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Why Is Demand Forecasting Important For Effective Supply Chain Management?

Demand forecasting is important for effective supply chain management as it facilitates critical business activities like budgeting, financial planning, production planning, and distribution planning. Accurate demand forecasting allows companies to optimize inventory levels, improve supplier relations, utilize capacity efficiently, and increase customer service. The main roles of forecasting are to support strategic planning, initiate supply chain push processes like procurement and manufacturing, and drive pull processes like order fulfillment and logistics. Common demand forecasting methods include quantitative, qualitative, time series, and causal techniques.

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236 views

Why Is Demand Forecasting Important For Effective Supply Chain Management?

Demand forecasting is important for effective supply chain management as it facilitates critical business activities like budgeting, financial planning, production planning, and distribution planning. Accurate demand forecasting allows companies to optimize inventory levels, improve supplier relations, utilize capacity efficiently, and increase customer service. The main roles of forecasting are to support strategic planning, initiate supply chain push processes like procurement and manufacturing, and drive pull processes like order fulfillment and logistics. Common demand forecasting methods include quantitative, qualitative, time series, and causal techniques.

Uploaded by

Pooja Tripathi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Why is Demand Forecasting important for effective Supply Chain

Management?

Demand forecasting forms an essential component of the supply chain process.


It’s the driver for almost all supply chain related decisions. While demand
forecasting is undeniably important, it’s also one of the most difficult aspects of
supply chain planning. Demand is often volatile making demand forecasting both
an art and a science.  

Demand Forecasting defined as the process by which the historical sales data are


used to develop an estimate of the expected forecast of customer demand.
Demand Forecasting provides an estimate of the of goods and services that
customers will purchase in the foreseeable future. 

Why is Demand Forecasting important for effective Supply Chain Management? 

Demand Forecasting facilitates critical business activities like budgeting, financial


planning, sales and marketing plans, raw material planning, production planning,
risk assessment and formulating mitigation plans. Outlined below are the
impacts of Demand Forecasting on Supply Chain Management:

 Improved supplier relations and purchasing terms: Demand Forecasting


drives the raw material planning process which facilities the Purchasing
Managers to release timely purchase plan to suppliers. Visibility and
transparency of raw material demand improve supplier relations and
empowers Purchasing Managers to negotiate favorable terms for their
companies. 
 Better capacity utilization and allocation of resources: Based on the
current inventory levels, raw material availability and expected customer
orders, production can be scheduled effectively. This
leads to improved capacity utilization and judicious allocation of
manufacturing resources. 

 Optimization of inventory levels: A proper Demand Forecast provides vital


information for driving the desired raw material, WIP and finished goods
inventory levels. This reduces the Bullwhip effect across the Supply
Chain, leading to optimization of inventory levels and reduction in stock-out
or over-stocking situations. 

 Improved distribution planning and logistics: Apart from small


businesses, this is particularly evident in businesses dealing with multiple
SKUs and wide distribution networks. Distribution and Logistics Managers
are enabled to balance inventory across the network and negotiate favorable
terms with Transporters. 

 Increase in customer service levels: With optimized inventory levels and


improved Distribution Planning and Logistics, customer service metrics like
on-time delivery (OTD), on-time in-full (OTIF), case-fill/fill-rate, etc. are
improved due to right sizing and right positioning of inventory. 

 Better product lifecycle management: Medium to long range Demand


Forecasts provide better visibility of new product launches and old product
discontinuations. This drives synchronized raw material, manufacturing and
inventory planning to support new product launches and most importantly,
reducing the risk of obsolescence of discontinued products. 
 Facilitates performance management: Management can set KPIs and
targets for various functions like Sales, Finance, Purchase, Manufacturing,
Logistics, etc. based on the medium to long range plans derived from the
Demand Forecasting process. Organizational efficiency,
effectiveness, and improvement initiatives can be designed for key areas of
the company. 

3 Main Roles of Forecasting in Supply Chain Management 

Forecasting plays three major roles in effective supply chain management:  

