An Informative Guide on Demand Forecasting: Types, Methods, and Examples

Do you know how much inventory you need to fulfill the customer demands?

Or, in your next fiscal year, how much capital will you need to invest in stock?

Nobody can predict the future with certainty.

However, using a forecasting model can assist you in making an educated guess about the future. 

Integrating demand forecasting in your business will give you a comprehensive picture of potential opportunities and pitfalls. 

According to Gartner, businesses that utilized demand forecasting increased their profits by 60%.

In this article, we’ll cover everything you need to know about demand forecasting methods and how they can help your business reach its maximum potential. 

What Is Demand Forecasting and its Types?

The process of predicting future demand for goods and services is known as demand forecasting. This is accomplished by utilizing previously collected and saved data. 

Forecasts can be produced using mathematical models based on historical data, qualitative methods such as management experience or expert opinion, or a combination of the two.

Forecasting tries to answer questions like “when,” “where,” and “how much” demand when making such predictions. 

It is critical for you to understand that predictions are not targets but rather educated guesses about what will occur. These guesses can assist your businesses in making important decisions. 

5 types of demand forecasting

Demand forecasting can be achieved in various ways. Your forecast may differ depending on the forecasting model you use. Let’s look at the various types of demand forecasting models which will help you know which one to use depending on the scenario.

1. Short-term demand forecasting

Short-term demand forecasting is limited to three to twelve months. It will help you to manage your just-in-time supply chain. This can help you to react quickly to changes in customer demand.

2. Long-term demand forecasting

Long-term forecast will make predictions for the next one to four years. This forecasting model is concerned with determining the growth trajectory of your company. It can assist in planning marketing campaigns, capital investments, and supply chain operations. 

Long-term forecasting will help you prepare for future demand. Being ready for your company’s expansion is critical to its success.

3. Passive demand forecasting

Passive demand forecasting is the most fundamental type of forecasting. It uses past sales data to forecast the future. This is beneficial if your business has seasonal fluctuations.

Furthermore, this is a great model for businesses prioritizing stability over growth. It’s a strategy that assumes sales will be roughly the same as last year.

4. Active demand forecasting

It is a good option if your company is growing or starting. The active approach considers aggressive growth plans such as marketing or product development and the industry’s overall competitive environment, including the economic outlook, market growth projections, and other factors.

5. Macro demand forecasting

This model takes into account broader economic trends. It considers how these trends will affect your objectives. An external macro demand forecast can also point you in the right direction for achieving your objectives.

External macro forecasts can also address raw material availability and other factors affecting your supply chain.

Why is Demand Forecasting So Crucial?

Forecasting demand is important for businesses because it can help determine expected demand levels for your product or service. Forecasts do not need to be perfect to be highly useful. 

Even slightly inaccurate forecasts can be useful; knowing whether demand will fall or rise significantly or remain roughly the same allows you to plan accordingly, whether that means tightening your belts, expanding a production line, or staying the course. 

The most crucial benefits demand forecasting provides are:

1. Pricing for your product

Pricing is an important aspect of running a business. Demand forecast helps determine the appropriate markup for your product while keeping current market activity and demand in mind.

It will help you predict when your products will be the most popular using demand forecasting, then make price adjustments and capitalize on opportunities when demand is high and supply in the market is low.

Simultaneously, you can lower your prices and sell some of your inventory if you expect a drop in demand. This can improve your cash flow and reduce your overhead costs for the time being.

2. Optimizing your inventory

Insufficient inventory will not only dissatisfy customers and cost you money, but if it happens frequently or on a significant enough occasion for a customer, it may result in a loss of future business.

Demand forecasting will allow you to better plan when to order items with long or varying lead times, ensuring that you always have enough on hand. This will save you from incurring rush fees and placing items on backorder as you rush to fill orders.

