What will happen when a product's market demand radically changes?
In business, forecasting is key to making sound decisions. Forecasting the impact of sudden change in demand can be difficult, but it's an important skill for decision-makers. When the market demand for a product suddenly changes, it can have a significant impact on company profits and operations.
Companies must be prepared for sudden change in demand by monitoring their supply chains and their own inventory levels. Additionally, it's critical to have backup strategies in place in case unexpected sales decline. This allows companies to adapt quickly and minimize disruption to their operations.
In today’s guide, we’ll learn everything about demand forecasting and its associated concepts. Before we dive in, let’s take a look at the table of content:
- Demand Forecasting Definition
- Significance of Demand Forecasting
- Factors Affecting Demand Forecasting
- 6 Different Types of Demand Forecasting
- 8 Important Techniques for Demand Forecasting
- Important Advantages of Demand Forecasting
- How to Start with Demand Forecasting?
- Your Supply Chain And Fulfillment: How Forecasting Affects Both?
- Demand Forecasting Challenges in Most Businesses
- Why Demand Forecasting is Essential for Your Ecommerce Business?
- How Deskera Can Assist You?
Let's get started!
Demand Forecasting Definition
A technique for anticipating future demand for a product is demand forecasting. However, the strength of the projection is significantly influenced by the quantity and quality of the data, the methods used to calculate it, and the user's level of competence.
To predict demand forecasting method more accurately, supply chain managers usually use a variety of sales predictions. And each of those uses a different demand forecasting approach.
The forecast's accuracy is dependent on the validity of the demand planning data and the extent to which outside circumstances corroborate the demand plan's underlying assumptions.
The first step in creating a demand prediction is to have a firm understanding of the challenges. It would further help to look for the accurate solutions to it. The best demand forecasting models and methods will be determined in this step.
Moreover, it is important to look for questions such as does being mindful of seasonal demand assist you in controlling inventory levels year-round? Or is it necessary to use supply chain analytics to find weak points in your supply chain? and so on.
Evidently, planning for upcoming events requires much more inputs than planning for current events, even though past demand projections may serve as a starting point. It's not the only indication, by any means.
Significance of Demand Forecasting
Demand forecasting is crucial because it helps organizations to foresee customers wants and make plans appropriately. Furthermore, demand forecasting planning helps businesses plan production and inventory management, set pricing, and adjust marketing and sales efforts.
This further enables companies to more effectively meet client demand and manage short- and long-term objectives in a proactive manner. Accurate forecasting helps businesses minimize costs associated with over- or under-stocking, reduce lost sales due to stock-outs, and ensure that customer orders are fulfilled on time.
Factors Affecting Demand Forecasting
Following, we’ve discussed several factors that influence demand forecasting. Let’s learn:
1. Economic Conditions:
Economic conditions such as GDP, unemployment rate, inflation rate, and consumer confidence are key factors that affect the level of demand for products or services.
The level of competition in a market can influence the demand for a product or service. There may be less demand for a good or service if there is greater competition.
3. Consumer Trends:
Consumer trends can have a major impact on the demand for a product or service. If consumers are gravitating towards certain products or services, it can have an effect on the demand for other products or services.
Price is a major factor affecting demand. The demand for a good or service may decline if its price rises.
Demand may also be impacted by a product or service's availability. The demand for a good or service may rise if it is unavailable or in short supply.
Advertising can also have a major impact on demand. A product or service's demand may rise if it receives extensive advertising.
6 Different Types of Demand Forecasting
Most of the times, demand forecasting makes estimates based on historical sales data. Other factors include market fluctuations, cyclical economic trends, and seasonal highs and lows in demand. Demand forecasting software assists in the creation of sales projections by using statistical forecasting.
There are many different formats for demand forecasts. Demand planning in your supply chain may employ a number of techniques.
Following, we’ve discussed six different types of demand forecasting. Let’s learn:
1. Short-Term Demand Forecasting:
The technique of predicting short-term demand for a good or service is known as short-term demand forecasting.
Typically, this kind of forecasting is used to make plans for a specific time period, such the upcoming few weeks or months. It is employed to assist businesses in making choices regarding production, inventory levels, and price.
Short-term demand forecasting can be done using various methods, such as
- Statistical analysis,
- Economic models,
- Market research and
- Customer surveys.
