Demand forecasting is the estimate of expected customer demand based on historical sales data. Despite the dichotomy of factual input and intuitive approximations that come into play, demand forecasting software has made this volatile field more accurate with aggregate forecasts. The role of demand forecasting in supply chain management touches on strategic business planning. Demand forecasting also sets in motion the push processes of supply chain management such as raw material planning, purchasing, and logistics. It steers the pull processes including order management and distribution. Let us break down the impact of forecasting in supply chain management.
Importance of Demand Forecasting in Supply Chain
A product development strategy is a part of the overarching corporate strategy by which a company offers new products, product improvements, and product line extensions to existing markets. This is in order to disrupt the competition, to retain market share, and to meet sales growth and revenue goals. This strategy establishes the goals and funding framework of the new products.
Boost Customer Satisfaction
Demand forecasting is especially important for assemble-to-order and made-to-stock business models. A happy customer is one who receives the products they have ordered on time. Demand forecasting enables shorter lead times and more efficient distribution.
Better Allocation of Resources and Capacity Planning
With a more accurate estimate of expected customer orders, organizations can source and acquire only the necessary raw materials. It also means that the production schedule will be more precise thanks to prudent capacity utilization and resource allocation.
A good demand forecast reduces the Bullwhip effect by providing more accurate figures for inventory throughout the supply chain. From raw materials to finished products, the organization will only carry stock that will move. This reduces the chance of overstocking or stockouts.
Plan Sales Strategies
Demand forecasts create a starting point for other strategic planning activities within the business such as product design and management for new products and same family products. They also provide crucial data used to make decisions in purchasing, pricing, and promotion of current and new products.
Better Supplier and Purchase Terms
As mentioned before, demand forecasting guides the push processes such as raw material planning, purchasing, manufacturing, and inbound logistics. This means, for the purchasing managers, prompt purchase plans which can be shared with suppliers early. The result is better relationships with suppliers and leverage to negotiate better terms with suppliers.
Demand Forecasting Software
It started with excel sheets and has now evolved into demand forecasting software which has brought supply chain management to a whole new level of efficiency and accuracy. For any medium-sized business with multiple SKUs and complex distribution channels, it is worthwhile to invest in demand management solutions.