Demand forecasts to optimize inventory levels

When we talk about demand forecasts, we refer to estimates of sales of a product during a certain time in the future. Executives first estimate demand across industries or markets and then predict sales of their company's products. Other more general definitions place demand forecasting as an estimation process in situations of uncertainty.

Demand forecasting gives rise to several kinds of projections. For example, a forecast may cover an entire industry, a product line, or an individual brand. It can apply to the entire market or a particular segment.

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The estimate may be based on general factors or a specific marketing plan. Therefore, for a forecast to be understood and useful, it is important to clarify exactly what it describes. The result of a demand forecast generates a sales forecast, which can cover a period of one year.

Why are demand forecasts important?

The importance of demand forecasts for companies lies in the fact that they form the basis for budgeting and operational planning in all departments of the company: marketing, production, and finance. So it is important to do it as accurately as possible.

If companies did not make demand forecasts, they would not be able to retain customers or it would be very difficult for them to retain them without having an estimated analysis of future sales of a product or service. This would generate such negative effects for any company as, for example, the impossibility of calculating the raw material required to execute the production process.

An inaccurate calculation will cause excessive expenses for the company because either raw material and part of the production will be lost if the expense was greater than the demand, or customers will be lost if the expense was less than the demand because it implies a surplus of angry customers and consumers who will not be able to purchase the products they wanted.

There are even times that a well-positioned company in the market can sometimes ignore demand forecasts, or execute them with errors. That is when they have to be vigilant, since there are products that, due to their original characteristics, are more in demand than others and, well, they sell out quickly. It is in them where the focus must be placed while their validity remains in the market.

The same goes for mass consumption.

How to make a demand forecast?

There are plenty of models and methods for forecasting demand, but their application will depend on the period we are forecasting and also on whether or not we have historical data or the age of the product or service.

Concerning the methods of demand forecasting, the short-term ones are the most accurate, since the factors that influence demand are constantly changing and by enlarging the forecast timeline, it will be more likely that some inaccuracy will occur.

For this reason, medium- and long-term demand forecasts usually consider more general aspects, where administrative decisions are made that influence planning, products, plants, and processes.

Two approaches to address demand forecasts: qualitative and quantitative.

We can find two classes: Quantitative and qualitative production forecasts. Numbers and attributes. Mathematics and subjectivity. In practice, companies often use both types of forecasts.

The qualitative demand forecasting approach

• Consultation with the sales force
• Consumer market survey
• Consensus groups
• Executive opinion jury
• Delphi method

The quantitative demand forecasting approach

• Simple average
• Weighted average
• Simple exponential smoothing
• Double exponential smoothing
• Linear regression

Steps to create a demand forecast.

1. Determine the use of the forecast.

What is the objective for which you are going to forecast? If you do not have a specific objective to be able to forecast, any analysis will be difficult. Define this point well by remembering the characteristics of SMART objectives so that it is easier for you to specify, prioritize and make your objective viable in the time you stipulate.

2. Select the aspects to forecast.

What is the unit of measure you will use to forecast? Here what you should keep in mind is that if you sell a product, your interest will be oriented to knowing the number of sales. If you have a bar or restaurant, you can calculate the revenue number. Now, if what you do is to manage a private hospital, what will matter to you is the number of patients admitted.

3. Determine the time horizon of the forecast.

Keep in mind that the longer the time horizon, the more inaccurate the forecast will be. Some companies handle daily, weekly, fortnightly, monthly and annual forecasts. This is based on your company and the products or services it offers.

4. Select the forecast models.

In this instance, you can employ the quantitative and qualitative judgment methods, discussed above.

5. Collect the data to make the forecast

Do you conduct surveys? Do you keep sales records? Do you use software to account for income? The goal here is for you to have a reliable and practical way of getting the data that will be relevant to making your demand forecast.

6. Make the forecast.

Depending on the forecast model, the way to proceed will be different.

7. Validate and implement the result.

There are error measures to determine the validity of a forecast. It's also important that you make constant comparisons between actual and forecast demand to determine how well (or how poorly) you're doing.

Do not be bitter if the demand forecasts show errors at some point since several internal and external reasons can condition the results. So, if you're looking to get more accurate data without risking too much, try forecasting demand for a family of products, which will be easier than forecasting for individual products.

Now you have better metrics and strategic tools to start making your demand forecasts with the products or services that your company provides, achieving more accurate results that allow you to optimize inventory levels and anticipate the needs of your customers, who are responsible for the growth of your company.