The Importance of Demand Forecasting


Revel Blog | Revel Systems | March 23, 2021 |

Advice

Demand Forecasting: The Details You Need to Know

Countless variables can affect how much product you will sell in a given period. 

While it’s impossible to predict all of the aspects that could impact sales performance, businesses using demand forecasting have been able to make informed and accurate decisions about the future, as well as their current inventory needs. 

But what is demand forecasting? And how should you forecast demand for your business? 

We answer these and other questions below. But first, let’s look at the demand forecasting definition. 

What is Demand Forecasting? 

As the name implies, demand forecasting is the process of forecasting the future demand of your product. 

The demand forecasting methodology uses historical sales performance, seasonal trends, and other relevant data to make educated guesses about what sales might look like in both the near and the long-term future.

The ability to plan warehousing, inventory, and budgeting decisions is a massive advantage. It allows companies to maintain stock products while also not overspending on overhead costs associated with having too much product inventory that can’t be moved quickly.

While forecasting demands with complete accuracy may not be possible, today’s demand forecasting tools and best practices have allowed businesses to create more precise forecasts than ever before. 

The best perk of using the process is that with every year of applying demand forecast methods, companies can accumulate more data to work with, adjusting for past discrepancies and continually improving performance. 

Importance of Demand Forecasting

Demand drives all businesses. Therefore, it’s not surprising that the ability to make an accurate demand forecast can have a massive impact on your business as well. 

But why is demand forecasting important? Let’s examine a few demand forecasting examples. These will highlight how this practice impacts your business decisions.

Pricing

Setting prices is an integral part of running a business. You need to figure out the right markup in your situation, considering the current market activity and the demand for your product. 

With the help of demand forecasting, you can accurately estimate when your products will be the most popular, make adjustments to your price, and make the most of opportunities when demand is high and supply in the market is low. 

At the same time, when you know a dip in demand is coming, you can lower your pricing and sell off some of your inventory.  This can provide you with more cash flow and reduce your overhead costs for that period. 

Budget

Another reason demand forecasting is so important is due to the vital part it plays in planning a budget. For businesses, ensuring consistent cash flow and efficient resource allocation is always a top priority.

Sound demand forecasting practices can be the difference between taking advantage of growth opportunities and facing serious issues. This is especially true when demand is low, and you need to have resources allocated to survive the downturn in revenue. 

Optimizing Inventory

A final demand forecasting example includes how to use it for optimizing inventory. A good grasp of your inventory needs is one of the best ways to maximize how you use the available resources.

On the one hand, you want to keep your inventory costs low and only stock up as much as necessary. But at the same time, you must be able to handle demand surges. Running out of stock in the middle of a buying frenzy can seriously damage not just your bottom line but your reputation as well. 

Demand Forecasting Types

To make the most of what demand forecasting can offer, it’s essential to understand the different types and uses that can be applied in different situations.

Passive & Active

Passive demand forecasting is ideal for businesses that don’t plan for rapid expansion, using historical data in a limited scope. Meanwhile, active demand forecasting considers more factors, such as external factors and even the economy. 

Micro & Macro

At the macro level, demand forecasting looks at the entire market and analyzes the shifts and trends occurring. Micro-level demand forecasting looks at the business itself, examines its processes, and uses that data to predict future patterns. 

Short & Long Term

Finally, you can use demand forecasting to look at different time periods. With short-term forecasting, you look at the upcoming months, while long-term forecasting covers multiple years.

Demand Forecasting Methods

There are two main demand forecasting approaches that can help you determine how to forecast demand more accurately. Depending on your business situation, size, and the sample size of historical data, you may find that some methods are more suitable for your business than others.

First are quantitative methods, which are based on historical or current data. This involves looking at the data from the past few years, or even the existing data, and interpreting it to provide you with forecasts about likely future performance. 

Quantitative demand forecasting uses advanced models such as the autoregressive integrated moving-average, fine-tuning the equation to account for the historical representation. Then, inserting the specific numbers to produce a forecast. 

Another approach is the qualitative demand forecasting method, which relies on opinions from experts either outside or within the company to generate multiple forecasts and then synthesize them to produce a final result.

Quantitative demand forecasting can also employ surveys of the target audience, which can provide insights that might be missed by people within the organization. However, one of the more significant demand forecasting constraints with this approach is the difficulty of ensuring the survey is an accurate representation of your audience. 

Bottom Line

Demand forecasting is one of the most powerful tools for predicting future sales. It’s also an effective method for optimizing your business so that it can handle shifts in demand in the most cost-effective way possible.

At Revel Systems, we offer a cutting-edge POS platform that helps ensure your sales processes remain efficient, helping you collect valuable data so you can make more accurate predictions in the future.

To learn more, contact us today and request a free demo