3. Fulfilling customer expectations

Fulfilling customer expectations for demand forecasting

Providing your customers with the product they want on time will increase their satisfaction and make them more likely to buy from your company again. Demand forecasting is useful in this situation because it ensures that you have enough inventory to meet demand quickly.

Which Methods are Used for Demand Forecasting?

Choosing the best type of demand forecasting for your business is only the first step. The next step is to decide how you will create the forecast. Here are some of the most popular demand forecasting methods.

1. Market research

Market research for demand forecasting

Market research demand forecasting is based on customer survey data. Sending out surveys and tabulating data takes time and effort, but it’s well worth it. This method can provide valuable insights that internal sales data cannot.

Market research can help you gain a better understanding of your typical customer. Your surveys can collect demographic information that will help target the right customers. 

2. Sales force composite

Your sales team is in charge of the sales force composite method. It uses feedback collected by the sales team to forecast customer demand.

Your salespeople are the ones who have the most direct contact with your customers. They listen to feedback and accept requests. As a result, they act as an excellent source of information about customer preferences, product trends, and what your competitors are up to.

3. Trend projection

Trend projection forecasts use your past sales data to forecast future sales. It is the most basic and straightforward method of forecasting demand.

You must ensure to remove any anomalies. For instance, you experienced a sudden spike in your product last year because a story about your product went viral. However, it is unlikely to occur again. So, when using the trend projection method, note any unusual factors in your historical data.

4. Econometric

The econometric method necessarily requires some data crunching. This method combines sales data with information about external forces that influence demand. You then develop a mathematical formula to forecast future customer demand.

The econometric demand forecasting method takes into account economic factor relationships. For example, an increase in personal debt may coincide with an increase in demand for home repair services.

5. Delphi

The Delphi method incorporates expert input into your market forecast. This method necessitates the involvement of outside experts and a skilled facilitator.

This demand forecasting method involves sending surveys to a group of experts and then compiling the responses. The anonymity of the responses allows each person to provide honest feedback. Because there will be no in-person discussion, your panel can include experts from anywhere in the world. 

Beneficial Tips to Start Demand Forecasting

Are you new to demand forecasting but eager to reap the benefits? We are sharing some beneficial tips that you can follow to get started.

1. Define your objectives

Before you begin collecting or analyzing data, you must determine your goals. It would be best if you asked yourself the following questions:

Is it possible that demand for certain products will fluctuate?

Could shifting consumer trends influence sales?

What will you do if demand drops dramatically?

2. Collect data

Once you’ve determined your objectives, it’s time to select a forecasting method or methods from the list we provided earlier. Then collect as much data as possible. The more data you collect, the more accurate your forecast will be. 

Remember that internal and external factors influence product demand, so it’s a good idea to collect data from inside and outside your organization (via your CRM platform or sales team).

3. Analyze the data

After you’ve collected some data, it’s time to analyze and look for patterns and trends that will help you make predictions. If you have a small business, you can do the analysis manually; otherwise, you can use machine learning algorithms and statistical techniques to provide insights quickly from your data.

4. Be open to making necessary adjustments

What you do with your findings is critical – this is where your company will benefit! Make changes to your business operations to better align them with your forecasts. 

For example, if market trends indicate that demand for a specific product will increase, you should increase your product inventory to avoid backorders or stockouts. 

Some Examples of Demand Forecasting

Every business can profit from demand forecasting. Let’s look at two examples of how demand forecasting can help you increase your revenue.

1. Smoothing high demands swings

A group of friends sells personalized hoodies. They took the last three years’ sales data and averaged it to forecast trends for the coming year. According to historical data, their best months are November to March and their worst are June and July.

They use this data to generate a trend projection that tells them when to place wholesale orders. This also informs them when they need to hire temporary workers for their fulfillment warehouse.

2. Launching a new product in the market

A startup has created ground-breaking gaming consoles. They learned about customer demand from digital platforms. However, they want to increase their customer base to develop their venture into a viable eCommerce business.