2. Long-Term Demand Forecasting:
An analytical procedure called long-term demand forecasting is used to foretell future demand for a good or service over a protracted period of time. It is further used to plan and allocate resources to meet future demand, and to identify potential opportunities and risks.
Long-term demand forecasting typically utilizes both qualitative and quantitative methods, such as statistical modeling and market research, to generate accurate and reliable predictions.
3. Passive Demand Forecasting:
The forecasting method known as passive demand forecasting uses only previous sales data to project future consumer demand.
Remember that this technique does not incorporate any external factors such as seasonality, customer preferences, or economic trends, and instead uses only past sales records to project future demand.
Passive demand forecasting is best suited for companies with relatively stable customer demand. It is mainly because it does not take into account any changes in customer preferences or economic conditions.
4. Internal Demand Forecasting:
Businesses utilize the internal demand forecasting method to forecast future consumer demand for their goods and services. This forecasting process is based on a variety of factors such as past sales, industry trends, economic conditions, and customer feedback.
Businesses can use this technique to more effectively plan for their production and inventory requirements. It further ensures that they have the proper quantity of goods and services on hand to satisfy client demand.
5. Active Demand Forecasting:
Making projections for future demand for goods or services is known as active demand forecasting. This type of forecasting involves analyzing past demand, current market trends, and other data to make predictions about future demand.
It is often used in the retail and manufacturing industries to help with product planning and inventory management.
Active demand forecasting can help companies make better decisions about how much to produce or order, when to produce or order, and how to price products or services.
6. Macro & Micro Demand Forecasting:
Macro demand forecasting involves predicting the demand for a product or service in the overall economy, while micro demand forecasting involves predicting the demand for a specific product or service in a given market.
Macro demand forecasting uses macroeconomic indicators such as population, GDP, income, and spending, while micro demand forecasting uses market-specific factors such as demographics, local economic conditions, and product availability.
On the other hand, micro demand forecasting is a method of predicting the demand for products or services in small geographical areas. It involves considering factors such as customer behavior, seasonality, competition, and pricing to create accurate, granular forecasts.
This type of forecasting is especially useful for businesses with localized customer demand, such as retailers, restaurants, and service providers.
By using micro demand forecasting, businesses can better understand customer needs and anticipate changes in demand, allowing them to make more informed decisions about inventory, staffing, and marketing strategies.
8 Important Techniques for Demand Forecasting
The initial stage in the process is deciding the sort (or types) of demand forecasting or eCommerce demand forecasting you'll utilize for your organization. The method you'll use to make the forecast must be chosen as the next stage.
Following, we’ve discussed eight effective techniques for predicting demand. Let's learn:
1. Market Research/Surveying:
The technique in market research is customer surveys is essential instrument for demand forecasting. Internet surveys have made it easier than ever to target your audience, and survey software has greatly sped up analysis.
Survey results can teach forecasters a lot that a sales figure simply cannot. They may assist with marketing initiatives, find opportunities, and improve your comprehension of the requirements of your target audience.
The following surveys are some of the most well-liked ones among sales and marketing teams:
- Sample surveys are conducted to learn more about the purchasing behaviors of a small sample of potential clients.
- Complete enumeration surveys, which entail speaking with as many prospective customers as is practical in order to collect a bigger amount of data.
- End-user research, which entails asking other businesses for their opinions on what client's desire.
2. Statistical Approach:
The application of statistical approaches to demand forecasting is a reliable and frequently cost-effective strategy. The following are some applications for the statistic approach:
- Trend Projection: This is the easiest method for predicting demand. Simply put, by studying the past, you can predict the future. Obviously, make sure to correct any errors. For instance, you might have had a momentary fall in sales the year before as a consequence of a breach into your eCommerce website, or you might have witnessed a temporary spike in sales the year before as a result of a month-long viral article about your product. Both of these events are extremely improbable to happen again, hence they shouldn't be included when identifying a pattern.
- Regression Analysis: This technique can be used to identify relationships between the demand for a product or service and external factors (such as price, time of year, or advertising campaigns).
- Time Series Analysis: A quantitative forecasting method called time series analysis uses historical data to forecast future demand. It is predicated on the idea that current demand trends will hold true going forward. It is used to predict short-term and long-term demand.
- Market Segmentation: This method can be used to identify what market segments are most likely to purchase a product or service.
- Decision Trees: This technique can be used to analyze how different variables can affect the demand for a product or service.
- Simulation Modeling: This method can be used to forecast demand by simulating different scenarios.
