In basic economics, there is the principle of supply and demand. Most businesses rely on demand to survive and those who are able to successfully forecast and evaluate the demand for their product or service are the most profitable. As a result, there is a great deal of time spent collecting and evaluating data, looking at sales, and improving the accuracy of the information.
Demand forecasting is a guess or prediction about how much of a product will be sold over a specified time frame, or what and how much of something many people will want to buy this month…week…season, etc. Demand planning is looking at these forecasts and then purchasing based on the assumptions. An example might be to have learned of the initial spread of the Covid virus, anticipated its widespread impact, and pre-ordered a warehouse of materials to construct masks.
Obviously making these predictions can make or break a large company. Corporate planning is a serious undertaking that involves much research, extrapolation, and analysis that will result in a reasonable guess about how to proceed.
The usual method of forecasting is to look at historical data and project that the coming year will be the same. However, as we are well aware, there are a number of influences that can change the coming year over past periods. Considering that forecasting should be as accurate as possible, this can put the company in a precarious position. That is why most experts now suggest four elements.
This is the most common method for forecasting. You look at the big sellers from the past and expect that they will still be popular. However, at this point you need to look at the age of the data as well as current tastes and preferences. The data can also be skewed if you don’t incorporate enough data to be realistic. Click here to learn more.
Generally, a two-year history is a good starting place to determine trends. Statistical models are also used to weight the data based on applicability. Sales are not necessarily a good indicator. Sales are what actually transacted for your company. Demand is what you could have sold. Lost sales can be credited to insufficient stock, poor customer service, or other factors.
This is simply sales patterns. For example, the demand for artificial Christmas trees is highest in the fall and early winter. Beyond that time, there is little to no demand. However, while swimsuits may be most popular in the late spring and summer, there are still people who need new swimwear in the winter for a tropical vacation or others who have decided to take up the sport indoors.
Using the correct data and applying the appropriate statistical models becomes very important.
These are areas outside the immediate control of a company and can include economic conditions, political changes, technological changes, and cultural influences.
The economy is an external force that can boost sales or reduce buying power. In a downturned economy, there is less disposable income for luxury items. Cultural adjustments are just as important. Who could have predicted the impact of “influencers” on the buying habits of especially younger adults? Political changes can be equally unpredictable. If you use a foreign country for supplies or labor and that nation has a change in administration, natural disaster, or another form of upheaval, you could be scrambling for a source. Technological changes are a huge variable. It can be difficult to determine the next changes and how they will affect how we perform our jobs and needs.
All of this means that you need to consider both internal and external trends and then apply a human element, a gut feeling or intuition, to come up with your best estimation.
Ultimately you want to attract the attention of buyers. Sometimes this means offering a special deal or sale. Again, some of this is seasonal like the January white sales or Halloween decorations. Sometimes you will initiate the promotion or discount based on the volume of product on hand and the lower demand. If people are not buying your product, offering a discount or sale price can stimulate demand. While you will reduce profit, you will be clearing warehouse space that could be used for other products, especially those that have a trend to sell more rapidly or with more volume.
In this case, it is important that management work closely with the various departments. Initiating a discounted sale price will stimulate sales but if the internal structure is not properly geared up, you may have a problem filling the orders. This can actually be harmful to your reputation.
This includes the launch of new products or upgrades. This can be a way to rid yourself of older, but still viable, products and at the same time, generate interest in the new and improved versions.
One of the most important tools in special offers is the calendar. For a great many, Black Friday can outsell an ordinary month by far. If you are a global company, many countries have holidays different from those in the United States and you should be ready to capitalize on those as well.
So, with all of the moving pieces involved in demand planning, you probably would like some help. Increases and decreases in demand affect sales which results in differing revenues and profits. There are a number of very good programs available as well as companies that specialize in forecasting and demand planning.
As a business owner or upper management, you should realize the importance of factoring all of the components in order to determine the demand for your product or service. The best strategies include professional assistance with their operational forecasting and demand analysis. Check out some of these companies and discuss the possibilities.