Demand forecasting: A linchpin of your supply chain
Given a chance to choose between never bearing a loss and accurately forecasting your demand, what would you choose? Business is more than just profit and loss; it is about solving real-life problems and making life easy. One such problem is precise sales forecasting or demand forecasting. Today, with the rise of technology, anticipating demand has become accessible only if you know how to go about demand planning and forecasting.
Demand planning is not just a science of reacting to forecasted demand. It is the art of planning every step, preparing for the worst, hoping for the best, and then fulfilling the predicted demand. It is always essential you ask questions before beginning with the demand planning. Here are some of the crucial questions that you should ask before you start planning
What is your desired demand planning KPIs?
Demand planning KPIs provide you with real-time information which assists you during forecasts. Demand planning is the art of preparing the estimates obtained by considering all the scenarios and influencing factors. Due to the rapid growth of the market in the current times, it has become crucial to keep to all the things that can potentially disturb your demand forecasting. Demand planning KPIs help you avoid that by providing up-to-date intelligence.
How do I choose the right KPIs?
Enhancing the efficiency and effectiveness of the business along with revenue is the sole purpose of demand forecasting or demand planning. However, to forecast precisely, there are various aspects or components, known as KPIs, that you must consider. It is also essential to choose these KPIs based on your specific needs and not what your competitors or peers are choosing. Understand it with this example: Two companies are selling mobile devices, the first is one23 and the second 34five.
34five has been in the market for a long time and holds a market share of around 45%. In contrast, company One23 has just started to operate and recently launched its device. For both companies, KPIs will not be the same. 34five would like to retain and maximize its market share, whereas One23 will desperately want to penetrate the market and gain some initial market share. Choosing suitable KPIs for your individual company is crucial. Some common KPIs include forecasted v/s actual sales or Mean Absolute Deviation or MAD, Mean Absolute error or MAE, order fill rate or root mean square error, etc.
What is the ideal frequency and length of a forecast?
How often do you forecast, and for how long? This is one of the important questions you must ask yourself before getting down to business. Both variables, the length of the forecast and its frequency, are interlinked. Forecasting for a distant future is of no point; similarly, forecasting every day or every hour except for a few products does not work. It only misuses resources. Be aware of the ideal length and frequency of demand planning and demand forecasting. For example, FMCG products are heavily affected by uncontrollable or external factors; so, companies should do daily forecasting. For FMCD products, monthly or even quarterly demand forecasting can work. So, it would be best if you chose the right things at the right time.
What are the distinct types of methods a software uses to forecast?
There are many different methods that you can use to forecast, like Barometric forecasting, Regression analysis, and so on. These methods are broadly classified into two categories: quantitative and qualitative.
When you use statistical techniques like executive opinions or Delphi technique to forecast instead of numerical analysis, it is categorized as a Qualitative method. If you use numerical analysis like Regression analysis, Trend projection, it is classified as a Quantitative forecasting method.
The quantitative method primarily uses historical data, trends, and numeric data to forecast. Some of the well-known methods are:
Regression Analysis: This method supervises the relationship between two variables (one independent and another dependent) and then forecasts based on how one factor affects another one.
Barometric Forecasting: This method uses current events to anticipate the future. It considers leading, falling behind, and simultaneous economic conditions, which are put into equations to provide the forecast.
Trend Projection: This method forecasts demand using historical trends and data. It utilizes growth patterns to anticipate. While it is evident that Trend projection may give you an accurate forecast, it is risky to forecast only based on historical data and patterns.
The qualitative method is a way of forecasting demand or sales on the basis of experts' and sellers' opinions and instincts. Some of the usual qualitative methods are:
Sales and Executive Teams' Opinion: This method asks sales teams to submit the prediction for their respective areas. Then with the help of executive teams, the forecast is tested. Afterward, the managers add some input, which is when you get a prediction.
Delphi Method: The reiteration process. No numeric data is used in this process. It is the process of a simple question where some experts make forecasts based on their knowledge. The summary of the forecast is submitted to a panel of experts. Then the experts again answer questions based on the outline, reiterating this process until you get a consensus forecast.
Market Research: This method uses the current market trends, patterns, and other external factors and then supplies a forecast based on that.
5. Does it integrate with your existing ERP?
Integrating your demand planning and forecasting software with your current ERP is crucial. As we all know, ERP or enterprise resource planning has the company's data, right from its building blocks to your inventory stock, last year's sales data, and more. It is critical for demand planning software to have access to these data. However, for efficient working, you must select software that automatically takes data from the ERP, just like the demand planning software by Avercast. You do not have to feed the data manually. After implementation, the software works automatically and gives accurate forecasting.
6. How many Algorithms does the software have?
It is always advantageous to know how many algorithms a software has. After all, the precision of the forecasts entirely depends (other than data) on the algorithms it goes through. The more, the better! It would be best if you chose software for demand planning with more algorithms. However, having more algorithms does not supply a correct demand forecast. It is its efficiency to solve a problem that is the difference maker. Just like Avercast's demand planning software has more than 250 algorithms, they were developed after receiving input from the clients or facing real-life problems, providing accuracy of demand planning forecast or inventory forecast higher than any other software.