3. Econometric Models:
Econometric models are mathematical models used in economics and related fields to describe economic systems. They are used to estimate relationships among economic variables, such as prices, demand, supply, and consumption.
Econometric models are also used to examine the effects of economic policies. These models are used by economists to forecast economic trends and to explain and predict economic behavior.
Though it may appear straightforward in theory, the econometric demand forecasting methodology can actually be extremely difficult. It is mainly because forecasters are rarely able to run controlled trials where only one variable is changed and the subject's reaction to that change is evaluated.
Instead, econometric calculations are made utilizing a complex network of connected equations in which all variables are simultaneously changed. There is a reason that people who aren't just forecasters adopt this strategy.
4. Composite Sales Force Approach:
Sales personnel predict demand in their particular territories using a demand forecasting technique known as the sales force composite, sometimes known as the "collective view." This information is combined at the branch, region, or area level, and an overall firm demand projection is made by accounting for the total of all the variables.
This "bottom-up" approach is advantageous because salespeople are situated near to the market and frequently have first-hand knowledge of customers.
When using this strategy, it's crucial to bear in mind that variables like product price, marketing campaigns, client affluence, and competition can vary by area. Sales leaders can gather and distribute this data online using some inventory management solutions' built-in tools, while others use market research questionnaires to gather data.
5. A/B Experiment:
There are times when it is possible to study consumer behaviour through carefully monitored market trials. This includes testing different campaigns, features, website images or features, email subject lines, and many other things using A/B methods.
If customers strongly prefer one over the other and are more aware of their preferences, businesses will be better able to predict demand. For instance, a study found that firms enjoy a boost in sales when they offer prices with odd final numbers!
6. Delphi Method:
The Delphi method is a qualitative forecasting technique that relies on the opinions of experts to predict future demand. In a series of rounds, specialists are questioned about the anticipated demand for various products. The opinions are then consolidated and used to make a prediction.
The Delphi Method, which was developed by the RAND Corporation and is still commonly utilized today, is frequently employed in conjunction with an expert opinion. The Delphi method of forecasting utilises the expertise of subject-matter experts to anticipate demand.
Briefly, this is how it operates:
- There is a team of subject-matter specialists.
- A questionnaire is given to every expert panelist on the panel.
- Each panelist receives their copy of the questionnaire back after the facilitator summarizes the results.
- The panel is once more questioned over their forecasts, and they are exhorted to reconsider their initial comments in light of the panelists' responses.
- There might be one or two more rounds of this.
As a result of the Delphi method's capacity to enable the experts to build on one another's expertise and viewpoints, the conclusion is considered as a more well-informed consensus.
Three indicators are used in this forecasting technique to identify trends.
- Leading indicators attempt to predict future events. For instance, a surge in complaints from customers about shipping delays or backorders could lead to a decline in sales.
- Lagging indicators look back at prior outcomes. For inventory management purposes, a rise in sales over the previous month can indicate a tendency that has to be continuously monitored.
- Coincidental indications are used to gauge what is happening right now. As an example, real-time inventory turnover displays continuous sales activity.
Each indicator has the potential to improve inventory planning and supply chain management.
8. Expert Opinion:
Qualitative demand forecasting is a method that relies on expert opinion and judgment to predict the future demand for a product or service. It involves collecting opinions from experts in the field and using them to estimate the future demand. It is used when there is no historical data to use for forecasting.
Important Advantages of Demand Forecasting
All businesses, whether they are fast eCommerce startups or well-established retail behemoths, can benefit from demand forecasting in a number of ways.
Following, we've discussed some crucial advantages of demand forecasting. Let's learn:
Helps in Preparing your Budget:
Making a budget is tough without demand forecasting. How else might you plan for upcoming purchases?
Take into account the case where inadequate demand projections cause you to overestimate the quantity of inventory you will require. Less money is required when you invest more in inventory.
As a result, the cash flow to do so may be constrained in inventory when there is a chance to invest in a new product line or when it is time to create that new advertising campaign.
Determining a Pricing Plan:
Considering the on-demand strategy can help you determine an appropriate price for your good or service. This might be very profitable but will also demand knowledge of the market and your competitors.
For instance, if you have a large amount of inventory and know a newer model is on the way, you may swiftly clear what you already have by dropping the price and making room for the new models. Alternately, if a product is in high demand and short supply, you might increase the price by applying the exclusivity concept.
