Forecasting Demand Part 2: What is Demand Forecasting?

Predicting customer demand, simply put, is Demand Forecasting.

Following our previous discussion (Forecasting Demand Part 1: Is a Demand Forecast a Sales Target?), this then becomes one of the most critical functions in the organization. The quality of the output from this function will determine the success of the organization in meeting customer demand ... and its chances of growth in the long term!

If the objective of Demand Forecasting is to predict customer demand accurately every time, then the process and the achievement of this objective is more important than whatever theory or single technique is used in achieving this. If, simply by talking to your customers or sales/ marketing people you can forecast demand accurately, then that is the correct forecasting technique to use. In a different market, more sophisticated computer-based techniques or combination of techniques may be appropriate. It is therefore important to approach demand forecasting in a professional manner, by understanding the theory, but once you have found a methodology which works ... exploit it!

In meeting the objective of demand management, organizations will vary in their methods. To what extent forecasting theory is applied will vary from company to company. As long as we keep focused on this simple objective, the process of forecasting customer demand must remain as flexible and dynamic as the market which we are in.

“Nothing is more important to accurate forecasting than developing a logical and consistent system which is responsive to the needs of managers and capable of being attuned to a changing environment.” Renfro & Morrison

The fact remains that it is impossible to accurately forecast customer requirements every time. So, the management of any demand forecasting system will focus on:

1. measuring forecast error
2. understanding the causes of forecast error
3. continually minimizing the error
4. Managing your business by buffering the impact of the forecast error by keeping surplus inventory and/or capacity.

RELATED ITEMS

Forecasting Demand Part 1: Is a Demand Forecast a Sales Target?

Forecasting Demand Part 3: Achieving the Benefits of Accurate Demand Forecasting.

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SMALL BUSINESS VIEW

Generally, as compared to bug businesses, you are closer to your customers, are selling fewer products or services, and have a simpler order to delivery process. As a small business owner/ manager, you thus require less sophisticated tools to forecast demand, and the technique that works the best for you is simply talking to your customers and sales people.

Where small businesses fall down in this area is that they do not track forecast accuracy. Doing this will help you undersand the relationship between your customer service level, and how well you plan your business.