Demand Forecast

A critical role in business strategy

In the modern business world, demand forecasting plays a crucial role in strategic planning. This glossary entry discusses the term ‘demand forecasting’ in detail, including its meaning, why it is important, and how it is applied.

Definition of a demand forecast

Demand forecasting refers to estimating or predicting future demand for products or services. It is a business-critical activity that is carried out based on current sales volumes, market conditions and other relevant factors.

Why are demand forecasts important?

Predicting future demand is crucial for businesses for a variety of reasons. First, it helps companies manage production and inventory effectively. Companies can avoid overproduction and excess inventory (and the associated additional costs) and manufacture and maintain exactly the amount of products that are likely to sell.

Second, demand forecasting enables companies to set business goals and financial estimates. Accurate demand forecasts allow companies to predict profitability and growth forecasts more accurately.

Third, demand forecasts are a valuable tool for sales and marketing teams. They can help determine when to increase or decrease sales and marketing activities and in which geographic areas or market niches to focus these activities.

How are demand forecasts created?

There are various methods for creating demand forecasts, ranging from simple to complex statistical techniques. Some of the most common methods are:

1. The qualitative method: This involves estimating demand based on factors, trends and market opinions contributed by experts and specialists within the company. This method is usually used when there is insufficient historical data available.

2. The time series method: This method uses historical sales data to make a forecast. It works well when patterns and trends are recognisable in the data.

3. The causal method: This method attempts to model the relationship between demand and one or more independent variables such as price, advertising and economic indicators.

4. The multivariate method: This method uses multiple factors and variables to predict demand. It can be more accurate, but requires higher data quality and trained analysts.

Conclusion

A demand forecast is an essential part of strategic planning in companies. It helps to define production levels, plan sales and marketing activities, and make financial forecasts. Various methods can be used to forecast demand, depending on the data available and the complexity of the demand structure. Accurate demand forecasts enable companies to respond better to market changes and gain competitive advantages.