Forecasting

What is demand forecasting?

Demand forecasting in the supply chain is a process used by organisations to determine potential future requirements of customers. Forecasting figures are usually determined by analysing historical sales data and trends, being aware of market variations such as new trends, seasonal variations and new products that are brought into the market by potential competitors all of which can impact consumer demand.

Why does an organisation forecast future demand?

In the supply chain, forecasting can help to deal with the 'bullwhip effect' caused by the distorted flows of information up and down the supply chain. Excessive inventory quantities, poor customer service, cash flow problems, stock outs, high material costs, overtime expenses and transport costs, which cause the 'bullwhip effect' can be avoided by accurate forecasting (Handfield and Nichols, 2002; Monczka et al., 2009; Porasmaa and Ojala, 2011).

Does sales forecasting play an important part?

The sales team are a key stakeholder in the forecasting process as are the marketing team and 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 on the organisation. Sales forecasting will feed into the demand forecasting for horizon scanning and historical sales figures will also play a key part in determining potential accuracy of future projections on demand.

Marketing also play a critical role in the forecasting process as they will have awareness of upcoming promotions and marketing campaigns that will deliver a potential “rush” on inventory levels and details of the timeframes that this increase in demand could occur.

How does demand forecasting link to the production process?

Once all of the historical sales data, trends, seasonal variances, market activity and future forecast of demand have all been quantified, a demand figure is determined per inventory SKU, this figure is validated by the forecasting team then populated into a planning system, which is often an MRP or ERP system or it can be as simple as an excel spreadsheet in some instances, the production planners will then work to this figure to determine when and how much inventory to manufacture through the production plant.

What are some forecasting techniques?

An important issue in forecasting is choosing the most appropriate techniques. Examples of qualitative techniques include expert opinion, market surveys and Delphi method. Quantitative approaches include time series modelling and rely on ‘hard’ information that eliminates most personal bias attributed to qualitative techniques (Lysons and Farrington, 2016).

The Delphi method, a combined qualitative and quantitative technique, is a useful forecasting technique when there is no historical information on which to base more objective forecasts is available (Lysons and Farrington, 2016).

 

To find out more about this subject read the full knowledge paper: Forecasting

 

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