In 2014, Walgreens had a $1 Billion forecasting blunder that led to the exit of two executives. In 2001, Nike also had a demand planning software implementation failure that led to a $100 million loss in sales. These examples show how imperative demand forecasting and having the right demand forecasting systems play in the overall profitability of businesses.
Demand forecasting forms an essential component of the supply chain process. It’s the driver for almost all supply chain related decisions. While demand forecasting is undeniably important, it’s also one of the most difficult aspects of supply chain planning. Demand is often volatile making demand forecasting both an art and a science.
Demand Forecasting defined as the process by which the historical sales data are used to develop an estimate of the expected forecast of customer demand. Demand Forecasting provides an estimate of the of goods and services that customers will purchase in the foreseeable future.
Read More: Demand Management Best Practices
Why is Demand Forecasting important for effective Supply Chain Management?
Demand Forecasting facilitates critical business activities like budgeting, financial planning, sales and marketing plans, raw material planning, production planning, risk assessment and formulating mitigation plans. Outlined below are the impacts of Demand Forecasting on Supply Chain Management:
- Improved supplier relations and purchasing terms: Demand Forecasting drives the raw material planning process which facilities the Purchasing Managers to release timely purchase plan to suppliers. Visibility and transparency of raw material demand improve supplier relations and empowers Purchasing Managers to negotiate favorable terms for their companies.
- Better capacity utilization and allocation of resources: Based on the current inventory levels, raw material availability and expected customer orders, production can be scheduled effectively. This leads to improved capacity utilization and judicious allocation of manufacturing resources.
- Optimization of inventory levels: A proper Demand Forecast provides vital information for driving the desired raw material, WIP and finished goods inventory levels. This reduces the Bullwhip effect across the Supply Chain, leading to optimization of inventory levels and reduction in stock-out or over-stocking situations.
- Improved distribution planning and logistics: Apart from small businesses, this is particularly evident in businesses dealing with multiple SKUs and wide distribution networks. Distribution and Logistics Managers are enabled to balance inventory across the network and negotiate favorable terms with Transporters.
- Increase in customer service levels: With optimized inventory levels and improved Distribution Planning and Logistics, customer service metrics like on-time delivery (OTD), on-time in-full (OTIF), case-fill/fill-rate, etc. are improved due to right sizing and right positioning of inventory.
- Better product lifecycle management: Medium to long range Demand Forecasts provide better visibility of new product launches and old product discontinuations. This drives synchronized raw material, manufacturing and inventory planning to support new product launches and most importantly, reducing the risk of obsolescence of discontinued products.
- Facilitates performance management: Management can set KPIs and targets for various functions like Sales, Finance, Purchase, Manufacturing, Logistics, etc. based on the medium to long range plans derived from the Demand Forecasting process. Organizational efficiency, effectiveness, and improvement initiatives can be designed for key areas of the company.
3 Main Roles of Forecasting in Supply Chain Management
Forecasting plays three major roles in effective supply chain management:
- Pivotal in strategic planning of Business: Forecasting is the underlying hypothesis for strategic business activities like expansion planning, budgeting, financial planning, risk assessment, and mitigation. Critical business assumptions like turnover, profit margins, cash flow, capital expenditure, etc. are also dependent on Forecasting.
- Initiating all push–processes of Supply Chain: Forecasting is the starting point for all push-processes of Supply Chain like raw material planning, purchasing, inbound logistics, and manufacturing. Better forecasts help optimize the inventory levels and capacity utilization.
- Driving all pull–processes of Supply Chain: Forecasting drives all pull-process of Supply Chain like order management, packaging, distribution, and outbound logistics. Better forecast improves the distribution and logistics and increases customer service levels.