Top 3 Common Demand-Forecasting Mistakes
Demand forecasting is a technique that demand planners and supply chain professionals use to estimate the probable demand for a product or service in the future, based on historical data. When done correctly, demand-forecasting can help businesses make informed decisions and overcome supply chain constraints. Some factors that can affect demand forecasting are seasonality (on-season vs. off-season), geography, competition, economic conditions and types of goods. Some types of demand forecasting include:
- Active demand forecasting: Takes into account the growth plan of businesses and the competitive environment.
- Short-term demand forecasting: Is used to forecast demand for the next 3-12 months. Businesses can analyze short-term demand to adjust their projections.
- Long-term demand forecasting: Is conducted for a longer period – more than 12 months.
- Internal demand forecasting: Is done to determine if the existing resources are enough to meet increased demand.
The Importance of Demand ForecastingAccurate demand forecasting helps managers allocate resources effectively, control costs and compare actual performance with expected performance. Demand forecasting allows top management to determine if the business is ready for expansion. It helps in devising sales and marketing plans and budgets.
Demand Forecasting Steps
- Establish goals: Set clear goals and objectives. Think about what you’re trying to achieve. Choose a time period and the product or service. Decide if you want to forecast for all customers or a specific subset of customers’ future demand for the product or service.
- Collect and compile data: Look at your customer relationship management platform for internal data. Conduct market research to gather external data. Integrate your sales channel data.
- Analyze data: You may decide to analyze data manually by looking through your spreadsheets and notes or use demand forecasting software to automate the process. Analyze all your findings so you can better predict future trends and demand.
- Make adjustments: Once you have analyzed your data, adjust your inventory strategy. If, for instance, you project an increase in the demand for the product based on future trends, you will want to have more inventory on hand.
Common Demand Forecasting MistakesImproper demand forecasting can do more harm than good. It can result in wastage and negatively affect a company’s profit margins and cash flow. To help you demand forecast accurately, we have compiled a list of some common demand forecasting mistakes to avoid. Take a look.
Not Adapting Your Strategy to Market TrendsAlthough analyzing the past is usually a reliable way to predict future demand, you should not base your forecast solely on historical data. If you sold more units of a product than usual last year, try to find out the factors that led to an increase in demand and determine how relevant they are in the present situation, instead of automatically assuming that the demand for the product will continue to rise the next year. One of the biggest names in the camera industry – Kodak – filed for bankruptcy in 2021 (INTERNAL QUESTION: is this the year they filed? Or was it much earlier than this?, because the top management refused to adapt Kodak’s business strategy. The 2000s saw the rise of digital cameras, but the company stubbornly clung on to its traditional cameras. The top management wrongly assumed that Kodak’s outdated cameras would sell like hot cakes despite the evolving market.
Failure to Understand Demand DriversOne way to ensure the accuracy of your demand forecast is to pay close attention to the reasons consumers buy your product. When the demand for a product decreases, many companies automatically assume that there’s something wrong with it. Before arriving at a conclusion, businesses should analyze every factor that drives the demand for the product. Coca-Cola learned this the hard way. As part of the ongoing Cola wars, Pepsi launched the Pepsi Challenge in 1975. Participants were asked to take a sip of two unlabeled drinks – Coke and Pepsi – and then pick the drink that, according to them, tasted better. Most participants picked Pepsi. Coca-Cola automatically assumed that the product was the problem and launched a new drink. A retaliatory campaign was also rolled out. Coca-Cola’s campaign involved measuring the new drink’s effectiveness through blindfolded taste tests. The strategy backfired and consumers rejected the new drink (dubbed the New Coke). As a result, Coca-Cola was forced to bring back the original drink in less than three months. Coca-Cola made a big mistake by automatically assuming that the original drink was not up to the mark. Had Coca-Cola dug deeper, it would have found a fundamental error in the methodology. People who took the Pepsi Challenge were asked to take a sip of the drinks. It turned out that consumers felt differently about them when they took multiple sips of the drinks.
Building the Forecast Around the TargetBase your forecasts on both qualitative and quantitative research. If you do not have past sales records, study the market. Conduct market research and analyze the factors that contribute to your competitor’s success. In 2020, former Disney chairman, Jeffrey Katzenberg launched the streaming platform Quick Bites, popularly known as Quibi. The platform delivered short-form scripted and unscripted content to mobile devices. In just seven months, Quibi was forced to shut down. A fundamental mistake that Quibi’s top management made was building demand forecasts around ideal sales. Quibi failed to stay grounded in reality. The management overestimated the amount required for production and paid the price.
Tips to Avoid Forecasting MistakesHere are our top tips to steer clear of demand forecasting mistakes:
- Use as much data as possible. Analyze your data or you may arrive at erroneous conclusions.
- Utilize a variety of demand forecasting methods.
- Keep your data organized.
- Use demand forecasting tools such as sales forecasting calculators and demand planning and forecasting software.
- Consider hiring a demand forecasting expert.