What is Demand Forecasting?
Demand forecasting is the process of estimating how many units of each product will be purchased by your customers. It identifies what both current and future customers will want to buy to provide the manufacturing facility an estimate of how many units to produce in anticipation of the incoming demand.
Challenges of Demand Forecasting
While demand forecasting is an essential tool for any manufacturer, there are some challenges associated with it. The first is that it is nearly impossible to generate a demand forecast that is 100% accurate. This is because manufacturers have to rely on past sales data to make informed decisions on the future demand for specific items. In addition, demand is driven by customers and their needs, wants, and priorities are constantly changing.
It is essential to have accurate demand forecasts as this will dictate how much of each product to produce. If you overestimate demand, you will be left with too many items and will have to find a way to sell them. On the other hand, underestimating demand will lead your company to experience stock outs which could result in your customers purchasing from your competitors.
Fortunately, there are various softwares that are capable of utilizing algorithms to integrate multiple sources of information to generate more accurate demand forecasts. In this blog, we will explore four steps that you can take to improve our demand forecasting and ensure that you generate accurate and reliable forecasts.
Steps to Improve Demand Forecasting
The four steps to improve demand forecasting include the following:
- Prepare for Data Analysis - Good demand forecasts rely on good data. However, this does not mean that you should include all data you possess in the forecast. The most common way to understand future demand is to look at past sales history for each item you are trying to forecast. The further back a manufacturing facility has sales data, the more accurate the demand forecast will be. Usually, three years of past data will help create a more accurate forecast but 1-2 years of data will also be acceptable. Manufacturers should look at how many of each item the company sold in previous years and the revenue reported. They should also include significant factors such as promotions and sales that could affect the number of goods sold. Managers can then summarize this information to develop a thorough understanding of sales activities and trends.
- Measure Data Accuracy - The best way to improve demand forecasting accuracy is to measure it by comparing your forecasts to the actual demand received. You will then be able to determine if your method of forecasting is a good fit for your organization and find ways to further improve it. If you are constantly over- or under-estimating the demand, it might be worth exploring alternatives to generate your demand forecast. There are various models available out there to analyze sales history, from averages to advanced regression methods that adequately measure trends, seasonality, and cyclic characteristics of data. Choosing the right one for your data and organization will further improve the accuracy of the forecast.
- Understand Order Fulfillment - Most businesses will experience situations of stock shortages at one point or another. Some manufacturers will be able to fulfill customer demand through alternate channels such as expedited orders from a different location. While doing so will please the customer as their orders will be fulfilled, this can create confusion and inaccurate data when trying to forecast future demand. Manufacturers should ensure that orders that are fulfilled by external or alternate sources are still considered when generating demand forecasts.
- Manage Data Spikes - Most businesses will see variations and spikes in their sales data. This can be due to errors in data or represent actual variations in sales such as increased demand in retail before the holidays. Demand spikes tend to pull demand distribution in their direction, which can skew inventory planning. This is why it is important to understand traditional forecasting and pay particular attention to spikes to understand if they are trends or one-time occurrences. If these spikes follow a trend, it is important to determine the cause (e.g. increased spending during the holidays, promotions, sales, special offers, etc.). This will allow manufacturers to adjust their demand forecast and improve their accuracy.
These four steps can help you improve the accuracy of your demand forecast. In addition, an Advanced Planning and Scheduling (APS) software like PlanetTogether APS can also help you improve your demand forecasts. This software can automatically incorporate your demand forecast with production planning and scheduling to allow you to generate the most advantageous production schedule for your manufacturing operation.
With PlanetTogether, we’re able to make strategic decisions that improve operations. We can proactively prepare for anticipated increases or slowdowns in demand.
DICK MARX, MATERIALS MANAGER, KNAPHEIDE TRUCK EQUIPMENT
Advanced Planning and Scheduling (APS) Software
Advanced Planning and Scheduling Softwares have become a must for modern-day manufacturing operations as customer demand for increased product assortment, fast delivery, and downward cost pressures become prevalent. These systems help planners save time while providing greater agility in updating ever-changing priorities, production schedules, and inventory plans. APS Systems can be quickly integrated with an ERP/MRP software to fill the gaps where these systems lack planning and scheduling flexibility, accuracy, and efficiency.
With PlanetTogether APS you can:
- Create optimized schedules that balance production efficiency and delivery performance
- Maximize throughput on bottleneck resources to increase revenue
- Synchronize supply with demand to reduce inventories
- Provide company-wide visibility to resource capacity
- Enable scenario data-driven decision making
The implementation of an Advanced Planning and Scheduling (APS) Software will take your manufacturing operations to the next level of production efficiency by taking advantage of the operational data you already possess in your ERP system. APS is a step in the right direction of efficiency and lean manufacturing production enhancement. Try out a free trial or demo!
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Topics: Demand Forecasting