Demand Forecasting: Your Guide to the Future
If you were asked what the score will be in the Super Bowl, you’d probably say you can’t predict the future. The same is true for demand forecasting, you can’t predict the future exactly, but with the right methodology, you can more accurately forecast the number of sales on every product you sell. This allows you to plan for inventory replenishment, avoid stockouts, reduce overstocks and more.
In this article, you’ll learn what retail demand forecasting is, the different types and methods of demand forecasting and the influences on demand. Read on to learn the three simple demand forecasting steps, to review e-commerce examples and better understand how software can help.
Table of Contents
- What is Retail Demand Forecasting?
- What is the Main Purpose of Demand Forecasting?
- Types of Demand Forecasting
- Demand Forecasting Methods
- 3 Simple Steps to Forecast Demand
- Influences on Demand
- E-commerce Demand Forecasting Examples
- How Can Software Help With Demand Forecasting?
- Demand Forecasting for the Future
What is Retail Demand Forecasting?
Retail demand forecasting predicts future customer sales by analyzing data. Done well, demand forecasting looks at the whole product environment, including historical product data, promotional events, markdowns, size curves & in-stock data, and marketing campaigns. If you create an accurate forecast, retail demand planning is much easier, you can optimize your inventory levels and you won’t miss out on important sales.
What is the Main Purpose of Demand Forecasting?
No matter the size of your company, demand forecasting is essential. Its main purpose is to prepare you for whatever your customers need and to improve their customer experience, but there are many benefits:
Inventory Planning
If you know how many sales you’re likely to make over a specific period, you can tailor your inventory planning to meet that demand. You can find a main supplier, set up contingencies, assess lead times, optimize stock levels and prevent stockouts.
Forecast demand, issue and track POs, re-order on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.
Discover Seasonal Trends
Some products sell evenly across their whole product lifecycle — like black t-shirts that can be worn alone or layered under a sweater — but many products fluctuate. For example, if you sell sleeveless dresses in the summer, they’re likely to fly off the shelves, but in autumn and winter you’d want to replace them with a more appropriate sleeve length or material. Knowing when these seasonal trends are can help you decide whether to order less or to offer incentives to buy left over stock in the quieter months.
Manage Cash Flow
Avoiding stockouts is important but not overstocking is too. Too much stock increases your cost of inventory as you’ll incur holding costs and you won’t have room in your warehouse to bring in stock that’s more likely to sell. You’ll also have less money available to spend on sales and marketing to grow your product sales. Forecasting demand allows you to plan the optimal inventory levels and frees up your cash flow.
Deal With Outside Influences
Demand forecasting isn’t just about historical data. The state of the economy, industry trends, market sector projections and other outside influences affect demand. Forecasting that includes these influences leads to more accurate projections.
Prepare For the Future
The unexpected just isn’t expected but demand forecasting can still help you to prepare. You can set up your supply chain for redundancy and business shocks so that you’re ready for a pandemic, war or anything else that might hit you, e.g. with safety stock.
Types of Demand Forecasting
Demand forecasting comes in many different shapes and sizes. In reality, you’re better off using multiple demand forecast types so you can highlight the differences in predictions. That’s why it’s useful to know how each type of demand forecast works:
Short-Term
Short-term demand forecasting is usually done over a period of 3-12 months. You can quickly adjust these projections as your data changes and if customer demand changes. Short-term forecasting is important but it’s often a small part of a larger puzzle. Planning for long-term projections will help to complete the puzzle.
Long-Term
What’s going to happen to your demand in 1-4 years? Long-term projections use most of the same data as short-term projections but there’s a particular focus on your business growth trajectory.
Use long-term forecasting as a roadmap. It’s partly about where you’re going and partly about where you’d like to go. You can aim to reach your long-term demand forecast with marketing, capital investments and supply chain operations.
Macro-Level
Macro-level demand forecasting looks at external factors and incorporates trends in the wider economy. When the market changes, you need to react. Understanding those changes in advance will help you react quickly, no matter your goal.
Micro-Level
Micro-level forecasting looks at internal business factors, a particular customer segment or industry trends. If demand is projected to double, can you meet capacity? If you can’t and don’t make the changes to ensure you can, you’ll experience stockouts and won’t be able to meet demand, which will eventually cause it to drop off.
