Demand forecasting challenges — how to deal with fluctuating demand

It’s been over two years since the far-reaching effects of the Coronavirus pandemic on global supply chains started to take the world by surprise.

Fluctuating demand and supply volatility have made accurate demand forecasting even more challenging for two reasons:

1. Using last year’s sales data as a base for forecasts is a ‘no go’, as demand fluctuations due to the pandemic skew the data. Without consistent and reliable demand data, it’s difficult to generate a baseline forecast.
2. There have been significant shifts in customer behavior, making it hard to base assumptions on consumer trends. Customer behavior continues to be erratic as buying habits reflect current events and news stories rather than actual needs.

Consequences of poor demand forecasting

Accurate demand forecasts are essential, as forecasting problems lead to numerous other supply chain problems. Not only will poor forecasting impact your supply chain teams, but it will negatively affect the overall business, including operations, growth and reputation.

Possible implications from poor demand forecasts include:

• Higher risk of stock-outs — inaccurate forecasts make it harder to determine the right stock levels or set appropriate safety stock levels to achieve stock availability (service level) targets.
• Excess and obsolete stock — accurate forecasts are needed to prevent overstocking and risking stock becoming obsolete.
• Damaged customer satisfaction and reputation — if you cannot meet demand, loyal customers could turn to a competitor and not return. Sharing their experience could lead to reputation damage and further customer loss.
• Harder to manage supplier lead times — if you cannot give suppliers a good forecast of your annual inventory needs, it will be harder for them to meet your delivery deadlines. It’s vital to maintain excellent supplier relationships.
• Understaffing — if you miscalculate peak sales periods, you might also be understaffed in your warehouse and customer-facing roles to successfully manage the sales peak.
• Lost revenue — all the above could lead to a further loss of sales down the line.

These are all very unwelcome problems for inventory planners, and unfortunately, unpredictable demand seems to be the new normal.

How to overcome demand forecasting challenges

Even with the current volatility in sales and fluctuating demand, there are some practical steps you can take to improve your forecasts and stay ahead of your competitors.

1. Use appropriate historical data
As a first step, if you have access to historical data, look for a sales period with similar trends and market dynamics as the present day (if possible). Use this data for your forecast instead of simply using taking the figures from 2020 or 2021 when demand data could be skewed due to the ‘coronavirus effect’.

2. Use qualitative data
The second step, and perhaps the most critical, is to include qualitative data in your forecasts. For example, up-to-date information from your staff, customers, and, of course, industry bodies.

Using qualitative forecasting insights will make it easier to foresee potential demand fluctuations in the marketplace.

3. Improve communication between departments

Good communication between departments will also help improve the quality of your forecasts when actual demand is constantly fluctuating. Collaboration between purchasing and sales departments will allow better sales and trend pattern tracking.

4. Take trends and seasonality into account
It’s essential to identify items with seasonal demand or longer-term trends to ensure you make the most of sales peaks and plan for the dips. Some items may grow due to a booming marketplace, while others may stabilize or decline due to supersessions by newer designs or models. You should therefore flag and adjust trends and seasonality in your forecasts.

5. Remove periods of stock-outs from your forecast
If you have experienced periods when items have been out-of-stock, you should exclude them from your forecasts. Even better — try to predict the lost sales and add these figures to your predictions for more accuracy. Stock-outs make forecasts incorrect and decrease your sales numbers.

Challenges in forecasting demand and supply in spreadsheets

Accurate demand forecasting is not a simple task, especially if you track each stock item and have an extensive portfolio. It’s also very difficult to track lead times and anticipate supply delays.

For start ups, spreadsheets can be an efficient, low-cost tool. However, once your SKUs start building up, you will begin to see their limitations. Spreadsheets don’t integrate well with business systems or ERPs, collaboration is complex, security is weak, and most importantly, they don’t give you a holistic view.

Also, regularly reviewing every item in your warehouse manually to calculate forecast errors, spot outliers, and understand causal factors is very time-consuming. They also go out of date the minute they are created, so if supplier lead times continuously fluctuate, updating the document can become a full-time job.

Improve demand and supply forecasting

If you’re experiencing demand forecasting challenges, it may be time to consider demand forecasting software, such as EazyStock.

EazyStock provides more accurate results by automating demand forecasting and inventory planning, making it faster and easier to carry out.

While we continue to see fluctuating demand, EazyStock offers advanced functionality that’s simple to use and delivers accurate forecasts that consider demand variance, seasonality, trends, and promotions.

Despite the global economy trying to recover from the pandemic and manufacturing levels beginning to regain momentum, continued supply delays will be inevitable for the foreseeable future.

EazyStock’s dynamic lead-time feature provides complete visibility of lead-time performance, which is key to mitigating the impact of supply chain disruption on fulfillment.

You can receive and monitor alerts when lead times deviate from expectations. Alternatively, EazyStock can automatically adjust replenishment parameters, such as reorder points and quantities or safety stock for specific items, increasing your ability to hit service levels or fulfillment targets.

If you’d like to improve how you forecast demand and deal with supply issues, learn more about EazyStock by arranging a quick call with one of our team or take a look at our whitepaper on how to improve your demand forecasting accuracy.

Originally published at https://www.eazystock.com on March 23, 2022.