Demand Forecasting in the Supply Chain

All of the institution’s systematic planning activities to accurately predict the amount and timing of the demand for its products or services can be called Demand Planning.

Many factors that may affect the demand can be recorded within Demand Planning and used while producing the forecasts.

The factors (data, information, events, etc.) that can be considered to prepare the demand plan successfully are summarized in the table below.

Internal Factors

Price Policy

Delivery Performance

Social Media Activities

Past Requests and Sales

Sales and Marketing Activities

Logistics and Production Costs

New Product Launches, Delists

Rumors About Quality and Quality

Management’s Instructions, Quotas, and Targets

External Factors

Big Projects

Legal Regulations

Tenders, Bulk Purchases

Competitors’ New Products

Changes and Trends in Prices

Competitors’ Products, Prices

Economic Contractions, Growths

Competitors’ Delivery Performances

Existing, New, and Potential Customers

Contractions and Growths in the Market

In the case of institutions, many factors can be added to the above list. The multitude of factors affecting demand makes it difficult to produce forecasts effectively.

Within the scope of Demand Planning Processes, these and similar factors affecting the market should be identified, grouped if necessary, and followed up systematically.

What are the Effects of Demand Planning on the Competition?

Organizations that can plan the demand more successfully than their competitors will be able to design and construct all Supply Chain Operations, mainly production and purchasing, offer more reliable deadlines and delivery times to their customers, increase their competitiveness with the price and cost advantages they will provide, and increase their market share, product and customer satisfaction. As a result, they will be able to expand their portfolios steadily.

In this context, the Demand Planning System to be designed is among the prerequisites for the sustainable profitability of the institution.

How to Forecast Demand, How to Produce Forecasts?

A systematic approach should be followed while designing Demand Planning Processes within the organization. These systematics should be explicitly created for the institution. In general terms, the following path can be observed.

Data is Collected and Prepared

Collecting demand or sales data of previous periods, cleaning these data, determining the factors affecting the market in the past, and enriching the data with the history of events can be listed among these preparatory activities. In this way, the data and information to be used when creating forward demand forecasts are compiled.

Estimating Levels and Units are Determined

Estimates Include Products, product subgroups, parent groups, product families, categories, brands, etc. It is preferable to work at different levels. Depending on location, region, customer, or customer groups can also be applied.

Time–Related Process Parameters are Set–Up

Time–Related Decisions such as the horizon of the forecasts to be produced, how the periods within this horizon will be constructed, and how often the estimates will be made or updated play an essential role in structuring the Demand Planning Process.

The Definition of the Process and its Objectives are Made

The importance of the institution’s demand planning and sales forecasting process, its place in corporate planning, its inputs, outputs, objectives, and performance indicators should be expressed.

The Data is Analyzed, and the Estimation Technique is Selected

Initially, visualizing the data will help analyze forecasts and select appropriate techniques. Then, statistical or judgmental methods are used to make forward predictions. Finally, numerical and reasoning estimates should be appropriately integrated into the process, and the performance of the chosen technique should be continuously monitored.

Forecasts Produced are Included in Corporate Planning Processes

Demand Planning (DP), Budgeting, Sales and Operations Planning (S&OP), Supply Chain Collaborations, Strategic Business and Investment Planning, etc. It is subject to planning steps and activities designed within the scope of processes. Adjustments and adjustments to current demand forecasts are also likely at these stages.

Demand Planning and Forecasting Process is Improved

The process’s overall performance is evaluated, suggestions and feedback on the improvement of the process are received, and improvement activities are carried out.

DEMAND MANAGEMENT IN THE SUPPLY CHAIN

The Supply Chain is a complex organization formed by more than one company. Hundreds of interrelated activities are carried out by independent companies in the Supply Chain. The operation of many decision processes such as raw material supply, production, stock, distribution, and the operation of these organizations by coming together depends on the presence of a single element, which is customer demand.

Without customer demand, no activity in the Supply Chain would be of any importance. And for this reason, customer demand in the Supply Chain is an essential input that ensures the operation of the whole system. Demand Management aims to maintain the balance between supply and demand in the Supply Chain. In this way, when the customer demand is realized, it is possible to supply enough products by the supply chain to meet this demand. Suppose the customer demand is not known in the Supply Chain.

In that case, it will cause an increase in inventory costs because the chain elements have excess inventory to protect themselves against demand uncertainty. If there is no excess stock, the cost of being out of stock will be incurred due to losing the customer due to unmet customer demands. For this reason, the successful management of the demand in the Supply Chain and the planning of the chain activities with the information coming from this stage is an essential concept for customer satisfaction and the success of the Supply Chain.

Demand forecasting in the Supply Chain is a complex problem that can depend on many variables. Therefore, it may not be possible for companies to know precisely the customer demand in advance. However, it is possible to make realistic estimations using the developed demand forecasting methods. Demand forecasting methods are divided into qualitative and quantitative.

Qualitative Estimation Methods are based on verbal data and the knowledge and experience of employees.

Quantitative Methods, on the other hand, are methods that predict future customer demand with numerical data obtained from sales information or research in the past.

Today, together with the developing technology, demand forecasting systems, in which these two methods are used together, have been developed with the help of computer programs.

In Supply Chain Management, accurate forecasting of customer demand is essential for the smooth functioning of all Supply Chain Activities, ensuring customer satisfaction and reducing costs. Demand forecasting is a process that examines not only the desire of customers to buy a product at a specific price but also how long the demand for this product will continue, whether it is seasonal and what conditions are affected.

Demand is divided into two types dependent and independent demand. First, if the customer and the market determine the need for a product, there is independent demand for that product.

Demand Forecasting Methods

One of the most critical decisions in Demand Management in the Supply Chain is choosing the proper forecasting method. At this stage, it is essential to analyze the most appropriate way for the company, taking into account the factors such as the product’s characteristics, the level of maturity, the level of saturation of the market, the period to be estimated in the near or distant time.

The way to be followed in demand forecasting applications in companies is as follows.

- Establishment of demand forecasting team,

- Choosing the appropriate estimation method,

- Investigation of the validity of prediction results,

- Determining how long the forecast is to be made,

- Determination of external factors affecting customer demands,

- Gathering information and equipment needed for demand forecasting,

- Correct understanding of demand forecasting purpose by team members,

- Measuring the performance of the method at the end of the application of the estimation method,

- Investigation of the customer’s characteristics and consumption habits of the product whose demand will be determined. Determining the segmentation of customers.

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aNumak & Company is a Global Business and Management Consulting firm with expertise in building scalable business models for diverse industry verticals.