Reduction in Backorders:
Effective demand forecasting can help reduce backorders even though unexpected increases in demand are always possible (for example, when a product that was previously in low demand becomes popular, is advertised on television, or is sponsored by a powerful person).
When you don't have enough inventory to meet demand, backorders occur. They might make customers angry and lead them to seek out a competitor. You run the risk of losing them permanently if they end up enjoying the competitor. Making preparations for demand reduces the possibility that you will run out of popular products (and running off your customers).
Inventory management is an important factor in demand forecasting. Stockpiling inventory can assist lower the likelihood of stockouts and guarantee that there are adequate goods on hand to satisfy client demand.
Companies should use an inventory management system to track their inventory levels and ensure they have the right amount of stock on hand at any given time. An inventory management system can help companies monitor stock levels, keep track of sales orders, and forecast future demand.
Additionally, having enough inventory on hand can help companies avoid lost sales and maximize customer satisfaction.
Saving on Restocking:
There are various ways to save money when it comes to refilling. The most crucial thing to keep in mind is that restocking is a continuous process that calls both patience and preparation. Purchasing in bulk is one of the best strategies to reduce the cost of refilling.
Buying in bulk typically allows you to get better prices and discounts on items, which can result in substantial savings over time. Additionally, it is important to shop around and compare prices between different stores and suppliers to ensure you are getting the best deal possible.
Finally, you should look for sales and special offers available from retailers and manufacturers, as these can provide additional savings.
How to Start with Demand Forecasting?
Below are some tips on how to begin demand forecasting:
1. Assemble Historical Data & Information:
Gathering historical data, which can be used to examine historical trends and patterns, is the first step in demand forecasting. Furthermore, the list such as sales figures, customer reviews, market research findings, competitor information, etc. should all be included in this data.
2. Analyze the Relevant Data:
The analysis of historical data after it has been gathered is necessary to spot trends, patterns, and seasonality. Statistical methods like regression analysis and time series analysis can be used to do this.
3. Create Forecasts:
After analyzing the data, forecasts should be created for the future. This can be done using various methods such as trend extrapolation, simple average, moving average, weighted average, and exponential smoothing.
4. Monitor Forecasts:
After forecasts are created, they should be monitored to make sure they are accurate. This can be accomplished by contrasting the actual outcomes with the anticipated outcomes. If the forecasts are not accurate, adjustments should be made to the forecasting methods used.
Your Supply Chain And Fulfillment: How Forecasting Affects Both?
Forecasting affects your supply chain and fulfillment by allowing you to anticipate demand, plan inventory, and make adjustments to your production and delivery process. By ensuring that you have the proper products available when customers need them, accurate forecasts help you avoid overstocking or backorder costs.
Having a good forecasting system also helps you better manage your supply chain by allowing you to plan for contingencies and adjust production and delivery schedules to meet customer needs.
It also helps you optimize your fulfillment process, ensuring that you have an efficient supply chain that is able to meet customer expectations.
You do not have to make the mistakes that demand forecasters make. You may use demand forecasting to maintain the health of your company by following these supply chain best practices.
- Share data to improve your supply chain. Data silos might result in inefficiency. At all supply chain levels, keep lines of communication open. Make sure that communication is two-way.
- rely on a variety of sources. Relying solely on a supplier who has a production issue could lead to backlogs. Diversify your vendors to safeguard your supply chain.
- Monitor the outcomes of your demand projections. To find your mistakes, go back and look at earlier estimates. How precise was your most recent forecast? How well did your demand forecasting strategies perform? Or are there other models you need to look at in order to acquire results you can use?
- Use your 3PL to cut down on deadstock. Unsold products are referred to as "dead stock." This goods can remain unused in a warehouse for years, costing you money. It is challenging to forecast future client demand if you have a dead stock issue. By keeping an open inventory, an eCommerce fulfilment firm can assist you in avoiding dead stock.
Your fulfilment company is a key partner in demand forecasting. It can incorporate a significant portion of the data needed to generate accurate estimates.
Demand forecasting assists in making smart business decisions. It doesn't matter if you use straightforward or intricate procedures. Your company will remain strong if you base demand planning on sales data, market analysis, and economic variables.
Demand Forecasting Challenges in Most Businesses
Following, we've discussed demand forecasting challenges that are faced by most of the businesses. Let's learn:
1. Lack of Data:
Many companies lack the necessary data to accurately forecast demand, leading to inaccurate results.