1. Pivotal in strategic planning of Business: Forecasting is the underlying


hypothesis for strategic business activities like expansion planning,
budgeting, financial planning, risk assessment, and mitigation. Critical
business assumptions like turnover, profit margins, cash flow, capital
expenditure, etc. are also dependent on Forecasting. 
2. Initiating all push–processes of Supply Chain: Forecasting is the starting
point for all push-processes of Supply Chain like raw material planning,
purchasing, inbound logistics, and manufacturing. Better forecasts help
optimize the inventory levels and capacity utilization. 
3. Driving all pull–processes of Supply Chain: Forecasting drives all pull-
process of Supply Chain like order management, packaging,
distribution, and outbound logistics. Better forecast improves the distribution
and logistics and increases customer service levels. 
Demand Forecasting is a process of estimating the service or product quantity required by
end customers. Demand forecasting techniques include the use of current or historical sales data
to anticipate future demand. Other factors taken into consideration in make the final forecast are
seasonal trends or 'events' trends. Data from finance, sales & marketing and production are all
usually considered. The demand forecast that is arrived at is based on this combined information
once fully assessed. Other software functionality elements include Sales & Operations Planning
(S&OP). This is a business management process that takes into consideration data from both the
business/finance and operational aspects of a company to reach determine a forecast or plan that
best serves the whole organisation, rather than a segment of it.

Forecasting demand is an important task for just about any type of business. Accurately
projecting the demand for specific goods and services helps companies to order raw materials
and schedule production of those products in a timely manner, making it possible to fill
consumer orders quickly and efficiently without the need to build up a large inventory that adds
to the tax burden of the business.

Demand Forecasting is the activity of estimating the quantity of a product or service that
consumers will purchase. Demand forecasting involves techniques including both informal
methods, such as educated guesses, and quantitative methods, such as the use of historical sales
data or current data from test markets. Demand forecasting may be used in making pricing
decisions, in assessing future capacity requirements, or in making decisions on whether to enter a
new market.

Collaborative Planning, Forecasting and Replenishment (CPFR, a trademark of the


Voluntary Interindustry Commerce Standards (VICS) Association), is a concept that aims to
enhance supply chain integration by supporting and assisting joint practices. CPFR seeks
cooperative management of inventory through joint visibility and replenishment of products
throughout the supply chain. Information shared between suppliers and retailers aids in planning
and satisfying customer demands through a supportive system of shared information. This allows
for continuous updating of inventory and upcoming requirements, making the end-to-end supply
chain process more efficient. Efficiency is created through the decrease expenditures for
merchandising, inventory, logistics, and transportation across all trading partners.

Demand forecasting is used to determine the number of products or services that will be
purchased by consumers in the future. Numerous methods can be used when integrating demand
forecasting into any business.

Most demand forecasting methods fall under four basic categories or methods –

1) Quantitative,

2) Qualitative,

3) Time series methods

4) Casual method.

Quantitative Methods: These methods forecast demand levels based on analysis of


historical time series i.e quantities sold in the past to forecast how much will be sold in the near
future. This is usually a forecast that will provide numbers for the next sales year. Some
examples of quantitative forecasting methods include last period demand, multiplicative seasonal
indexes, and simple and weighted moving averages. Each of these use quantities sold in different
types of mathematical formulas to determine how many products or services will be sold at the
same times in the future year’s sales that is being predicted.
Qualitative Methods: These methods rely on experts who try to quantify the level of
demand from the available qualitative data.

The two most widely followed methods are:

Jury of execution opinion method: Opinions of a group of experts is called for and these
are then combined to arrive at the estimated demand.

Delphi Method: In this method a group of experts are sent questionnaires through mail.
The responses received are summarised without disclosing the identities. Further mails are sent
for clarification in cases of extreme views. The process is repeated till the group reaches to a
reasonable agreement.

Time Series methods: Demand forecasting typically does use strategies in the time series
method to forecast the demand of products and services. The time series method can be split up
into two different types of methods. These include frequency domain methods and time domain
methods. Even though the frequency domain method is classified as a time series method, it is
not based on time, but on frequency of the occurrence happening or a product being bought.
Time domain will show quantities purchases with respect to time.

Casual methods. These methods work under the assumption that underlying incidents can
affect sales numbers of products and services. Examples of casual methods include seasonal
activities such as ice cream sales or sales of gardening products. These casual methods also may
use linear relationships between sales and another components that remain consistent over time.
If the linear relationship remains consistent, then it is a safe prediction.
Demand forecasting encompasses many types of methods and is not limited to those
listed here. This forecasting helps those in businesses to determine projected quantities of
products or labour needed to provide services for future sales. In addition, demand forecasting
can be an effective tool for those new to certain business industries. These methods can assist in
writing business plans and obtaining the funds needed to fund a new business venture.

Sales and Operations Planning (S&OP) provides an updated forecast that leads to a sales
plan, production plan, inventory plan, customer lead time (backlog) plan, new product
development plan, strategic initiative plan and resulting financial plan. Variations in frequency of
the plan depend on the type of manufacturing industry. Short product life cycles and high
demand volatility require a tighter S&OP planning than steadily consumed products.

https://www.slideshare.net/anandsubramaniam/forecasting-techniques-2663882

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