This type of forecast helps you to make more realistic projections and uncovers limitations that might slow your growth. Make sure to factor in business financing, cash on hand, profit margins, supply chain operations and personnel.
Passive
Passive forecasting is the simplest form of predicting demand. You look at historical data, over a particular period to predict the future. If you have strong sales data, passive projections are a great starting point.
If you only use passive projections, you’re basing everything on the presumption that what happened last time will happen again. For businesses pursuing stability, this may be true but external factors always play a part.
Active
Market research, marketing campaigns and expansion plans all play a role in active forecasting. You need to take in a wider range of data for this, including macro-level and micro-level data. This type of forecasting is great if you’re in a growth phase or just starting out — you can predict demand even if you don’t have a lot of historical data. It’s useful for new product launches too, especially if you combine it with passive projections.
Demand Forecasting Methods
You can create forecasts in a number of ways. Here are some of the most relevant methods for retail and e-commerce businesses:
Market Research
If you ask the right questions to the right people at the right time, you’ll gain valuable insights that you can’t always get from internal sales data. You can perform market research over time or during an intensive period.
The data you get from customer surveys is usually qualitative so you have to sieve through it to find the relevant details. It’s worth it to increase your knowledge base and you can use demographic information to target future marketing efforts.
Trends
Trends use past sales data to predict future sales. When you’re looking at trends, you need to adjust for historical anomalies, like a sudden spike in demand, which won’t be repeated in the year ahead. Maybe a celebrity was wearing one of your jackets on the red carpet but she’s chosen a different product for future events.
Staff Insights
Sales people, customer service and procurement officers are talking to customers and suppliers every day. They’re in a perfect position to ask for feedback and to get a sense of the market direction. Combine their data with your historical data and market research for a more comprehensive forecast.
Delphi Method
Outside experts and a skilled facilitator come together to offer expert opinions on your demand forecast with the Delphi method, or Delphi technique. You repeat a process of sending a questionnaire to a group of relevant stakeholders (e.g. customers) and collate their responses and rationale anonymously. The experts and facilitator then refine their responses until a consensus is reached.
This technique also allows your respondents to be completely honest and as there is no in-person discussion, your experts can come from anywhere in the world.
Scenarios
What if? Scenarios allow you to play with hypotheticals so you can plan for multiple realistic possibilities. What if a global pandemic happened? What if we ran a promotional campaign? What if we introduced a new product to the market?
With the right software, scenarios are easy to set up and you can use them to expect the unexpected. Freely make assumptions and compare your results at the SKU (stock keeping unit) level.
💡Pro Tip: Plan for multiple versions of the future with Singuli’s Scenarios. Ask “what if” and get answers immediately
Econometric and Statistical
Econometric and statistical forecasting is all about the numbers. You take all sales data with marketing data, trends, insights and any other relevant information, you put it all into inventory planning software and you use the software’s mathematical algorithms to predict future sales.
📌Get Started: With Singuli’s Advanced Forecasts, it’s easy to analyze historical data, market trends and customer inputs, which saves you or your inventory planner time and increases forecast accuracy.
3 Simple Steps to Forecast Demand
Different demand forecasting types and methods are useful but to forecast demand accurately, you need to have a process. It’s important to be flexible but you also need direction.
Let’s review the 3 steps in demand forecasting:
1. Set Objectives
Start with a clear purpose. What are you hoping to discover and over what period of time? Are you creating a general forecast for all the products in your business or are you looking at a particular SKU, category or product? Are you starting with a short-term forecast or a long-term projection?
Think about how your forecasts will affect financial planners, marketing departments, logistics, operations and other teams. What do you want to do with the results of the forecast? Do you have supply chain goals, growth goals, stability goals?
2. Collect, Record and Measure Data
You’ll need lots of data. Exactly what you need depends on the demand forecasting types and methods you’re using but your best bet is to collect as much data as possible. Keep track of purchase orders, SKU velocity, inventory turnover, average order values, return frequency and stockouts.
What other data do you need? Think about market conditions, customer surveys, seasonal variants and trends. With the right software, you can collect this data automatically and use it at the appropriate time.
Great inventory planning software also lets you measure and analyze your data. You can see how your forecasts compare to reality, you can create scenarios and you can measure and track demand for multiple products at the same time.
💡Pro Tip: Take advantage of Singuli’s detailed Reporting & Analytics to create a forecast that meets the strategic needs of your business.
