Demand forecasting techniques

Demand forecasting may be a difficult exercise. Making estimates for future under the changing con­ditions may be a Herculean task. Consumers’ behaviour is that the most unpredictable one because it’s motivated and influenced by a multiplicity of forces. there’s no easy method or an easy formula which enables the manager to predict the longer term .Economists and statisticians have developed several methods of demand forecasting. Each of those methods has its relative advantages and drawbacks . Selection of the proper method is important to form demand forecasting accurate. In demand forecasting, a judicious combination of statistical skill and rational judgement is required .

Inventory demand types:

If you analysed the historical sales data of each product in your warehouse, you’d find that the demand for various items varies considerably. Some will have consistently high demand over time, for others there might be sporadic or low demand.An item’s demand type is vital because it should be wont to determine the sort of calculation (or algorithm) you employ for forecasting. It makes statistical sense to use a special equation to calculate the demand of a product with an erratic demand type, to at least one with slow demand.

Inventory demand trends:

Almost every manufacturer, distributor or retailer can expect to ascertain seasonal demand fluctuations for a few of their product lines. Seasonal weather patterns, school holidays and annual traditions all have a seasonal influence on demand.Understanding how these seasonal factors affect your customers’ purchasing habits will assist you cash in of peaks in demand and plan for the troughs.Best practice is to stay seasonal demand factors break away your base demand calculations. This keeps the info clean and easier to use for forecasting going forward.

Survey Methods:

Under survey methods surveys are conducted about the consumers’ intentions, opinions of experts, survey of managerial plans, or of markets. Data obtained through these methods are analyzed, and forecasts on demand are made.These methods are generally used to make short-run forecast of demand.Survey method is one of the foremost common and direct methods of forecasting demand within the short term. This method encompasses the long run purchase plans of consumers and their intentions. during this method, an organization conducts surveys with consumers to figure out the demand for his or her existing products and services and anticipate the long run demand accordingly.

Sample Survey and Test Marketing:

Under this method some representative households are selected on random basis as samples and their opinion is taken because the generalised opinion. This method is based on the essential assumption that the sample truly represents the population. If the sample is that truth representative, there’s likely to be no significant difference within the results obtained by the survey. apart from that, this method may be a smaller amount tedious and fewer costly.

A variant of sample survey technique is test marketing. Product testing essentially involves placing the merchandise with sort of users for a gaggle period. Their reactions to the merchandise are noted after a period of some time and an estimate of likely demand is made from the result. These are suitable for brand fresh products or for radically modified old products that no prior data exists. it is a more methodology of estimating likely demand because it stimulates a national launch during a closely defined geo­graphical area.

Qualitative inputs:

Whilst historical data (quantitative demand forecasting) provides a great basis for achieving demand forecasting accuracy, sometimes you’ll also need to consider more qualitative factors. Qualitative demand forecasting includes accounting for future events and external market factors, such as sales promotions and competitor activity.

The Delphi Technique: A panel of experts are appointed to provide a requirement Forecast. Each expert is asked to urge a forecast of their assigned specific segment. After the initial forecasting round, each expert reads out their forecast and within the method , each expert is influenced by other experts. A consequent forecast is again made by all experts and thus the method is repeated until all experts reach a near consensus scenario.
Sales Force Opinion: The Sales Manager asks for inputs of expected demand from each Sales person in their team. Each Salesperson evaluates their respective region and merchandise categories and provides their individual customer demand. Eventually, the Sales Manager aggregates all the strain and generates the last word version of Demand Forecast after management’s judgment.
Market Research: In marketing research technique, customer-specific surveys are deployed to get potential demand. Such surveys are generally within the sort of questionnaires that directly seeks personal, demographic, preference and economic information from end customers. Since this sort of research is on a sampling basis, care must be exercised in terms of the survey regions, locations, and demographics of the top customer. this sort of method might be beneficial for products that have little to no demand history.

Inventory demand forecasting outliers:

Unusual demand outliers are often the results of known actions (sales promotions, large one-time orders, employee strikes etc) or unpredictable events (a competitor going out of business, natural disasters etc).

Take the time to analyse your inventory forecasting data to detect outliers, as they will significantly skew the accuracy of your forecasts. Any demand data – high or low – outside of the reasonable variance of average demand must be identified. You then got to make a judgement turn whether it should be included in your demand forecasting calculations (if it’s a part of a trend) or not (if it’s an anomaly in demand).

Understand demand forecasting accuracy:

Your demand forecasts are impossible to be 100% accurate. So, if you’ll calculate the extent of error in your previous demand forecasts, you’ll factor this into future forecasts. If you’ll determine how uncertain a forecast is for a given business period you’ll make the required adjustments to your inventory management rules, like increasing safety stock levels to hide uncertain periods of demand.

There are many formulas to assist you measure demand forecast accuracy, or forecast error. The Mean Absolute Percent Error (MAPE) will calculate the mean percentage difference between your actual and forecasted demand over a given period. Whilst the Mean Absolute Deviation (MAD) shows the deviation of forecasted demand from actual demand in units. you’ll learn more about forecasting error here.

Sales Force Opinion Method:

This is also mentioned as collective opinion method. during this method, instead of consumers, the opinion of the salesmen is sought. it’s sometimes referred because the “grass roots approach” because it’s going to be a bottom-up method that needs each sales person within the corporate to make a personal forecast for his or her particular sales territory.

These individual forecasts are discussed and agreed with the sales manager. The composite of all forecasts then constitutes the sales forecast for the organisation. the benefits of this method are that it’s easy and cheap. It doesn’t involve any elaborate statistical treatment. the foremost merit of this method lies within the collective wisdom of salesmen. This method is more useful in forecasting sales of latest products.

Experts Opinion Method:

This method is additionally referred to as “Delphi Technique” of investigation. The Delphi method requires a panel of experts, who are interrogated through a sequence of questionnaires during which the responses to at least one questionnaire are wont to produce subsequent questionnaire. Thus any information available to some experts and to not others is passed on, enabling all the experts to possess access to all or any the knowledge for forecasting.

The method is employed for future forecasting to estimate potential sales for brand spanking new products. This method presumes two conditions: Firstly, the panellists must be rich in their expertise, possess wide selection of data and knowledge . Secondly, its conductors are objective in their job. This method has some exclusive advantages of saving time and other resources.

 Demand forecasting periods and reviews:

The period of time you select for your demand forecasting features a direct impact on the accuracy of your forecast. for instance , a forecast watching your inventory’s demand over subsequent fortnight is far more likely to be accurate than a forecast that appears 12 months out.

In addition, if markets are volatile, or an item’s demand pattern is erratic, you’ll got to review your forecasts on a way more regular basis than in slow markets or for slow moving products. If you start to experience stock outs or see cases of excess stock, then you’ll got to adjust your forecasting intervals.

Consider inventory optimisation software:

Accurate inventory demand forecasting isn’t an easy task. Especially if you would like to trace each  and you’ve got an outsized product portfolio. Demand forecasting also requires an accurate picture of the stock levels in your warehouse and your sales across each channel.
Inventory optimisation software offers a quick and accurate means of forecasting, regardless of how complex or varying the demand. Whilst enterprise resource planning systems (ERP), warehouse management systems (WMS) and ecommerce platforms offers a particular level of forecasting, investing in inventory optimisation software supports more complex demand forecasting requirements.

Statistical demand forecasting systems, such as , will make sure you have a tool to swiftly and accurately complete your complex demand forecasting requirements so as to scale back stock outs, decrease tied-up capital and, most significantly , meet customer requirements.Read more



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