2. Over-Reliance on Past Data:
Companies tend to rely too heavily on past data when forecasting demand, which can lead to inaccurate predictions.
3. Limited Visibility into the Future:
Companies do not have the ability to accurately predict what the future holds, making it difficult to accurately predict demand.
4. Inaccurate Demand Models:
Companies often use inaccurate models for forecasting demand, which can lead to inaccurate predictions.
5. Poor Forecasting Processes:
Companies often lack the proper processes and tools to effectively forecast demand, leading to inaccurate results.
6. Insufficient Resources:
Companies often lack the resources, such as data analysts, to accurately forecast demand.
7. Unpredictable External Factors:
External factors, such as changes in the economy, can make it difficult to accurately predict demand.
Why Demand Forecasting is Essential for Your Ecommerce Business?
Demand forecasting is an essential tool for any eCommerce company that wants to remain competitive and successful. Forecasting allows eCommerce companies to understand customer demand and anticipate future trends, enabling them to plan ahead and make informed decisions.
Demand forecasting assists online retailers in better understanding and foreseeing the needs of their customers. This helps companies develop effective marketing and promotional campaigns that target their customers and increase sales.
Forecasting also enables eCommerce companies to more accurately predict inventory levels and make sure they have enough stock to meet customer demands. This helps to reduce the risk of stockouts and improve customer satisfaction.
Finally, demand forecasting enables eCommerce businesses to locate and seize development prospects. By understanding the demand for different products and services, eCommerce companies can plan ahead and identify new product lines and services to meet customer needs and requirements.
The conclusion of forecasting the impact of sudden change in demand is that it is an important tool for businesses to be able to predict how their operations and finances will be impacted by sudden changes in demand.
By having an understanding of how their operations and finances may be affected, businesses can better prepare for any potential disruptions.
Additionally, forecasting the impact of sudden change in demand can help businesses understand the potential implications of any external factors that may influence their operations. This knowledge can be used to develop strategies that allow businesses to remain competitive and respond quickly to sudden changes in demand.
How Deskera Can Assist You?
Deskera ERP is a comprehensive system that allows you to maintain inventory, manage suppliers, and track supply chain activity in real-time, as well as streamline a variety of other corporate operations.
Deskera ERP and MRP system can help you:
- Manage production plans
- Maintain Bill of Materials
- Generate detailed reports
- Create a custom Dashboard
Deskera Books enables you to manage your accounts and finances more effectively. Maintain sound accounting practices by automating accounting operations such as billing, invoicing, and payment processing.
Deskera CRM is a strong solution that manages your sales and assists you in closing agreements quickly. It not only allows you to do critical duties such as lead generation via email, but it also provides you with a comprehensive view of your sales funnel.
Deskera People is a simple tool for taking control of your human resource management functions. The technology not only speeds up payroll processing but also allows you to manage all other activities such as overtime, benefits, bonuses, training programs, and much more. This is your chance to grow your business, increase earnings, and improve the efficiency of the entire production process.
We've arrived at the last section of this guide. Let's have a look at some of the most important points to remember:
- A technique for anticipating future demand for a product is demand forecasting. However, the strength of the projection is significantly influenced by the quantity and quality of the data, the methods used to calculate it, and the user's level of competence.
- Demand forecasting is crucial because it helps organisations to foresee client wants and make plans appropriately. Furthermore, demand forecasting planning helps businesses plan production and inventory levels, set pricing, and adjust marketing and sales efforts.
- An analytical procedure called long-term demand forecasting is used to foretell future demand for a good or service over a protracted period of time. It is used to plan and allocate resources to meet future demand, and to identify potential opportunities and risks.
- Businesses utilise the internal demand forecasting method to forecast future consumer demand for their goods and services. This forecasting process is based on a variety of factors such as past sales, industry trends, economic conditions, and customer feedback.
- Macro demand forecasting involves predicting the demand for a product or service in the overall economy, while micro demand forecasting involves predicting the demand for a specific product or service in a given market.
- The Delphi method is a qualitative forecasting technique that relies on the opinions of experts to predict future demand. In a series of rounds, specialists are questioned about the anticipated demand for various products.
- After forecasts are created, they should be monitored to make sure they are accurate. This can be accomplished by contrasting the actual outcomes with the anticipated outcomes. If the forecasts are not accurate, adjustments should be made to the forecasting methods used.