It’s hard for us to predict the future with absolute certainty. However, several types of demand forecasting can help you make better business foresight. Here’s everything you should need to know about demand forecasting and its types, and methods along with examples.
What is Demand Forecasting?
Demand forecasting predicts how much of a product or service customers are willing towards in the future. This helps businesses decide how much to manufacture and have to keep ready in stock for customers.
It’s important to get this right so businesses can plan production well and meet customer demand. If they predict too much, they might have too many products left over. If they predict too little, they might not have enough for customers.
6 Types of Demand Forecasting
There are different ways to forecast demand. Your predictions can vary depending on the methods you use. It’s a good idea to use multiple forecasting methods. This gives you a better overall view of your future sales.
There are six types of demand forecasting. Each has its specific requirements and uses. Let’s see all of them in detail.
Let’s see our first option.
- Passive Demand Forecasting
This is the simplest of all types of demand forecasting. This model allows you to predict future sales based on past data. It’s crucial to use data from the same time of the year to get accurate predictions. This is true for businesses’ seasonal ups and downs.
This method works well if you have strong sales data to rely on. It’s also good for businesses that prefer stability over growth. The idea is that this year’s sales are similar to last year’s.
Passive demand forecasting is easier than other methods because it doesn’t involve any complex statistical techniques or studying economic trends.
Let’s see our second option on this list of “ types of demand forecasting ”.
- Active Demand Forecasting
If your business is growing or just starting, active demand forecasting is a smart option. This method uses market research, marketing efforts, and expansion plans to make informed decisions.
Active forecasting also looks at external factors like the economy, growth trends in your industry, and potential savings from improving your supply chain. Startups with limited historical data rely more on external information to make their predictions.
Let’s see our third option on this list of “types of demand forecasting”.
- Short-term Projections
Short-term demand forecasting looks ahead to the next three to twelve months. This time frame is particularly useful for businesses that need to manage their supply chain efficiently, making adjustments based on real-time sales data. It enables quick response to changes in customer preferences and market conditions.
For businesses with frequently changing product offerings, understanding short-term critical demand is critical to avoiding overstack or shortages. However, short-term forecasts are just one aspect of effective planning.
It’s also important to complement them with medium- and long-term forecasting to develop a comprehensive strategy for future stability and growth. This broader approach helps businesses anticipate trends, plan production schedules, and optimize resource allocation efficiently.
Let’s see our fourth option on this list of “types of demand forecasting”.
- Long-term Projections
The long-term forecast can do projections as far as one to four years into the future. This forecasting model focuses on shaping your business growth and trajectory.
Think of long-term demand forecasting as a roadmap. It may help you plan marketing, investments and supply chain operations to prepare for future demand. Being prepared for business growth is essential to achieving that growth.
Let’s see our fifth option on this list of “types of demand forecasting”.
- External Macro Forecasting
External macro forecasting considers trends in the overall economy. It predicts how these trends will impact our broader business goals. This type of forecast guides you on how to achieve those goals.
Even if your company prioritizes stability over growth, understanding external market forces is crucial for your sales predictions. Macro forecasts also address factors like raw material availability that directly influence your supply chain.
Let’s see our sixth option on this list of “types of demand forecasting”.
- Internal Business Forecasting
A key factor that limits your business growth is your internal capacity. If you expect customer demand to double, you need to consider if your business can handle that increase. Internal business demand forecasting reviews how well the operations are set up.
This type of forecasting identifies any obstacles that could slow your growth and spots areas where your business could grow more. It looks at your finances, cash flow, profits, supply chain and staff.
Internal demand forecasting helps you make realistic predictions and shows where you might need to expand your capacity to reach your growth goals.
3 Examples of Demand Forecasting
Demand forecasting is useful for all businesses. Here are the three ways it helps eCommerce operations.
- Passive/Trend Projection
A small bakery makes artisan bread and pastries. It’s been open for five years and has loyal customers. The owner focuses on quality rather than growing the business. They use past sales to predict how much bread and pastries they will sell next year.
They schedule baking and staff based on when they’re busiest, like holidays and weekends. This helps them always have enough bread and pastries. They also plan special promotions to bring in more customers during quieter times of the year.
- Active/Market Research
A startup has created innovative wireless headphones and launched them on Kickstarter. They got some information about customer interest from a crowdfunding platform.
Now they want to attract more customers to be a successful eCommerce business. The marketing team sends surveys to all customers to learn more about them. They find out details like age, job and where they live. They discover that people who use public transit like their noise-cancelling headphones a lot.
Using the survey results, the company plans to advertise on trains and buses. They use economic principles to predict how effective their ads will be. By studying demographics and how people shop, they forecast future demand.
- Short-term/Sales force composite
A company sells high-end office chairs to both individuals and businesses. Their sales team focuses mainly on getting bigger orders from businesses. But recently, salespeople have struggled to close deals.
The CFO gathered the sales team to discuss the issue and they decided to lower their production for the next six months to match the expected lower sales. This gives them time to adjust their marketing and plan for new markets.
FAQs:6 Types of Demand Forecasting
What are the different methods of demand forecasting?
The top five demand forecasting methods are trend projection, market research, sales team input, Delphi method, and econometric analysis.
What is an example of a demand forecasting method?
Demand forecasting method in simple terms refers to the process of assessing the demand of a product or service in the future to develop manufacturing and business strategies. Market needs are predicted in this process. The above-mentioned samples can be used as a reference to understand better the types and applications of demand forecasting.
What makes demand forecasting crucial to the supply chain?
Demand forecasting in the supply chain helps us to foresee how much of a product or service has to be available in the future. It plays a pivotal role in predicting the future by analyzing current trends.
Conclusion
In conclusion, mastering the types of demand forecasting is crucial for business. External macro and internal business forecasting enhance decision-making by considering broader trends and operational capabilities. Using these methods improves customer satisfaction in a competitive market. Qodenext provides expert supply chain solutions, including powerful OMS tools. Contact us today and let’s unlock your ecommerce potential!
