So, You Want to Forecast Your Demand?

Demand forecasting is one of the most common business activities carried out by organizations. Business analysts, sales, finance, and other internal teams invest a considerable amount of time and effort in forecasting demand based on the different market conditions and internal parameters. But, unfortunately, on many occasions, companies find that the forecasts they came up with are completely unusable.

So, why do these forecasts fail to give a clear picture? Why do internal teams spend so much time and energy battling failed forecasts? Well though trough answers to a few basic questions can go a long way in getting the right forecast that will help your business.

So first, let’s identify these questions, and take a shot at answering them based on the type of industry you operate in.

What is the right frequency to forecast? Is it by month, week or even day?

This can simply be answered based on the frequency you place orders with your suppliers.

If you’re in the business of perishable goods and you purchase items from your suppliers on a daily basis, you will have very little value from a monthly or even a weekly forecast. Instead, you should be forecasting on a daily basis.

But if you purchase every month as oppose to daily, you should be concentrating on a monthly forecast.

What is the right forecasting horizon?

A static forecasting horizon can only be used for high-level planning and budgeting needs. But, at most times what you need is a rolling forecasting horizon.

The best way to determine the horizon that’s best suited for you is to consider the production/sourcing lead times.

Example 1: You import your goods every month, but it takes approximately three months for the imports to arrive. In this instance, you need to have a forecasting horizon of at least four months.

Example 2: If your supplier needs a 3-month lead time and your ordering frequency too is 3 months then you need a forecasting horizon of at least 06 months.

What is the right forecasting scale?

Let’s assume you want to maintain the right amount of stock at each distribution point. Then, forecasting at the overall level will not be adequate. In this case, forecasting will have to be done at the distributor level itself. Sometimes forecasting even at an outlet level might be useful to increase efficiency in the entire distribution process.

However, if all you need is to decide is what to produce or how much to import, a national demand forecast would be the best way to go.

What is the forecasting unit?

As simple as it may sound, deciding the right unit to forecast can be challenging at times. Knowing what specific use case forecasting is used will help narrow this question down.

For example, if you were to order a particular raw material that can be used to manufacture several products, forecasting at the category level is sufficient. You don’t need to forecast at each SKU (Stock Keeping Unit) level.

i.e. if you are a beer manufacturer importing barely, you need not forecast the demand for beer cans and beer bottles separately. You only need to forecast the demand for your beer as a whole. Based on that, you can now decide how much barley you may need to import.

Frequency, Scale, Horizon, and Unit — We’ve now covered 04 basic questions you need to answer before you start forecasting demand for your products.

If you still need help understanding the right way to do your demand forecasting follow my next piece in which I will explain more elements of demand forecasting