We like to frequently talk about demand forecasting; why? - because many, many people say that it cannot be done. Of course it can be done, and done well. Perfectly? No, all demand forecasts are wrong, but having a disciplined demand forecasting process can have a significant impact on the bottom line - reduced inventories, efficient capacity utilization, and improved customer service. Demand forecasting is not magic or "art" and usually begins with interpreting past demand correctly.
The information that a firm knows about customers past behaviour sheds light on their future behaviour, as well as the responses they will have based on the firms actions. Good demand forecasting involves a firm identifying the factors that influence future demand and then determine the relationship between these factors and future demand. Developing a good demand planning process requires a firm to be knowledgeable about numerous factors that relate to the demand process, including components like:
- Past demand
- Planned advertising or marketing efforts
- Planned price changes
- Expected changes in supply of raw materials, components, labor and logistics
- State of the local, regional, and national economy
- Actions by competitors
A firm must take into account these and other factors, and clearly understand past actions and customer demand, before it can select an appropriate forecasting methodology.
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