Demand forecasting is an important and critical field of predictive analytics that is dedicated to understanding or comprehending the demand of customers for goods as well as services (Ayers and Odegaard, 2008: 12). For many years now, companies have developed supply chains methods and strategies that focus on cost optimization through the application of inventory as a buffer to meeting many of the customer service goals that companies have. Furthermore, since forecasting customer demand can be a bit challenging, organizations always add inventory in order to protect against erroneous forecasts. From a profit as well as loss viewpoint, many of these companies think of this inventory practices as “free,” therefore, creating little incentives for efficiency (Frazelle, 2002: 2-23).
As many of the sources of growth nowadays become more cumbersome and uneasy to find affair, a number of corporations are seeking to drive incremental sales augments through processes such as innovation, quicker levels of speed of goods to the market, as well as customization of goods and services. In the world today, an efficient as well as high-performing supply chain becomes highly important to success of the business. Yet, many times organizations are confronted with their lack of ability (Mentzer, 2004: 23-56) in order to meet the huge expectations of their clientele, despite having elevated amounts of slow-turning inventories. These issues are due to an underperforming supply chain, which usually come from the inefficient or poor forecasting of demand, poor organization and planning processes, as well as production abilities, which are sluggish to respond to many of the changing market demand. In essence, these numerous inefficiencies become major barriers to growth, thus, leading to customers’ discomfort and lost sales, poor inventories, and bunged distribution networks (Ross, 2004: 3-44).
In fact, one of the most effective and accurate way of understanding of future demand of customers is forecasting (Shapiro, 2001: 1-12). Forecasts offer important input to organization planning as well as management. Demand forecasting is not only theoretical, but a practical science. It often considers the underlying market forces that are based on market assessments as well as economic theory, in addition to the physical capacities as well as constraints. Each business is unique and while each business has common components, the translation from efficient practices to planning metrics, which requires careful review of both the current as well as the past activities.
Importance of demand forecasting in today’s business environment
While it is sometimes very difficult to forecast an exact level of activity for a specific period in the future, improper preparation of forecast is critical to today’s business operation. Demand forecast is essentially important in understanding a business’s demand growth, evaluating the market risk, as well as forecasting financial gains or losses to design efficient management strategies. This kind of understanding is harnessed as well as applied in order to forecast the consumer demand. The knowledge of how demand may or may not fluctuate helps the business to keep the right amount of stock on hand. However, when demand is underestimated, the sales of a particular company can be lost because of the lack of supply of services or goods. On the other hand, when the demand of a given product of service is overestimated, then the company is left with a surplus of goods, which can also lead to a financial drain. The meaning of this is that understanding demand makes a company become more competitive in terms of delivering goods and services in the marketplace. In addition, understanding demand as well as having the ability to predict accurately the company’s demand is imperative for efficient manufacturers, businesses, as well as retailers. In order to meet the needs of consumers, proper forecasting approaches are very important. Even though, there is no flawless forecasting model, unnecessary costs that stemming from a lot of or inadequate supply can usually be avoided through the use of data mining approaches.
Its relevance for supply chain management at the strategic, tactical and operations levels
Demand forecasting is an important aspect of a given business organization for a number of reasons, including budgeting and planning. At different levels, including tactical, strategic, as well as operational, analytics of customer demand means a lot towards the success of a business. Businesses that are able to forecast accurately on their strategic, tactical, and operational demands are better placed to anticipate the diverse needs of their clients, and thus, are in a better position in order to develop to their full potential. Furthermore, the use of the most current, correct, solid, as well as reliable information is fundamentally essential to a business.
As stated above, effective or efficient inventory management is important to many businesses’ profitability levels as well as to their ability to meet the needs of their customers. This can also mark the success or failure of business as those that are unable to forecast well are left to make huge losses, while the most effective businesses take advantage. Thus, regardless of the business, the supply chain of a company remains the backbone towards a successful business. This process often begins with the procurement of materials as well as services that are required in creating the end products, and finally delivering these finished goods to customers for consumption. With the right forecasts in place, decision-making at the three major levels of a business becomes much easier.
At the strategic level, effective supply chain strategies start with solid and long-term decision making process, which is informed by a deep understanding of the market. However, proper understanding of the market is made possible through demand forecasting. With these understanding, the strategic level is then able to lay the groundwork for the whole process of organizational supply chain, right from the start up to the end. This level is an essential part of any supply chain management, in which decisions are often the initial step towards designing the correct process, which can yield the business unmatched success in any particular industry. Besides, with sufficient information on the market trends from demand forecasting, the strategic level can be able to address a number of issues, including choosing the purpose of the business (Richards, 2013: 1-24), developing effective networks for reliable suppliers, long-term improvements towards meeting the needs of client base, as well as proper inventory as well as product management.
