Inventory Management 5 min read
November 11, 2021 by Rashi Sood - 5 min read
Running a business is a tedious task. You never know how it will turn out in the coming month or year. Yet you have to anticipate how much inventory of each SKU you should store to meet the demands of your customers on time. Demand estimation is indeed one of the most challenging aspects of running a business.
Even if you have been forecasting demand for a while now, the projections can shift at any time.
What is Demand Estimation?
Demand estimation or forecasting is analyzing the historical inventory data to estimate and predict customers’ future product demand. It helps make a well-informed decision that calculates the total inventory demand, sales, and revenue for a period of time.
With the help of demand estimation, you can optimize your inventory by predicting its demand and sales by utilizing the data. You can use the data for everything – from planning inventory and warehousing space requirements to deciding product price and running a flash sale.
Importance of Demand Forecasting
The survival of any business depends on the demand for its product. If there is no demand, there is no business. Also, without understanding demand, no business would survive in the market for long. Although you can never be 100% accurate with demand forecasting, you can take steps to increase efficiency, production lead time, launch new products, and save money. All this will help you provide a better customer experience.
Demand estimation helps in reducing risks associated with overstocking of inventory and paying extra for warehousing space. Thus, you can make better decisions about inventory accounting, operations costs, cash flow, profit margins, allocation of resources, etc. Also, a business’s strategic and operational plans are prepared based on demand forecasting.
As discussed above, you spend less money on inventory purchase and warehousing space to store it with demand forecasting. The more inventory you store, the expensive it gets to store it. By managing inventory efficiently, you can always have enough products in hand to meet customer demand. Thus, you need to track inventory levels closely and restock by forecasting inventory.
Planning Production and Storage
Demand estimation helps you be prepared with the products when the customers want them. It helps forecast demand for a particular product and be prepared with your marketing activities to attract customers. Being sold out for days and weeks when your products demand is high kills your business the most. Thus, you can forecast demand and control inventory to help you never run out of inventory, especially when it is high in demand.
Demand forecasting also helps in deciding pricing for the products as per their demand and supply. It is essential to understand the market and the potential opportunity so your business can grow. Thus, you can formulate the right pricing strategy and use the right mix of marketing strategies.
If there is an excess supply of a product, you can slash prices or offer a discount. Similarly, if the product is scarce, you can increase its costs.
Types of Demand Forecasting
There are different ways to do demand estimation. Let’s take a look at the different models to do demand estimation:
Passive Demand Forecasting
One of the simplest types to forecast demand, passive demand forecasting, uses the sales data from the previous season to predict demand for the future. It is one of the most common types to forecast demand. You can use data from the same previous season, like last year’s Diwali season, to predict demand for this Diwali season. Thus, you can compare apples to apples to predict demand and sales for this season. This stands helpful if your business goes through seasonal fluctuations a lot.
Passive demand forecasting is particularly easy as it does not involve any statistical methods or studying economic trends.
Active Demand Forecasting
Active demand forecasting is the best option for businesses that have just started or are seeing an upward trend. It involves taking into consideration the market research and marketing campaigns. Some external factors are also taken into consideration, like economic outlook, growth projection, etc. This is an excellent option for startups as they don’t have any historical data to help draw demand estimation.
Short-term demand estimation involves projecting estimation just for the next 3-12 months. It is an excellent option if you are looking to manage the just-in-time supply chain. With its help, you can adjust your projections with the help of real-time sales data and quickly respond to customers’ demands.
Long-term estimation involves forecasting for 1-4 years. This method focuses on shaping the business growth trajectory and is based on sales data and market research. Many business owners also take long-term projections as a roadmap. With its help, they plan their capital investment, marketing, and supply chain operations.