Optimization of inventory levels
An appropriate demand forecast provides essential information for driving the desired raw material, work-in-progress, and finished good inventory levels. This helps in the optimization of inventory levels and reduces over-stocking or stock-out situations.
Improved customer service levels
With improved distribution and planning logistics and optimized inventory levels, customer service metrics like on-time-full, on-time delivery, fill rate/ case-fill, etc., are improved because of the right positioning of inventory and right-sizing.
Better management of a product life cycle
Long-range and medium demand forecasts offer improved visibility to a new product launch and discontinuation of an old product. This helps coordinate raw material, inventory planning, and manufacturing to support new product launches and, most vitally, reduces the risk of obsolescence of withdrawn products.
Helps in performance management
Management can set targets and key performance indicators for various functions like manufacturing, purchase, logistics, sales, finance, etc. based on long-range to medium plans derived from the process of demand forecasting. The efficiency and effectiveness of the organization and improved initiatives can be designed for vital areas of the company.
Proper demand forecasting ensures that you have enough supply on hand to meet the demand. An overestimation of demand can lead to high costs and bloated inventory. On the other hand, underestimating demand would mean that valuable customers will not get the products they want.
Demand forecasting and coordinating activities to meet the demand are full-time jobs. Organizations that operate globally have sophisticated systems and software to forecast the demand; however, small businesses use simple techniques.
Forecasting is pivotal in the strategic planning of a business, whether big or small. It is the underlying premise for strategic business decisions like budgeting, financing planning, expansion planning, and risk assessment & mitigation. Vital business assumptions like profit margins, capital expenditure, cash flow, etc., are also dependent on demand forecasting. It is the starting point for all the supply chain’s push & pull processes like inbound & outbound logistics, raw material planning, purchasing, manufacturing, order management, and packaging & distribution.
The bottom line is that effective demand forecasting is vital for supply chain planning to ensure increased consumer satisfaction, avoid stock-outs, scheduling an effective production, reduce product obsolescence cost, better shipment planning, negotiate superior terms with suppliers, and plan effective sales strategies.