At the tactical level, demand forecasting also performs a significant role in helping the business to make the up-to-date decisions. Many businesses are able to make short-term decisions concerning their supply chain management at the tactical level. In particular, this is one of the levels where the general processes of a business are defined. Therefore, here decisions play a vital function in controlling as well as minimizing on costs and risks, with the focus on the company customers’ demands. The place of demand forecasting now becomes of paramount importance, as such information would help the business achieve the best end values.
The common concerns at this level of business include procuring contracts for necessary services and products, adopting efficient practices, designing inventory logistics, as well as ensuring production quality standards.
Similarly, at the operational level, demand forecasting also plays a major role in the operation of businesses. In essence, the operation level in any particular business is the most obvious, which entails daily processes, planning, and decision making that seek to keep the supply chain of the business working. Effective operational management processes are often due to strong tactical as well as strategical planning. All these processes only become effective when the future demand of customers has been known, therefore, the significance of demand forecasting. Here, some of the aspects include daily as well as weekly forecasting of demand in efforts to figure out effective ways, in addition to satisfying demand in the market. The most successful supply chain operations are the results of a holistic operational method. Therefore, when the process of demand forecasting has been given proper attention, then the operational, tactical, as well as strategical levels stand to reap.
Highlight ‘challenges and issues’ in demand forecasting
There are a number of issues as well as challenges that are associated with the process of demand forecasting. The demand forecasting techniques are fundamentally statistical tools and analysts often apply these methods in order to project or forecast the future patterns of sales using the historical information on the past sales, and sometimes using other information regarding the organization. These tools can be sometimes difficult to use or breed errors, thus projecting false information about the sales trends of a given company. These are often called model specification errors, which arises particularly when the wrong model is applied to predicting the sales patterns of a company (Mentzer, 2004: 23-24).
There is also an issue with the information on demand throughput. It is generally known that the most well established instruments of forecasting are based on the historical information on demand. However, in the world of business today, changes in the market are very sudden and sometimes might not follow the historical patterns. This means that future demand might not be forecasted precisely through reliance on the past demand information alone.
Another issue is that changes, especially in the selling price as well as the presence of various promotions are generally understood to have a significant impact on the demand of goods and service in a number industries. In today’s business environment that is characterized with the proliferation of information as well as many other such technologies, price variations are less costly. Moreover, product promotions are nowadays getting increasingly costly.
Advantages that demand forecasting can provide to an an organization.
Forecasting product or service demand is essential to any type of business, including the supplier, manufacturer, as well as the retailer. In addition, forecasts of the future demand of a particular product or service can help determine the quantities of products, which can be purchased, produced, or sometimes shipped. Thus, demand forecasts for an organization are necessary because the basic operations process, which entails moving from the suppliers’ raw materials to finished products in the customers’ disposal, takes a lot of time. Many of the firms cannot simply wait for demand to emerge so that they can react to it. However, these organizations must anticipate as well as plan for the future demand for them to react immediately to the diverse customer needs as they happen. In other words, many of the manufacturers, retailers, or suppliers often “make to stock” instead of “make to order” – meaning that organizations must have to plan ahead as well as sufficiently deploy inventories of their finished products into field locations.
Therefore, once the customers’ orders materialize, it can be satisfied almost immediately (Chopra and Meindl, 2007: 67) – given that many of the customers are not willing to wait for the time that companies would take to actually process their order throughout the supply chain as well as design the product in respect to the customers’ orders. An order cycle can, in fact, take up to weeks or sometimes up to months in order to go back through parts of suppliers or sub-assemblers, or through the manufacture of the product, as well as through the final shipment procedure of the order in order for it to be delivered to the customer.
In the general practice, the most accurate or up-to-date demand forecasts may in most cases lead to efficient business operations as well as high levels of customer service satisfaction (Seifert, 2003: 9-11), while those forecasts that are largely inaccurate may inevitably contribute to inefficiencies or sometimes high cost of operations and/or poor levels of customer service satisfaction in a given company. In the majority of the supply chains, the most critical and compelling action that can be taken in order to improve the efficiency as well as the effectiveness of the company logistics process would be actually to enhance the quality and standard of the demand forecasts.
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