Manufacturing and warehousing enterprises are full of complex, nuanced operations. They can feel completely unique to you, and it’s easy to feel isolated in your processes. With inventory based businesses, one of the most important things you can do is engage in successful demand forecasting.
In short, demand forecasting is an essential tool that helps you make sure you have what you need to meet the demands of your customers. All those calculations you have for safety stock, cycle stock, and lead time? Those will come into play and help you run your company in a cost-effective manner. Demand forecasting is critical for the financial health of your business. Here’s what you need to do:
Step 1: Get a Baseline
If you’ve been in operations for awhile, you likely have a plethora of historical data available. The baseline needs to be at least monthly and shows the number of units bought, sold, and ending inventory. With this baseline, you’ll have a better idea of what to expect next year at the same time and can plan appropriately. This can also give you an idea of what your customers want the most. Baseline numbers are critical for effective demand forecasting. Without baseline numbers, you’ve got nothing to base your forecast on.
If you think you don’t have time to gather this information, leverage advanced intelligence, such as dashboards. This can help you in streamlining your process in general, but is especially beneficial in developing historical data summaries that can help you in demand forecasting. Moreover, the data gathered helps you create organized reports that show you exactly where you are, what you have, and what you need. The breakthroughs developed using advanced intelligence have led to victories in inventory planning because you’ll be able to respond to seasonality, find slow-moving items, and enable you to optimize your inventory.
Step 2: Follow the Forecast Formula
There are three important parts of great demand forecasting. The first is the actual demand forecast. The second is demand deviation. The third is seasonal profile. Each of these need to be leveraged to describe demand for each individual item in each individual location.
Step 2A: The Demand Forecast
You need the actual forecast value. It refers to the level of movement of your inventory and is the primary number of the equation. But it’s not the only part. In many cases, software can be used to predict demand based on historical data. Remember that baseline? Here’s where it goes to work. While the demand forecast value is important, most companies stop here then wonder why their purchasing behavior is too high sometimes.
Step 2B: The Demand Deviation
The demand deviation is important because it is a demand personality description. Most companies are missing this value when they transition from basic to advanced forecasting. However, it’s important at all levels. It’s best understood in graphs and figures and can be presented in either units or percents. This is where you’d use those new dashboards.
This demand forecasting metric is important because it is key in determining what your safety stock should be for each item you have. If your demand deviation is high, you most frequently need higher safety stocks in order to meet those abnormal demand fluctuations. You’ll also notice there’s a correlation between the stock volume and deviation. In fact, items that have a high forecast often have a low deviation that is similar to the steady items.
If there are more sales for an item, it’s more likely they will have a stable demand pattern. Slower-moving items don’t have this type of experience, leading to erratic demand and is rarely steady. So, your steady items have a lower deviation (needing lower safety stock) and your slow items have a higher deviation (needing higher safety stock). Your profitability is highly influenced by the deviation because of safety stock inventory requirements. It should have a significant influence on merchandising decisions and service goals. Ultimately, demand deviation influences how and if your company delivers profitability to stakeholders.
Step 2C: The Seasonal Profile
Items that have any type of seasonal pattern aren’t complete unless they have a seasonal profile. Seasonal forecasting helps you guarantee you’ll have what you need to provide demanded services in season, even as overall inventory of that item is reduced during other periods. If you distinguish seasonal movement from the deviation value, your safety stock needs will be lower, leading to lower costs. Seasonal forecasts help you maintain balance and help you make sure that replenishment is fluid. Your supply chain has to have plans for seasonality, as well as the ability to identify seasonal forecasts.
Common Problems in Demand Forecasting
Your old demand forecasting (if any) can become a habit, which means that, as your company grows, your prior methods won’t be effective. This can lead to expensive fixes. You can avoid most of these problems if you have a process that relies on intelligence. Here’s what you need to avoid:
- Don’t use one demand forecasting calculation for all items when they have different characteristics.
- Don’t overreact to spikes in demand by increasing the forecast. You’ll be left with too much stock that you can’t necessarily move.
- Don’t overlook seasonal patterns when completing a demand forecast. If you do, you’ll find yourself having to tell your customers you’re out of stock when that product sells the most and have too much stock in other seasons.
- Don’t overlook the importance of deviation for each item. You need to have a value for each to have appropriate safety stock and the right analysis to get the real profitability of the item.
- Don’t forget to update the demand forecast based on changing situations, such as new clients or loss of clients.
- Don’t forget to manage replacement item transition to avoid having double inventory. This will help you have a smooth changeover to new items being sold.
- Don’t forget to filter promotional movement. Otherwise, you’ll have an inflated forecast and inventory, which means that buying tools may be unusable.
There’s a lot of information here. You probably have questions to engage in the best demand forecast processes for you, so contact us today.
