Demand Forecasting: Meaning and 05 Factors Influencing Demand Forecasting

Demand Forecasting: Meaning and 05 Factors Influencing Demand Forecasting

Demand Forecasting is identified as the process of predicting the demand for a particular product or service in the future. It is the process of identifying and predicting what the future demand will be for the product in order to make smart and profitable business decisions related to cash flow, profit margins, supply chain management, capacity planning, and many other functions.

Demand forecasting identifies both current and future customers who will create a demand impact for the product and plan the manufacturing process accordingly. In other terms, demand forecasting helps the business to estimate the future sales revenue for a product for a future period of time. This is mostly done through analyzing pat data. However, historical data is not the only factor that helps to estimate future sales revenue.

It is important for manufacturing companies to accurately estimate future demands in order to avoid production surpluses and shortages. Production shortages can lead to creating a negative impact on the business-customer relationship as the customers do not have enough products available in the market. It can damage customer loyalty towards the brand. On the other hand, having a surplus can create unnecessary costs such as inventory and handling and lead to a high amount of wastage.

It is important for businesses to conduct a systematic, accurate, and scientific demand forecast, analyze the data to determine the future demand, select a type and method of demand forecasting, collect, analyze and interpret results.

Factors Influencing Demand Forecasting

There are many factors that can create a significant impact on demand. These factors should be taken into consideration when planning for demand forecasting. Below mentioned are a few common factors that influence the demand for a product or a service.

– Competition

When a competitor’s product enters or exits the market, there can be significant changes to the demand of the product. When a new product enters the market, many customers tend to purchase that product and it can create a drop in the demand for the existing product. When a competitor exits the market, the customers of that product tend to shift to other alternative options, so the demand is expected to go up.

Apart from that, the competitors’ promotions, advertising, and value additions can create a significant impact on the demand for the product.

– Seasonality

When seasons change, demand for certain products also tends to change. For highly seasonal brands or for returning products, peak season is the one that can bloom sales followed by off-seasons that makes the sales are steady or very slow. Seasonal products can be varied from the products that have a high demand in the summer or winter season, Christmas, Halloween, or functions such as weddings and parties.  When forecasting the demand for such items, the manufacturers should identify the seasons that can increase their sales and make forecasting decisions.

– Economic conditions

The country’s economy has a major impact on forecasting product demand. If there is economic growth, there is a possibility that the product can expect a rise in future sales and if there is an economic recession, the sales are expected to plummet. Inflation and disposable income play a major role in demand forecasting.

– Types of goods and services sold

The demand forecasting can change based on the types of goods and services offered to the customers. Since different products create different consumption patterns for the customers, based on the product type, the forecasting for the demand should change.

As an example, demand forecasting for perishable goods should be very precise as incorrect forecasting can create a major wastage and financial loss to the business.

– Geographical Conditions

The geographical conditions of the manufacturing plant, as well as the target market, can create a major impact on demand forecasting. It is majorly important to be strategic when choosing the manufacturing location as it can impact the entire supply chain, production as well as distribution process. Apart from that, the accessibility to the storage areas, fast distribution methods to the customers can create a positive impact on the demand forecast.

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