Erandi Silva
October 22, 2020

What is forecasting for businesses?

Businesses work with a lot of uncertainty involved in almost every aspect of it. Some of these uncertainties could present themselves as opportunities for sales while others could mean opportunity costs for the company. If the marketers, procurement officers, manufacturers, distributors, and sellers in the business are not prepared for these situations, it would only mean one thing: a major loss.  This is why businesses are so fixed on knowing what would likely happen in the immediate future so that they can make preparations in time. 

Why is there a need for forecasting for businesses? 

The baker down the street producing bread and buns for the twenty households in the neighborhood has very little planning to do to run his business throughout the year. He knows more roast bread is needed during the weekend, a special cake order is due next Tuesday and batches of cookies need be baked during school holidaysWith a direct view of his customers, the small-time baker can easily estimate the number of ingredients he should purchase and stock for his production next week. And even if sometimes a couple of people had to go empty-handed or if a few of his white bread is left unpurchased by the end of the day, that would not cause him lot of issues. He can easily adjust and provide on-demand. 

Often, the inability to get a good forecast leads to significant business impact, revenue is one of them. The goal of a good forecast is to get you enough confidence to make sound business decisions. Forecasts are generally not the end – but a means to an end.

forecasting for business

However, a confectionary company running a business nationwide and/or oversees would not have the same visibility to their entire customer base. Making matters worse, customers can be drawn to other options in the market based on comparable criteria such as price, discounts, promotions etc. 

On top of the end customer behavior, there can be multiple other factors that influence how the business caters to the demand. These can vary from weather conditions and the availability of the raw materials to delivery costs. If these variations are not foreseen in time and managed properly, the company will suffer large costs soon enough. Their customers will drop out, the better performing competitors will take over the market and the company’s profit margins will plunge. 

Intuitive and subjective methods of demand forecasting might seem effective for small scale businesses, but for large scale enterprises given the complexities of supply chain management, a much more scientific methodology is needed to manage the raw material acquisition, production, and logistics. 

Types of forecasting in businesses 

All businesses do some sort of forecasting with a common goal: optimally manage the supply chain, from order placement to delivery of goods. Given the complexities involved in various stages of business, there are multiple kinds of forecasts done. 

 

Market Size Forecast

– Market size forecast 

The Market Size Forecasts is done to estimate the growth trends of the target customer base in the coming months, quarters, or yearsIf the figures are projected by specific customer segment levels, the business personnel can derive insights that can help plan their budgets, production as well as the route to market better. 

Figure 1: Market Size Forecast 

Drivers of demand

– Inventory planning

This is the process of estimating the expected customer demand over a period of time in the future. While most projections are a function of recent growth trends and seasonal patterns observed over the past years, some would also look into the impact of external factors such as price changes, promotional campaigns, and competitor activities. The latter approach is known to be more complex but very dynamic and guaranteeing better predictions. Projection done way in advance will help businesses handle procurement, production, and distributions strategically. 

Figure 2: Drivers  of demand

Considerations in Inventory Planning

– Demand Forecast 

This is the process of estimating the expected customer demand over a period of time in the future. While most projections are a function of recent growth trends and seasonal patterns observed over the past years, some would also look into the impact of external factors such as price changes, promotional campaigns, and competitor activities. The latter approach is known to be more complex but very dynamic and guaranteeing better predictions. Projection done way in advance will help businesses handle procurement, production, and distributions strategically. 

Figure 3: Considerations in Inventory Planning

– Logistic and distribution management 

Companies that have accurate estimations on the demand and service requirements across their network can optimally plan how to manage their resources for logistics. With additional preparation on variabilities in the market, companies can maximize their profits on procurement and distribution. 

 

Forecasting methodologies in businesses  

Whether it is some subjective call or a scientific approach, all kinds of forecasting begin with one thing: historical data. Industry expertise and technical knowledge combined together with data is known to be the essence of reliable predictions for businesses. 

Since the data that is analyzed for this purpose almost always spans across time, they are coupled with characteristics endowed by time. Hence, the statistical methodology is recognized as Time-Series Forecasting. 

Many planners nowadays use software applications like ‘MS Excel‘Minitab or ‘SPSS’ to come up with forecasts. The ease of carrying out specific calculations together with the inbuilt functions and user-friendly features make it even more effortless to generate estimates for the variable they need to predict with such tools. 

Data analysts, on the other hand, would like to attempt more challenging and more precise approaches of forecasting using smoothing techniques like ‘Holt-Winters’ or ‘Naïve’; probabilistic time series models like ‘ARIMA’; or even much complex Machine Learning approaches like ‘Neural Networks’. 

Whats more, there is software that would carry out those complex forecasting processes without actually getting a data scientist involved! 

Whichever method is used, businesses need to continuously update their forecasts in order to adapt to the frequent changes in the market. Not only do they have to come up with flexible forecasting models, they also have to be mindful of the scale of their businesses if they need to stay on top of the competition. 

To know more about how you can do better business forecasting please reach out to us.

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