What Is Demand Forecasting?

Inventory management has always been a delicate balance, requiring enough inventory to meet consumer demand while procuring products at a reasonable price point to deliver your ideal margins.

With today’s global supply chain environment and evolving consumer buying habits, forecasting accuracy of future demand and fulfillment is challenging, yet critical to your success.

Running out of high-margin inventory in e-commerce businesses when there’s strong demand is frustrating for you and your customers. In contrast, having inventory sitting on your shelf because you overbought, fearing further supply chain disruptions, ties up unnecessary capital and can throw your sales forecasting out of whack.

It all starts with accurate demand forecasting for your supply chain management.

Understanding Demand Forecasting in Supply Chain Management

Demand forecasting in supply chain management is the process of analyzing historical sales data, current market research and consumer trends to generate a precise demand prediction. This process uses various techniques to manage your supply chain and ensure your company has enough products to meet consumer demands without overbuying.

When you get it right, you maximize profitability.

Why is accurate demand forecasting essential?  Let’s count the ways it impacts your business:

• Optimize inventory levels and reorder points
• Reduce storage space and excess safety stock
• Reduce stockouts
• Plan for promotional activities and product launches
• Manage seasonal variations
• Predict product demand in changing environments
• Fulfill customer demand with shorter lead times
• Reduce rush order fees for high-demand products
• Maximize supply chain management

These factors strike a crucial balance between satisfying customers and optimizing profitability.

The Challenges of Demand Forecasting in 2024

Organizations doing supply chain demand forecasting for 2024 and beyond may encounter challenges that may significantly affect accurate forecasting unless they implement more effective practices.

Data Silos

Data availability and inaccuracy are among the most significant roadblocks in supply and demand forecasting. These problems can easily occur when businesses record historical data without forecasting in mind. For instance, demand forecasting technology may require you to input information in a specific format.

Moreover, incomplete information may make it challenging to get an accurate demand picture. For example, some customers are more likely to share feedback if it is overwhelmingly positive or negative, so your company may never hear from people who had a middle-of-the-road experience.

Pivoting

Accurate demand forecasting may become challenging when pivoting your business to offer a new product, change existing products or merge with another company. Companies need additional insight into customer needs in these situations. You can use proxy data to predict the demand for the new or changed product,then monitor results to adjust forecasts accordingly.

Outdated Forecasting Models

You are at a severe competitive disadvantage if you still use manual methods or gut instinct for planning. Many organizations still use legacy systems to track their customers and business. Sometimes, this means separate ERP and CRM software, and maybe even other systems for warehouse or inventory management or marketing and promotions.

In some cases, outdated solutions can require duplicating data in multiple places, leading to mistakes, inconsistencies or siloed information that is inaccessible to other systems. Either way, it can make for messy and inaccurate demand forecasting and supply chain management.

Here’s a thought experiment about how challenging this can be without the correct tools. Based on historical demand, the sales and marketing team independently decides to create promotional pricing or incentives to drive demand for a particular product. However, they may have no idea about bottlenecks in the supply chain, skyrocketing supplier costs or limited warehouse capacity that results in reduced or vanishing profit margins.

The solution is to integrate planning and pricing to mitigate risk and shape demand in a more predictable, controllable and profitable way. Ideally, you keep your finger on the pulse of the latest industry trends and technological advancements. Your company can use cutting-edge technology to integrate better with other software systems and perform data management tasks faster.

Supply Chain Disruptions

Companies must stay abreast of the latest supply chain disruptions to refine their demand forecasts. While mass migration and climate change disrupt trade lanes in the Panama Canal, wars in the Middle East and Ukraine slow down the shipping of minerals and consumer goods. Savvy leaders read the news and consider how various geopolitical tensions may affect prices, inventories and consumer buying patterns.

Overcoming Demand Forecasting Challenges

As customer demand evolves, organizations must have the capability to adapt digital operations, fleet management and supply chain networks to be responsive. When you have a better handle on demand forecasting and a resilient supply chain, you can better anticipate, react to and plan for whatever comes next. Here are some best practices for solving challenges in forecasting and demand management.

Constraints

Technology can free you from some constraints of recent demand forecasting challenges. The best way to overcome these is by employing a holistic demand planning software solution that tracks everything you need, including:

• Real-time monitoring of every SKU and stock level
• High availability of historical sales forecasting data with statistical modeling to manage seasonal variations and time series forecasting
• Sophisticated forecasting tools for calculating accurate supplier lead times by tracking each supplier and vendor for more accurate reorder point planning
• A single source of truth for accurate data modeling
• The ability to see accurate pricing and lead times for suppliers to meet demand and maintain margins
• Forecasting and projection tools to quickly adapt to new supply chain disruptions, pricing anomalies or unexpected consumer demand
• Artificial intelligence and machine learning to continually improve your demand forecasting, pricing and supply chain management

Forecasting Errors

Businesses must improve several things to reduce demand forecasting errors and manage future trends more effectively.

• Collaboration: Try building better relationships with supply chain stakeholders like experts and consumers, so they feel willing to share information. Their valuable insights can become a source of accurate and comprehensive forecasts.
• Technological innovations: It may help to incorporate compatible and advanced forecasting tools that include predictive analytics, real-time data analysis and more granular customization features.
• Agility and flexibility: Businesses that incorporate more agile and flexible business processes can adapt to changing market conditions faster and scale operations based on real-time demand insights.
• Workforce training and data literacy: After implementing better software and improved processes, train your staff to use advanced forecasting tools and interpret their outputs for more seamless forecasting processes.

Seasonality

Companies should incorporate seasonal and cyclical patterns into demand forecasts to create more accurate forecasts. Analyzing demand fluctuations for your products and services may help inform forecasts and account for these variations.

Of course, managing pricing is part of getting demand forecasting right. Pricing demand may depend on market fluctuations, seasonality and regional uniqueness.

You can intentionally shape demand by making price optimization tools part of your SCM strategy, maximizing profitability by proactively raising or lowering prices as needed. However, you need to be able to manage pricing rapidly across your entire inventory and supply chain and do it at scale.

Navigating Supply Chain Instability With Better Demand Forecasting

The best way to anticipate and adapt to today’s supply chain instability is to combine the power of forecasting and pricing to shape demand planning. Blue Ridge is a supply chain software provider that offers various software solutions to help supply chain management professionals mitigate planning and forecasting challenges. Our platform allows you to do the following.

• Make more informed business decisions earlier: By combining data-rich statistical methods and analysis tools, we get a high-definition picture of your supply chain so you can quickly and confidently manage your assets.
• Discover untapped dollars: By marring planning for inventory levels and pricing, uncover opportunities for cost savings, incremental sales and improved margins for future sales.
• Experience seamless integration: Deep industry experience, partnerships and ERP integrations provide a seamless, fast startup that can accommodate your workflow.
• Enjoy ongoing support: LifeLine™ drives incremental value by providing ongoing support, including continuous monitoring as your needs evolve for long-term demand forecasting.

The Blue Ridge pricing and forecasting models provide a competitive advantage by more accurately forecasting customer demand, allowing you to improve your capacity planning and supply chain management. Many of our customers have saved millions of dollars in inventory reduction through better supply chain management and improved margins through strategic demand shaping and optimizing pricing. For enhanced forecasting accuracy with our demand planning solutions, request a demo with Blue Ridge today.