out surveys and tabulating data takes company time and effort, but it’s well worth it. Your surveys can collect demographic information and give you a better understanding of your target customers.

2. Sales force composite method

The sales and marketing teams are responsible for the sales force composite method to forecast customer demand based on collected feedback.  As a result, they are an excellent source of information about customer preferences, product trends, and what your competitors are up to.

3. Trend projection technique

Trend projection is the most basic forecasting method that uses your past sales data to forecast actual demand. For instance, you experienced a sudden spike in your product last year because a story about your product went viral. So, when using the trend projection method, you must ensure to remove any anomalies.

4. Econometric modeling

The econometric demand forecasting method takes into account economic factor relationships. It considers external factors and develops a mathematical formula to forecast customer demand. For example, an increase in personal debt may coincide with an increase in demand for home repair services.

5. Delphi method

The Delphi method incorporates expert input into your market forecast. It involves sending surveys to experts and then compiling the responses. The anonymity of the responses allows each person to provide honest feedback. As there will be no in-person discussion, your panel can include experts from anywhere in the world.

Implementing a Structured Demand Forecasting Process

If you are keen to start demand forecasting, here are 4 simple demand forecasting steps that will help you do it correctly.

1. Define your objectives

Before you begin collecting or analyzing data, you must define your goals. It would be best if you asked yourself below questions:

• Could shifting customer demand trends influence sales forecasts?
• What will you do if demand drops drastically?

2. Start data collection

Once you have defined your objectives, you will need to select a forecasting method and start collecting data. The more data you collect, the more accurate the forecast will be. Remember to collect data within and outside your organization (via your CRM platform or sales team) as it may influence actual product demand.

3. Do frequent analysis

After collecting data, you will need to analyze and look for sales trends to help you make informed decisions. If you have a small business, you can do the analysis manually; otherwise, you can use machine learning algorithms such as predictive analysis and statistical techniques to provide insights quickly from your data.

4. Make necessary adjustments

Findings are critical for your business; based on the findings you need to make changes to your business operations to better align with your forecasts. For example, if market trends indicate that total market demand for a specific product will increase, you should increase your product inventory to avoid backorders or stockouts.

Beneficial Tips to Start Demand Forecasting

Since you know how to do demand forecasting in four steps, you may find it easier to get going.  So, if you want to start demand forecasting, you can follow these handy tips, as stated below:

1. Do data analysis on a regular basis

2. Store data in cloud-based software

3. Discuss with industry experts if needed

4. Utilize demand planning tools like a sales forecasting calculator

5. Keep track of your findings and data

6. Finalize one of the demand forecasting methods

The above tips can be helpful for your business to start demand forecasting. Alright then, now let us go through a few demand forecasting examples to understand it better.

Real-World Demand Forecasting Examples

In this section, let’s look at two demand forecasting examples that can help you increase your revenue.

1. Smoothing high demands swings

A group of friends sells personalized hoodies. They took the last three years’ sales data and averaged it to forecast trends for the coming year. According to historical sales data, their best months are November to March, and their worst is June and July.

They use this data to generate a trend projection that tells them when to place wholesale orders. This also informs them when they need to hire temporary workers for their fulfillment warehouse.

2.  Launching a new product in the market

A startup has created ground-breaking gaming consoles. They learned about predicting customer’s consistent demand for a product from digital platforms. However, they want to increase their customer base to develop their venture into a viable eCommerce business.

The marketing team takes surveys from different people and analyzes them to know what their customers want. They then discover that video game players require a controller that is compatible with multiple platforms and offers low latency.

Based on the survey results, the company creates a marketing strategy that includes advertisements for their controller features. This helps them to acquire a large customer base.

Benefits of Effective Demand Forecasting

The companies that use accurate forecast demand can witness the below advantages followed by return on investment:

1. Scaling your business

The rate of scaling has been a make-or-break factor for many businesses. For example- slow business growth increases the risk of failing to meet customer needs. On the other hand, growing too quickly is expensive and significantly reduces the company’s runway. Good demand forecasts can help you reduce those risks and provide guidance to expand operational capacity.

2. Reducing backorders

Backorders occur when you do not have enough products to fulfill demand, resulting in dissatisfied customers. These customers may then switch to a competitor, and you may lose them permanently. Thus, proper demand forecasting models can help reduce backorders or running out of popular products.

3. Improved financial management

It is challenging to prepare a budget without forecasting demand. Assume you overestimate the amount of inventory you’ll need due to poor demand forecasts. As a result, when it comes time to invest in a new product line or create a new ad campaign, your cash flow may be constrained by inventory.

4. Optimized inventory management

The more inventory you have, the more expensive the storage becomes. And the longer you keep it, the more likely it will lose value. You reduce the risk of your inventory becoming obsolete by not stockpiling too much inventory. Demand forecasting can save you money on inventory purchase orders and warehousing by predicting what you’ll need and when you’ll need it.

Optimizing Demand Forecasting with Upper

Upper Route Planner is a leading route planning and optimization software that has unique routing features to help you optimize demand forecasting.

The reporting and analytics simplify the data for you by filtering, sorting, and grouping all data in any available date or date range in your dashboard. You can take a printout of delivery details, and then you can apply various demand forecasting techniques to predict demand in the future.

So, what are you waiting for? Sign up today for a 7 days free trial and take your business to new heights.

Conclusion

To summarize, demand forecasting can assist you in reducing risks and making efficient financial business decisions that affect your profit margins, cash flow, resource allocation, expansion opportunities, and inventory management.

Alongside this, you need software such as Upper that can store the data for you and present your data in the most simplified way. Upper’s route optimization features help businesses with the most optimized routes to ensure timely deliveries and operational cost declines.

You can book a demo today to explore the benefits of Upper.