Demand forecasting is an important tool for the business to plan and execute its operations. By demand forecasting, we mean that the process of foreseeing the possible demand for the products or services that the business can offer. It is to be done systematically and as a step by step process. The important steps involved in forecasting process are:
Steps in Demand Forecasting
- Understand the objective of Forecasting
- Integrate demand planning and forecasting throughout the supply chain
- Identify the major factors that influence the demand forecast
- Understand and identify customer segment
- Determine the appropriate forecasting technique
- Established performances and error measure for the forecast
Understand the objective of Forecasting
Every forecast supports decisions that are based on the forecast, so an important first step is to identify these decisions clearly. Failure to make these decisions jointly may result in either too much or too little product in various stages of the supply chain.
Integrate demand planning and forecasting throughout the supply chain
To accomplish this integration, it is a good idea for a firm to have a cross-functional team, with members from each affected function responsible for forecasting demand and an even better idea is to have members of different companies in the supply chain working together to create a forecast.
Identify the major factors that influence the demand forecast
A firm must identify demand, supply, and product-related phenomena that influence the demand forecast. On the demand side, a company must ascertain whether demand is growing, declining, or has a seasonal pattern. These estimates must be based on demand not sales data. On the supply side, a cOinpqny must consicier the available supply sources to decide on the accuracy of the forecast desired.
Understand and identify customer segment
A firm must identify the customer segments the supply chain serves. Customers may be grouped by similarities in service requirements, demand volumes, order frequency, demand volatility, seasonality, and so forth. In general, companies may use different forecasting methods for different segments.
Determine the appropriate forecasting technique
In selecting an appropriate forecasting technique, a company should first understand the dimensions that are relevant to the forecast. These dimensions include geographic area, product groups, and customer groups. At this stage, a firm selects an appropriate forecasting method from among the four methods discussed earlier–qualitative, time-series, causal, or simulation.
Established performances and error measure for the forecast
Companies should establish clear performance measures to evaluate the accuracy and timeliness of the forecast. These measures should be highly correlated with the objectives of the business decisions based on these forecasts. Then plans for decreasing future forecast errors or responding to the observed forecast errors can be put into place.