As a business owner you know there are many moving parts in building a successful company, and how complicated it can be to accurately anticipate what will happen in the future, specifically your products’ demand. There are lots of questions you need to be able to answer without much information or resources to go from; do you stock too much? Do you stock too little? What specific items might be out of stock in four months time? etc. If you manage to answer all these questions accurately you can save your business a lot of time and money!
But how can you possibly predict all the variables that will affect your inventory levels? Leave that to the software. Demand forecasting softwares use complex algorithms to provide you with all the information you need to make the right decisions.
What is Demand Forecasting?
Demand forecasting is a powerful tool that through complicated calculations and endless iterations predicts what will be the demand for products. It takes historical data from your ERP system (or CSV files) such as how much inventory you have, where it is, what’s its value, your turn rate, your lead time, etc. Using intricate algorithms, the system tells you how much inventory you should hold per product per location. This output allows you to optimize your supply chain and maximize your profit.
Why is Demand Forecasting Important?
Maximize Profit, Minimize Cost
It’s hard to know exactly how much product you need to purchase. If you overestimate, the leftover products lose their value, the cost spent to purchase them goes to waste, and you’re paying unnecessary storage fees. if you underestimate, you are undeserving your customer and are not seizing all the profit you can capture. Demand forecasting helps you understand your future demand for each of your products in each location, and as a consequence, maximize the profit you can capture while minimizing the cost of excess supply.
Sometimes you don’t think a certain product will do so well or there can be a shortage in the product’s materials that cause low inventory levels. Then when the orders start coming in you have to announce shipment delays to your customer. By understanding a certain product’s possible demand you can stock up properly and increase your customer satisfaction by preventing shipment delays.
Budget and Strategic Planning
Knowing where to allocate your budget can help you make wise business decisions such as whether you can / should start a new product line or hone in on the development of specific products. In addition, if you know there will be a big surge in the demand for product A in three months and you know the components for the products are cheaper now than they’ll be when demand picks up, you can make a larger order now and save on production costs. Demand forecasting gives you the ability to make more educated decisions and guides you to put the money in the right places.
Demand forecasting can be a great tool to companies that haven’t fully optimized their supply chain and need a little more visibility into their business. It provides you with a better idea on where you stand, how your future outlook looks like, and plants the seeds to your strategic plan of action (if demand doesn’t seem too high in the future, what does it mean? Should you change marketing strategies? Should you concentrate your efforts in one region?).
By utilizing demand forecasting you are unleashing the fullest potential of your business.