3. Budget Well
Now that you know what demand will be like, you can budget accordingly to meet demand or to use marketing campaigns and other promotional activities to increase demand. Of course, if you make changes to your data inputs, you need to use your forecasting software to assess changes in your forecasts.
Influences on Demand
As we’ve learned, demand isn’t a steady, linear curve or a direct reflection of years past. Many factors influence demand, including:
Seasonality
Summer dresses are usually more in demand just before the summer, winter coats, just before the winter, but seasonality isn’t just about changes of the weather. It refers to changes in order volume over a specified time period, event or season. Tennis racquets are more likely to be sold during the US Open or Wimbledon and Christmas crackers are usually not sold at all during the summer.
📌Get Started: Seasonal trends change all the time so make sure you’re planning for them with Singuli’s Advanced Forecasting.
Product Type
What you sell makes a difference to how you forecast. Certain products are more sensitive to spikes in demand, seasonality and external forces. You’ll also have different SKUs with common attributes that will follow similar forecasting patterns and, for example, beauty box subscriptions that are delivered monthly might have regular peaks in demand.
📌Get Started: Automatically compute the right size curve for every sized-based product in your assortment with Singuli’s size-based forecasting and planning tools.
Competition
You could have a largely predictable demand for certain products for years but as competition increases, the demand drops. Of course, if the competition moves away or stops selling the same products, your demand could rise. Sometimes, demand for a competitor can take you by surprise. You need to have a plan in place for spikes in demand and inventory planning software that can quickly deal with changes.
Marketing
If customers don’t know your product features and how they can improve their lives, they’re less likely to buy. Marketing puts your products in the thoughts of potential clients and makes them more likely to purchase, which affects demand. Make sure your marketing campaigns are catered for when you’re forecasting demand and use software that takes those campaigns into account.
💡Pro Tip: Get a holistic view of your inventory data with Singuli’s Reporting & Analytics. Track not only inventory data, but also marketing, promotions, site traffic, historical sales and customer behavior. You’ll have all of your information in one place, ready to use in inventory forecasting and planning.
Location
Not every store will have the same demand. Retail and e-commerce stores are dependent on foot traffic and website visitors, local economies, parking and many other factors. With the right software, you can forecast for each individual location and see an omnichannel overview, so you can allocate your stock accordingly.
💡Pro Tip: Use Singuli’s location-level forecasts and replenishment alerts to optimize your inventory. If you have a mixture of retail and e-commerce channels, Singuli bases your forecasts on distinct models to reflect the variations in inventory patterns.
E-commerce Demand Forecasting Examples
No matter what type of e-commerce business you have, you can benefit from demand forecasting. Here are a few hypothetical examples to show you how:
Caring Cosmetics
Caring Cosmetics sell everything from face creams to eye liners and perfumes. December is a big month for last minute Christmas shoppers in the cosmetic industry and Caring Cosmetics need to have just the right inventory levels to meet customer demand. Sales have generally increased year on year but some products remained steady or even dropped revenue over this period.
Its demand planner enters its micro-level data into inventory planning software to forecast demand for each product based on previous trends. Most years, this gives the brand enough information but this year, a recession caused customers to be more cautious. Caring Cosmetics sales have dropped by 2% month on month and it’s wondering how Christmas demand will be affected.
After launching a targeted marketing campaign in September, the brand is expecting a good return on investment (ROI). All its data gets added to inventory software, which projects a 3% year-on-year increase across all products. Two products are predicted to have a 1% year-on-year decrease.
Electronics Made Simple
Electronics Made Simple often has new products on the market but they’re usually upgrades of older versions. It sells accessories to go with devices like phones, laptops, TVs and computer consoles. It tends to sell more accessories in January when its customers have bought devices that need extra controllers, HDMI cables etc.
This year, it decided to expand. The company is going to sell laptops and phones as well as accessories. This is a big move as it has never sold these products before. Electronics Made Simple has years of data on its current product lines but no data on these new products. It needs an active type of demand forecasting and it needs to think about the short-term and long-term consequences.
To gather as much data as possible, the company does market research, it’s asked its staff to get a sense of customer interest and it uses an economical and statistical model so it has as much data as possible to work with.
