Demand forecasting is using historical sales data to develop an estimate of the forecast for customer demand. It gives businesses an estimate of the number of services and goods customers will need and purchase in the foreseeable future. Many different business assumptions, such as cash flow, turnover, and profit margin, are based on demand forecasting.
Importance Of Demand Forecasting
This process is an important business practice where the operational and strategic plans of a company are created. Based on the forecast, long-range and strategic plans of the business, such as sales and marketing plans, financial planning, and budgeting, are decided.
Types Of Demand Forecasting
There are different types of forecasting based on the time span considered, the scope of marketing, and the level of detail.
Passive: This demand forecasting is used for stable businesses that have conservative growth plans. It’s a rare type of forecasting and is typically limited to local and small businesses.
Active: This is used for diversifying and scaling businesses and there are big growth plans in terms of production, expansion, and marketing. There is a lot of consideration of competitors and the economic environment.
Short Term: This type of forecasting is used for the short term and ranges from a period of three months to 12 months.
Medium To Future Demand Forecasting: This is often usually finished quite 12 months beforehand. It helps drive the business strategy, marketing planning, capital expenditures, capacity planning, financial planning, and more.
External Macro Level: This sort of forecast takes into consideration the broader market movements within the macroeconomic environment.
Internal Business Level: Just as the name implies, this type of forecasting is used for the internal operations of the business, such as in the sales division, financial division, product category, and manufacturing group.
Different Methods For Demand Forecasting
An important step in the demand forecasting process is finding the right method. The methods can be qualitative or quantitative.
Qualitative Methods: The qualitative methods include the Delphi technique, sales force opinion, and market research. Using the Delphi technique, a gaggle of experts is appointed to supply the forecast. Each expert will generate a forecast for the assigned segment. A forecast is made by all the experts until there is a consensus. Using the sales force opinion, a sales manager asks for input from each salesperson on the team. Using the market research technique, there are customer-specific surveys that are used to look at potential demand. Each questionnaire includes economic information, preference, and demographic information. This type of method is useful for products that don’t have any demand history.
Quantitative Methods: Quantitative methods include the trend projection method, barometric technique, and econometric forecasting technique. The trend projection method is used for businesses that have a large sales data history to look at a time series and project demand under normal conditions for the future. The forecast is done by analyzing economic and statistical indicators. Using the economic forecasting technique enables businesses to look at complex mathematical equations and see the relationships between factors that influence demand and the demand itself.
Based on the precise requirements of a business or the merchandise , customized demand forecasting also can be used. A customized model can combine different quantitative and qualitative methods in order to come up with the best forecast for the business.