Why Every Business Should Understand Demand Forecasting

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In the business of selling goods or services, predicting how much demand there will be overtime is critical. After all, nobody wants to be in the business of stocking a full warehouse of inventory or keeping a stable full of employees on payroll when there aren’t any paying customers. Instead, the ideal situation is to match supply with demand as much as possible. That allows profit to be maximized and operating costs to be kept at a minimum. However, many businesses are still in the dark on demand forecasting, basically using a spreadsheet version of a 1970s Magic Eightball toy to figure out what might occur over the next few months. Worse, some don’t even plan or predict at all and just go with the market.

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Demand forecasting is not some arcane science nor does it require a physics degree to develop. However, good forecasting takes skill and industry know-how as well as a dedicated commitment to monitoring external factors such as regulation, the news, financial markets, international events, local and regional changes, and seasonal buying trends. All of these things and more contribute to ups and downs in market demand. For example, one can pretty much expect that during the summer ice cream sales are going to increase dramatically. However, who would have expected a COVID pandemic to send everyone home for a year and stop eating out at restaurants? A few did see that coming as they realized the ramifications of a growing pandemic in January and February before it really broke by March 2020.

Demand forecasting is applied in a number of different ways as well, which adds to the confusion for the layperson. There is passive demand forecasting, which simply relies on conservative views of historical trends. It’s rarely used. Alternatively, active demand forecasting involves a number of inputs, active decisions and actions, and external force factors to crank out a prediction of what might occur. Add into this mix various perspectives of short-term, medium, and long-term estimations of where things might go with a market and company’s demand profile. It becomes apparent very quickly why demand forecasting can cause people’s eyes to glaze over quickly.

When it comes to business strategy and consumption planning, demand forecasting becomes essential. Companies and managers need to have a working grip on what to expect for their operations, which means that most business essentially runs on educated, even calculated guesses of the near and medium-term future. An amazing amount, even today, tends to be based on anecdotal analysis, i.e. people’s experience. However, with the advent of big data, quantitative demand forecasting is really coming into the picture, even against positions based on 10, 15, or 20 years of experience. Objective data interpreted properly has become a powerful tool for modern demand predictions.

Even more interesting, an increasing number of non-traditional factors are entering the formula. For example, one demand factor many are looking at now involves online search fluctuations. When people start looking for something in particular with a higher trend than normal, data-watchers are taking those signals and applying them to market moves, anticipating a spike and supply shortage where it matters.

If you’re ready to start applying modern demand forecasting for your company, then you will want to have the right experts working for you in building those prediction models out correctly the first time. Making the wrong decision can not only miss opportunities, it could mortally wound a business with mistaken costs and too much inventory. Bring in trained model builders when it matters and don’t fall for the trap that any prediction can simply be crafted on a spreadsheet with enough thinking. That would be like playing a poker game blindfolded and trusting someone else to hold your cards.