What is demand forecasting?


Demand forecasting is a supply chain management process which tries to make accurate predictions about the demand of a certain product or service. It basically consists on making a mathematical and statistical analysis of data, coming from customer contracts, sales orders, historical data on sales… All this information allows the manager to make reliable predictions on expected demand, but why is this information important for the company?

This predictions are useful in order to be more efficient with production, you can produce exactly what you estimate to sell, and you can provide the product to all customers exactly when they want it. They allow you to contact the supply managers so you have the raw materials necessary for the production avoiding stock outs, and at the same time allow you to lower the safety stock level so you don’t have to produce highly above demand for safety. Supply managers have also the ability to negotiate with suppliers offering a long term relationship based on their demand and production expectations.

Predicting demand also allows to manage shipping in a more efficient way: If the logistics manager has this information he can make sure they have enough capacity to move resources from suppliers to the production center, or to move the finished product to the retailers or customers. If he didn’t have this information it would be very easy to have over or under capacity, for example trucks leaving with empty space or products staying at the factory because there is not enough room for them. These predictions help the logistics manager accomplish one of his core goals: provide the costumers with what they want and when they want it.

Currently, one of the most relevant topics in demand forecasting is discussing the role of the demand planer. A vast majority of companies when recruiting focus on people with outstanding mathematical and analytical skills which can make the most accurate predictions and save the biggest amount of money possible. But this skills are not the most important ones to look for, even if you have the best demand predictions you need to communicate these production goals to the rest of the parts involved in the production process and coordinate all the divisions. It is a waste of resources if half of your production cannot be delivered due to a communication issue with the logistics department. This is why it is essential that the demand forecaster has good communicating and leadership skills, so he can get all the company to work towards the same goal and be the most efficient possible. To prove this, a lot of companies are training their employees to improve their leadership skills, such as Nestle, who insisted on the importance of demand planners to understand and know all parts of the business to translate the data analysis to the rest of the divisions, including knowledge of logistics.





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