Demand planning is a process used to create reliable forecasts in supply chain management (SCM). Through improper planning, businesses can risk overstocking or understocking which can impact on revenue. Demand planning helps to control the levels of inventory, as the change in demand for the product rises and falls.
Employees need to have the skills to be able to plan in advance of ordering products and manage the supply chain effectively, through using the correct demand planning techniques. Efficient forecasting has other benefits such as improving profits and keeping costs controlled.
Demand Forecasting Methods
In order to determine the future demand for products a demand forecast can be used. In order to create a forecast there are several steps that need to be undertaken. The steps can include determining the use of the forecast, to deciding on a time frame (short term to long term) and analysing the data gathered.
There are two main methods to use for forecasting demand: qualitative and quantitative. The qualitative forecasting method is useful for companies that do not have historical data on product sales. The quantitative forecasting method can be used when there is existing data on products and there is an established demand. This method requires the use of mathematical formulations whereas the qualitative method relies on intuition and experience of those planning the forecast.
Measuring Forecast Error
Forecast error is when there is a difference between the actual demand and the forecast demand. One main method of measuring forecast error is mean absolute deviation (MAD). This method measures the difference between the actual demand and the forecast. Mean absolute deviation is a popular method as it is easy to calculate and apply.
Forecasting for new products
Forecasting for new products requires a different approach to forecasting demand for current products. Forecasting favourable demand for a new product that does not perform as expected can result in lost profit and unused stock. Forecasting for new products can use casual, qualitative or quantitative techniques, each of which will have distinct results, advantages and disadvantages.