Sneakers, That’s All
Sneakers, That’s All sells sneakers and nothing else. It has beautiful displays with just one sneaker on a stand in its store and its website is minimalist too. The biggest effect on demand until now has been marketing and new releases. It often use previous products to help forecast demand for new products, especially when the change is minimal.
A few weeks ago, a huge brand brought in a new line of products called “The Sneaker Section” and they’re undercutting Sneakers, That’s All on price. It sells a lot of similar products and offers bags, clothes and other accessories. Sneakers, That’s All is planning for the future but it needs a short-term demand forecast to start off with. It already used “scenarios” in case something like this happened but the speed of change has been a surprise.
How Can Software Help With Demand Forecasting?
Demand forecasting often runs into challenges. For example, how do you account for spikes in demand, new products or different product attributes? What happens if you have missing data? How do you deal with inadequate suppliers?
The right inventory planning software considers every barrier to make your forecasting as accurate as possible. Let’s look at all the benefits:
Be Ready for Spikes in Demand
Spikes in demand are often unexpected. If you don’t have the right set up, you won’t be prepared. Demand forecasting with scenarios is one way to plan for this. You can set up multiple “what ifs” on your inventory planning software using different assumptions and plan for the worst case scenario. You can also track your live sales velocity, so you’re aware as soon as any unexpected spikes take place.
💡Pro Tip: Maintain optimum stock levels and adjust to sudden changes by using Singuli to manage multiple vendors and products with different lead times.
Improve New Product Forecasts
When you have little to no historical data, new product forecasts are hard to predict. The right software uses attributes from other products, marketing campaigns and all the other relevant data on their system to keep your forecasts accurate.
💡Pro Tip: Use your past sales and product attributes to create accurate initial inventory orders with Singuli’s new product forecasts.
Buy the Right Size Curves
Having the right inventory for a complete product type is important but if each individual size curve isn’t considered, you’ll still get stockouts and missed sales. Good inventory planning software automatically forecasts the right size curve for you.
💡Pro Tip: Automatically compute the right size curve for every sized-based product in your assortment with Singuli’s size-based forecasting and planning tools.
Account for Performance Marketing Changes
Changes in marketing spend can affect forecasting performance, unless you have the right software, which will turn your marketing plan into a category level forecast.
📌Get Started: Understand what’s working and turn your performance marketing into a category level forecast with Singuli’s Performance Marketing.
Understand Seasonality
If you run a particularly seasonal business, forecasting can seem even more difficult than usual. Using software to understand true growth, compared to seasonality and budget constraints is vital for your business.
💡Pro Tip: Avoid unexpected changes in demand and automatically account for seasonality in your inventory forecasts with Singuli’s Advanced Forecasting tools.
Demand Forecasting for the Future
There’s a lot to getting demand forecasting right but now you have all the tools and information you need. You know what demand forecasting is, why it exists, the different types and methods, the influences on demand and how software can make your forecasting more accurate. Get the right software and start forecasting demand for the future.
Forecast demand, issue and track POs, re-order on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.
Demand Forecasting FAQs
Let’s answer some of the most frequently asked questions about demand forecasting:
What is Demand Forecasting?
Demand forecasting analyzes data to predict future sales. Getting it right keeps your customers happy by avoiding stockouts and overstocks, which improves the customer experience.
Why Does Demand Forecasting Matter?
Demand forecasting gives your business the information it needs to make decisions on marketing spend, production, supply chain, logistics and more. Running a business without demand forecasting can cause cash flow problems and cause you to run out of stock when your customers need it most.
How Do I Forecast Demand?
There are several types and methods of demand forecasting that suit different businesses. You can forecast on the macro or micro level, you can consider internal and external forces and you can plan for the long-term or the short-term. The right software can help you to forecast accurately, no matter your business type.
What Demand Forecasting Influences Should I Be Aware Of?
There are many influences on demand, including inaccurate data, spikes, seasonality, size curves, marketing and the unpredictability of new products. Preparation and organization are vital so you’re always prepared for even the most unexpected demand forecasting influences.
How Do I Build a Demand Forecasting Model?
Start by setting your objectives, collect and measure as much data as you can and budget well. If you submit your objectives, data and budget constraints into the right software, you’ll get the most accurate demand forecasts possible.
Forecast demand, issue and track POs, reorder on autopilot, and step up your reporting game across multiple channels and locations. Get in touch to see how Singuli can help you optimize your inventory.