The Critical Importance of Demand Forecasting
Nothing is more important than accuracy when it comes to demand forecasting. The higher the accuracy, the better. It can help businesses run more efficient S&OP meetings, scale with efficiency, and reduce costs across the entire supply chain...
A business’s ability to possess and utilize accurate sales forecasts is vital to its overall health—from the strength of its bottom line to its ability to scale effectively. This is true because highly accurate demand predictions can help CPG companies run more efficient S&OP meetings, reduce costs across the entire supply chain, and maximize sales—to name just a few benefits.
And even though no magic crystal ball is 100% accurate, you can get pretty close to it—especially if you know the type of data you’re looking for.
What Is Demand Forecasting?
The term Demand Forecasting refers to the process of predicting future demand for a product. Well-run demand planning teams produce accurate forecasts, which impact supply chain operations and overall company results.
The best demand planning teams calculate demand using one source of truth. With a 360-degree view of the entire business in real time, demand planners can identify key drivers across supply chain, produce accurate forecasts, set targets, and confidently guide teams to hit revenue goals. Accurate sales forecasts impact not just the sales team, but also distribution, inventory, manufacturing, and more. (Your S&OP process will be thankful.)
Are Demand Forecasting and Demand Planning the Same Thing?
In a word, no.
Though they are often used interchangeably and are unmistakably linked in the supply chain management process, they are NOT the same thing. They are, however, very closely related, as one can’t exist without the other. One (demand forecasting) is the result of the other (demand planning).
Demand planning is the process of forecasting demand for a product (or service) and executing an operational strategy across supply chain in order to meet it. Demand planning is a process; accurate demand forecasts are the results of a well-run demand planning process.
Demand planning—and the process of meeting to align on a company-wide forecast—usually leads monthly S&OP meetings. Demand planning is a critical business planning function because it sets the strategy on where you’re headed, why you’re headed there, when you plan to get there, and how to adjust and automate operations accordingly.
Whereas demand forecasts determine the future; demand planning provides the directions on how to get there.
Best Practices for Forecasting Demand
Demand forecast accuracy is essential across the board, and the data a CPG company uses to arrive at these numbers is a vital part of the demand planning process. However, accurate forecasts are incredibly hard to tabulate, let alone rely on, and depend on a business’s ability to:
Identify and understand the right drivers:
- Consumption-driven demand signals
- Market trends
- Brand (own) and competitive marketing and trade investments
- Channel shifting
Collect the right data:
- Historical shipments (SKU-level by customer, ship-to and ship-from)
- Point-of-sale consumption data at both chain and store levels
- Own and competitive marketing and trade investments
- Weather, seasonality, ingredient and health trends, online search behavior, social media mentions, and other variables that impact brand
A CPG company's ability to access a breadth of data is vital to calculating demand. When demand planning and collecting data, CPG brands should have access to data related to temperature, search, location, and consumption.
Have the right software and technological infrastructure.
CPG companies must be able to ingest the sheer magnitude of data that’s available to them (see above). These days, businesses employ a variety of forecasting methods and utilize a number of planning tools. Some demand planners prefer the “old school” method of using spreadsheets (like Excel) to forecast demand, which can be effective. More and more, however, demand planners are opting for a forecasting tool—also known as a demand planning platform—that can handle massive data sets.
Create dynamic forecasting models.
These formulas should overlay various data sets in order to accurately predict future demand in real time. CPG companies should continuously iterate these models so that they become more and more accurate, eventually resulting in machine learning models that use Artificial Intelligence to calculate demand.
Why Forecast Accuracy Is Vital
Accurate sales forecasts help to make the demand planning process better—and easier. The best demand planners forecast demand using one holistic view of business—a 360-degree, un-siloed snapshot of the entire supply chain in real time. Accurate sales forecasts based on one source of truth speed up the S&OP process (say goodbye to the need to align) and benefit other areas of the supply chain.
- Accurate distribution predictions will impact customer service levels.
- Accuracy of inventory predictions will reduce costs associated with working capital, transfers, obsolescence, and more.
- Accurate manufacturing predictions will help maximize the efficiency of line capacity and Capex (capital expenditure), reduce obsolescence, take a stronger position in negotiating with suppliers, and more.
When the sales team feels confident about demand signals, they can set performance benchmarks, identify key territories, coordinate with marketing, and devote other resources toward achieving these goals. Similarly, many other strategic benefits fall into place; the domino effect is incredible.
- Distribution predictions enable distribution teams to help sales teams. When sales teams are provided with visibility into customer inventory levels, they’re able to incrementally upsell the buying and planning teams. The best distribution predictions come with a Customer Scorecard, which enable distribution teams to predict their entire distribution footprint and adjust distribution schemes accordingly: optimize service levels, lead times, and DC splits.
- Inventory predictions help manufacturing teams plan while enabling procurement teams to negotiate better prices, MOQs (minimum order quantities) and delivery dates with suppliers. They also help teams manage working capital, in part by negotiating volume cost breaks for raw materials, components, and finished goods. When inventory levels are optimized, stock-outs, dead stock, and spoilage can potentially be avoided, and warehousing costs can be lowered. Supply and inventory management planning are key elements of effective demand planning.
- Manufacturing predictions enable plants managers to schedule production runs efficiently across all locations, and determine potential bottlenecks (in real-time) that could impact their ability to reach target production metrics, including throughput, capacity, and utilization rates.
- Sales predictions also enable VPs and senior managers to communicate consensus forecasts, and their departments' capabilities (and restraints) in hitting targets, to executives and other stakeholders.