The Fundamentals of Demand Forecasting

Yassar Haneef, Technology Delivery Director at Fine Hygienic Holding

Let’s be honest, we have all heard the following terms: Planning, Quantitative/Qualitative Forecasting, Predictive Demand, Prescriptive Supply Chains, why they are so important, and how they will deliver resilience and can future-proof your supply chain, irrespective of the vertical you operate within. These are some of those buzz statements that drive companies to implement demand planning systems. But why is planning held in such high esteem?

I asked ChatGPT, “Why is demand forecasting important?” and I received the following textbook answer:

“Demand forecasting is a crucial process for businesses and organizations in various industries. It involves predicting the future demand for a product or service based on historical data, market trends, and other relevant factors.”

In essence, demand forecasting provides valuable insights that drive informed decision-making across various business functions, leading to increased efficiency, reduced costs, and improved customer satisfaction.”

Even after a 21-year career in supply chain execution and optimization, this definition of demand planning/forecasting has not changed. Every company executive knows why it is important, every company does it, so why do they get it so wrong?

The ‘why’ is simple:

• The better the forecast, the better you are at placing your stock/resources in the right place at the right time, which translates to higher sales, reduced losses, or lower costs.

The ‘how we do it’ is a little more complicated:

• Use historical order data and determine trends and patterns using statistical forecasting methods.

Where do companies fail in effective forecasting?

Many technology experts share the view that the key to good forecasting is adopting technology, to be able to crunch the vast amount of data that can give you a representative baseline.

Cloud companies such as Oracle Supply Chain Planning Cloud love to base their solution around the premise that the technology will produce better results. This is because it combines forecasting algorithms with flexible analytics to help you adopt a customer-centric demand strategy. It has key features that visualize and track forecast factors such as baselines, trends, and seasonality while maintaining causal correlations and adjusting for built-in exceptions.

Sounds great! While technology is a great enabler. I don’t fully share the notion that a black box has the magic to predict future trends and behavior just by looking at what has happened in the past. I have been in countless S&OP meetings where teams of commercial and supply chain leads have struggled to answer ‘why’ they believe the demand is headed a certain way every time a projection has been presented to the leadership.

For me, it comes down to the fundamentals of planning that have been lost over time.

1. Understand the principles of what demand actually means to your company.

2. Are you a company that chases the trend, or are you a company that defines it?

3. What does resilience mean to you?

4. How adaptive is your supply chain?

Companies must now ensure that the way they are forecasting is much more agile than ever in the past; the last 2 to 3 years have eliminated any ability to develop predictable patterns of seasonality or regular consumer trends.

The data you gather and hold is only as usable and reliable as the point it is taken from. Five minutes/five hours/five days later, that data point has changed, and the world has moved on.

The Convergence of People and Technology

In the ever-changing data landscape, I believe having the right person sitting in front of your projections is more important than ever. These people should no longer be seen as ordinary demand planners but a hybrid of:

• Masters in their company’s product portfolio

• Industry experts.

• Data Analysts

•Supply Chain Orchestrators

This is where technology plays a crucial role in enabling these super planner teams!

At its core, these planners must know which items/services drive demand, which carry a halo effect (selling one item has a positive impact on another), which could cannibalize demand. What is the latest trend within their industry, what is driving that trend, consumer preferences, and the effect of competition in their landscape. Recently, you can see how key regional and global influences have driven demand. Over the last two years, Activewear & wellness have transformed how we work and live. On the other end, you have the marketing behemoth Barbie, where everyone wants to capitalize on adding some pink into their product /service portfolio.

Many technology experts share the view that the key to good forecasting is adopting technology, to be able to crunch the vast amount of data that can give you a representative baseline

A nimble Demand Planning solution will give them an algorithm that generates the forecast to provide consumer demand profiles. Planners can then conjoin this with their industry, market, and product knowledge.

Their data analysis skills come into their own when you combine real-time sales/inventory/resources data and apply them to the forecasting process to provide a competitive analysis.

Again, technology allows companies to detect and track objects as they move through the supply chain and automate data collection, such as the number of items on shelves or pallets of inventory in real-time.

This provides a view of where you are right now and what your pain points appear to be. This could help determine the goods that will sell better in stores or online and determine how sales forecasts may fit into a company’s fulfillment strategy.

Knowing how much you have of your limited edition products and interpreting their data accordingly, connecting the demand of different versions of the same product as well as analyzing each channel separately.

Finally, they become key stakeholders when it comes to communicating with their suppliers, going beyond the basics of placing orders, they collaborate with the manufacturers so there is a mutual view of demand as early as possible.

It is becoming a common place for technology to allow companies to directly collaborate with their suppliers’ planning team. A solution such as Infor Nexus provides a collaborative platform for driving real-time change, connecting you with your network of suppliers and partners via a single source of truth. This provides a degree of end-to-end insights previously unheard of, delivering a more agile, resilient, and sustainable process.

Traditional Forecasting

With volatility and the degree of change rising high, traditional approaches just do not work. Top-down planning and bottom-up reconciliation are just fraught with guesswork and danger. In the digital age, there should be little to no guesswork about your company. However, this is the reality for many companies today.