The marketing team takes surveys from different people and analyzes them to know what their customers want. They then discover that video game players require a controller that is compatible with multiple platforms and offers low latency.

Based on the survey results, the company creates a marketing strategy that includes advertisements for their controller features. This helps them to acquire a large customer base.

Advantages of Demand Forecasting

Forecasting demand has several significant advantages. Not all of them will be realized by every company, but companies that use demand forecasting effectively should see several of the following returns on investment.

Below are some advantages of demand forecasting:

1. Helps in scaling your business

Slow growth increases the risk of failing to meet customer needs, which can be fatal to a new company. On the other hand, growing too quickly is expensive, cash-consuming, and reduces the company’s runway significantly. 

The rate of scaling has been a make-or-break factor for many businesses. Good demand forecasts can help you reduce those risks and provide guidance when deciding how quickly to expand operational capacity.

2. Reduces backorders

Backorders occur when you do not have enough product to meet demand, resulting in dissatisfied customers who may switch to a competitor. Because if they end up liking the competitor, you may lose them permanently. 

While unexpected increases in demand are always possible, proper demand forecasting can help reduce backorders. Demand planning can help you reduce the likelihood of running out of popular products. 

3. Financial management

It is difficult to prepare a budget without forecasting demand. How else will you be able to budget for future purchases? 

Assume you overestimate the amount of inventory you’ll need due to poor demand forecasting. The more you spend on inventory, the less money you have to spend. As a result, when it comes time to invest in a new product line or create a new ad campaign, your cash flow may be constrained by inventory.

4. Inventory management

Inventory management for demand forecasting

The more inventory you have, the more expensive storage becomes. And the longer you keep it, the more likely it will lose value. Demand forecasting can save you money on inventory purchase orders and warehousing by predicting what you’ll need and when you’ll need it. 

You reduce the risk of your inventory becoming obsolete if something “new and improved” comes along by not stockpiling too much inventory.

Optimize Demand Forecasting with Upper

Upper Route Planner is a leading route optimization and planning software that offers advanced features to help you check your team’s performance.

The reporting and analytics simplify the data for you by filtering, sorting, and grouping all data in any available date or date range in your dashboard.

You can take a printout of delivery details, and then you can apply various demand forecasting techniques to predict demand in the future.

So, what are you waiting for? Sign up today for a 7-day free trial and take your business to new heights.

Utilize Upper for Demand Forecasting

Generate on-demand delivery reports on Upper Route Planner for demand forecasting. Take a closer look at past deliveries and analyze drivers’ performance using Upper.

FAQs

Demand forecasting enables a company to set the right inventory levels, price its products correctly, and understand how to expand or contract its operations in the future. Poor forecasting can result in lost sales, depleted inventory, dissatisfied customers, and millions of dollars in lost revenue.

Previous sales data is a good predictor of future sales performance. Historical conversion rates show how many prospects, teams, or individuals could convert in a specific time period.

Sales forecasting enables businesses to allocate resources efficiently for future growth while also managing cash flow. Sales forecasting also assists businesses in accurately estimating their costs and revenue, allowing them to predict their short- and long-term performance.

Conclusion

To summarize, demand forecasting can assist you in reducing risks and making efficient financial decisions that affect your profit margins, cash flow, resource allocation, expansion opportunities, and inventory management.

Alongside this, you need software such as Upper that can store the data for you and present your data in the most simplified way. Upper’s route optimization features help businesses with the most optimized routes to ensure timely deliveries and lower operational costs.

So, sign up today to get a 7-day free trial.

Author Bio
Rakesh Patel
Rakesh Patel

Rakesh Patel is the founder and CEO of Upper Route Planner. A subject matter expert in building simple solutions for day-to-day problems, Rakesh has been involved in technology for 30+ years. Looking to help delivery businesses eliminate on-field delivery challenges, Rakesh started Upper Route Planner with the ultimate goal of simplistic operations in mind.

https://www.upperinc.com/guides/demand-forecasting/