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July 03, 2017

6 Tips for Creating A More Accurate Demand Forecast

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(This post was originally published on March 29, 2017)

If the only forecasting you’ve ever heard of had to do with whether you should carry an umbrella to work, you definitely want to read this post. In the shipping and logistics industries, forecasting has less to do with weather and more to do with what you need and when you’re going to need it.

Creating a demand forecast is essential for inventory planning and control. With requirements and information from the customer, the customer service representative (CSR) determines the amount of material or product that needs to be ordered, when it needs to be ordered and when it’s coming to the warehouse. The forecast is used to keep material or product flowing seamlessly along the supply chain from supplier, to factory, to warehouse to customer. When you’ve got an accurate forecast, it’s a beautiful thing. But when the forecast is off, the result can be irate customers, stressed CSRs and a warehouse with too much or too little product.  

Okay, you’re convinced that forecasting is a good thing. How do you forecast? The easiest thing to do is to look at how much you order during a specific time frame, maybe weekly, bi-weekly or monthly. (For purposes of discussion, let’s go with monthly.) Using those figures, you give your CSR an estimate of how much you’ll use in a month. Say you’re using 500 pieces a month. Your CSR knows they need to have three months of material on hand, so they stock 1,500 pieces in the warehouse.

Unfortunately, what sometimes happens is that a customer overestimates how much they’ll need. So, in our scenario, let’s say you really only use 200 pieces a month. Suddenly your manufacturer has 12 months of inventory on hand, and that’s not good.

We checked in with a couple of our forecasting pros and they offered a few tips to building an accurate forecast:

  • Communicate with your CSR. They are your first and best point of contact. If you don’t know what information they need, ask them! Your CSR is there to help you. They are tracking your actual usage and can help you adjust your inventory based on those figures.
  • Look at a lot of data. Our CSRs recommend examining 12 months of sales information to get a realistic and accurate idea of what you’ll need to order.
  • Alert your CSR when changes are coming. Maybe you’re expecting orders to go through the roof in December, or a customer has dropped off and your sales are slowing. Communication is part of building an accurate forecast and a good relationship!  
  • Keep manufacturing lead times in mind. The time it takes to make your product needs to be factored into the forecast.
  • Accuracy is more important than frequency.  One of our CSRs said an accurate forecast produced once a month is better than an inaccurate forecast coming in weekly.
  • Stay aware of predictable slowdowns on the horizon. We're talking about things like holidays, typical vacation times and other recurring events. For example, Chinese New Year is an annual event that affects the entire supply chain as well as production. Your CSR has been there and done that. Listen to their advice – plan and order accordingly.

Accurate forecasting benefits everyone by strengthening the supply chain. Factories begin to adjust because they know how much customers will order. They order the correct amount of materials and manufacture the proper amount of product to have on hand. Suppliers order the amount of materials they know you’ll use, even if you don’t use it all immediately. Transparency and communication builds trust, and that, combined with accurate data, goes into building a true forecast that will keep your business, and theirs, moving along like a well-oiled machine.

For additional reading:

 

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Filed Under: Inventory, Supply Chain Management, Forecasting, Featured