A well-designed demand forecast model has powerful potential for your financial planning & analysis. It can deliver profound and meaningful insights about your business that can be used to guide many major decisions. Finance leaders can – and should – rely on these models to analyze and predict sales trends over time, gauge their inventory position and eliminate barriers to profitability. Particularly in today’s marketplace, which is more globalized and complex than ever before, companies who can predict the ebbs and flows of demand are at a distinct advantage. Yet inaccuracies and missed opportunities are not uncommon with demand forecasting strategies, and many organizations don’t realize it until profitability begins to suffer.
Is your business forecasting to its full potential? In this blog, we’ll offer strategic tips and highlight some key objectives you can achieve with your demand forecasting model.
1. Leverage In-Depth Insights on Product and Sales Trends
What sells? What doesn’t? How do specific products impact your bottom line? These are all questions that can be answered through your demand forecasting model and forecasting strategies. Consider fine-tuning your forecast to do the following:
- Gain insights at a SKU level. Your demand forecast model can reveal key insights about your sales right down to the SKU level. Analyzing trends and predicting demand at this minute level of detail enables you to make more surgical decisions about your product offerings. Consider the simple example of a business that, among other things, sells coffee. Their particular product line is made up of varying product types, each of which comes with its own set of variables, ranging from different suppliers, to different brewing processes, to different pricing and so on – so breaking down your forecast by SKU number gives you a clear idea on each product’s potential impact on profitability.
- Achieve greater accuracy for related costs. Revenue is the driving force behind your P&L budget from which all other line items are based. In fact, you can use your demand forecast to make more precise top line revenue predictions. This will, in effect, help you more accurately budget and forecast the “pieces that makes up the whole”—in other words, your related costs such as COGS, SG&A expenses, and other elements that are calculated as a percentage of revenue.
- Plan for high-selling or low-selling products. In reviewing your sales trends, your demand forecast model surfaces both high-selling and underperforming/obsolete products. Knowing your top sellers ahead of time not only allows you to stock your inventory accordingly, but helps reduce risk. If you haven’t sold a particular product in five years, chances are, you won’t sell it in the coming year – so it’s simply not cost-efficient for your business to have it on hand.
2. More Effective Inventory Management
Whatever insights your forecast reveals about your products will inevitably be tied to your inventory and warehouse decisions. The stronger your demand forecast strategies, the more proactively you can manage these decisions to create cost-efficiencies and streamlines processes with suppliers and retailers. Keep in mind the following goals for your model:
- Create order efficiencies. A demand forecast gives you a good sense of how much future inventory you need to have on hand – and understanding these quantities in advance creates opportunities for more efficient ordering. Smaller quantities are typically sold at a higher unit cost, so for products where demand is expected to be high, there is huge cost-savings potential in ordering them in larger quantities at lower unit costs. (Think Costco.) Doing so helps your business reduce the cost of goods sold and increase your gross margin.
- Consider the cost impact of your warehouse space. Along with your insights on high- and low-selling products (mentioned previously), you can use your forecast to more efficiently manage your warehouse space. Are inventory levels on track to meet predicted demand for high-selling product? Conversely, is half of your warehouse occupied by products that your forecast has deemed obsolete? Take into account your inventory turns to ensure you are only stocking products that are moving at an acceptable rate. Factor in your warehouse costs, too. For example, what is your rent by square foot of warehouse space? What does your obsolete inventory cost you in terms of rent? Which products are most cost-efficient to stock?
- Better inventory allocation for retailers. In addition to showing how much demand exists for a product, your forecasting strategies can also target from which retail locations that demand may originate. An efficient model should break down demand to a retail store level to ensure stores have adequate inventory at any given point in time. This reduces backorders, lost sales and customer dissatisfaction with your product or brand.
3. Strengthen Decisions in the Marketplace
In a highly competitive and globalized marketplace, your predictions on customer demand help you make decisions that are more proactive and strategic, giving you the following advantages:
- Insights on where to invest marketing dollars. When it comes to your marketing budget, an efficient demand forecasting model can guide your allocation efforts and reveal which markets (and/or products) to invest in. If you are not forecasting to sell a product in a certain geographic region, for example, you can pivot your plan: either spur sales by increasing marketing in that area — or cut your losses and focus on your predicted high-performing markets. Additionally, your forecasting model will reveal trends over time, enabling you to fine-tune your sales and marketing investment by product, by market, month, seasonality, and other factors.
- Get ahead of supplier lag time. For companies who source goods from offshore suppliers, it may take a considerable amount of time for those good to reach the warehouse. And in today’s global economy, having an efficient demand forecasting model is more vital than ever: it can alert your business to inventory stock issues, enabling you to reorder well in advance to prevent often-costly timing issues with fulfillment.
Good Demand Forecasting Strategies Are Critical to Business
All in all, your demand forecast model is an integral part of your business – it’s not a “nice-to-have” but a “must-have.” Sales are the lifeblood of your business; and your demand forecasting model is what keeps it flowing.
If you’re interested in learning more about financial forecasting process, you can also download our free guide for some best practices:
Would you like to discuss how to integrate these demand forecasting strategies into your business? Or do you have questions about how you can improve your current model? You can also contact us. We’d be happy to answer any questions you have.
About the Author
Vikram has over 15 years of experience in Financial Planning and Analysis covering diverse sectors of IT Communications (j2 Global), Banking (Citibank, HSBC, Bank of America), Food and Beverage (Nestle), Investment Consulting (Wilshire Associates), Retail (Harbor Freight) and Entertainment (The Walt Disney Company). His core competencies include managing finance teams, conceptualizing and leading budgeting and forecasting processes relating to the P&L, Capital Plan, Balance Sheet and Cash Flow both mid-sized to Fortune 1000 Companies. Vikram attended Willamette University (Oregon) where he received his MBA specializing in Finance. He also holds a Bachelor’s degree in Finance and Accounting from Christ College in Bangalore, India, and a Master’s degree in Finance and Accounting from Bangalore University in Bangalore, India.