How to do demand forecasting in the supply chain?
What is demand forecasting?
Demand forecasting in the supply chain is a process used to determine potential future requirements of your customers. For example, the future demand of a particular product or service. Forecasting figures are usually determined by analysing historical sales data and trends based on sales and marketing activity. It’s important to be aware of market variations such as new trends, seasonal variations, and new products; all of which can impact customer demands and therefore your demand forecasting.
So why do we need to forecast future demand?
In the supply chain, demand forecasting helps to avoid the ‘bullwhip effect.’ The bullwhip effect is the distortion of demand that travels upstream in the supply chain. This is caused by:
- Excessive inventory quantities
- Poor customer service
- Cash flow problems
- Stock outs
- High materials costs
- Overtime expenses
- Transport
Demand forecasting helps to reduce the risk associated with the bullwhip effect and deters this from happening.
Does sales forecasting play an important part?
The sales team are a key stakeholder in the forecasting process, as are the marketing team. They must be consulted before any forecasting figures are generated. The sales team will often be in discussion with end-users to understand customer order patterns, future requirements and potential timelines to orders being placed. Sales forecasting will feed into the demand forecasting for horizon scanning. Historical sales figures also play a key part in determining the potential accuracy of future projections on demand.
Marketing also plays a critical role in the forecasting process. Marketing often has an awareness of upcoming promotions and marketing campaigns that will deliver a potential “rush” on inventory levels when this increase in demand could occur.
How does demand forecasting link to the production process?
Demand forecasting is a vital part of the production process and contributes to the efficiency of the production area. The steps below show how demand forecasting is used within the production process.
- Historical sales data, trends, seasonal variances, market activity and future forecast of demand are quantified
- Demand figure is determined per inventory SKU
- The figure is then validated by the forecasting team
- The figure is populated into a planning system (MRP/ERP system or it can be as simple as an excel spreadsheet)
- Production planners will use this figure to determine when and how much inventory to manufacture through the production plant
What are some forecasting techniques?
A key area to consider when forecasting is choosing whether you want to use qualitative or quantitative techniques. Examples of qualitative techniques include expert opinions and market surveys. Quantitative approaches include time series modelling which relies on ‘hard’ information.
Qualitative techniques
Advantages: Flexibility, Intuition
Disadvantages: Bias, human error, heavily reliant on opinion
Quantitative techniques
Advantages: Access to historic data, clear patterns
Disadvantages: Lacks detail, expensive method
Another technique is the Delphi method, which is based on multiple rounds of questionnaires sent to a panel of experts. This is a combined qualitative and quantitative technique and is useful when there is no historical information present.
What is operations management?
Operations management is a key area within any organisation. It plays a key role in keeping supply chains operational in today’s challenging environment. Discover the key to success when thinking about operations management
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