Demand Forecasting: Definition, Methods, and Importance

Demand Forecasting Definition

Demand forecasting is the process in which businesses estimate customer demand for a product based on various factors. In this process, historical data and analytical information are collected to ensure accurate predictions. With demand forecasting, businesses obtain precise data and estimations of total sales and revenue. This is a crucial factor in their decision-making processes as the chances of optimizing their supply chain and inventory management activities increase.

Demand Forecasting Methods

There are several demand forecasting methods to help you estimate customer demand. These methods are classified based on the market, the length of time, and the number of details required.

1. Micro-Level Demand Forecasting

Micro-level demand forecasting is a method that focuses on the internal operations of businesses. Except for internal operations, micro-level forecasting includes segments such as product categories, sales, financial separation, and particular customer groups.

2. Macro-Level Demand Forecasting

Macro-level demand forecasting deals with the macro-economic environment including external economic conditions that affect the product demand of a business.

The most common factors included in macro-level demand forecasting are

Customer Preference Changes
Inventory Portfolio Expansion
Market Research
Other Macro-economic Factors

3. Active Demand Forecasting

Active demand forecasting is the ideal method for start-up companies or companies that are targeting business growth. It focuses on external factors such as general market growth, and supply chain studies but also it requires research in marketing, trends, and promotional campaigns.

4. Passive Demand Forecasting

This method combines internal and external economic factors. It includes considering historical data to predict future demand for products. Generally, passive demand forecasting is well known as the method dedicated to big enterprises that focus on obtaining stability rather than growth.

5. Short-Term Demand Forecasting

As it is implied by its name, short-term demand forecasting considers the amount of demand that is expected in a short period of time.

6. Long-Term Demand Forecasting

This method deals with long-term business decisions such as financial planning, investment planning, and capital expenditure.

The Importance of Demand Forecasting

Demand forecasting is very important for ecommerce companies. This is because it helps them understand their demand and make the right decisions about marketing and production based on accurate data. Furthermore, demand forecasting helps companies prepare their budget, schedule their productions and store their inventory properly. Demand forecasting is connected to the proper management of inventory because it can help businesses save money from ordering products that aren’t needed due to low demand as well as decrease expenses from warehousing.