Importance of Demand Forecasting in SCM

Demand Forecasting forms a very important component in the supply chain process and drives all supply chain related decisions. Demand forecasting is a process by which sales data is used to provide an estimate of the purchasing that the customer will do in the future.

Demand Forecasting-Impact on Supply Chain Management:
  • Improves supplier relations and purchasing terms by driving purchase plans to being released on time to suppliers. This leads to improved supplier relationships and negotiation of better terms.
  • Aides better scheduling of production based on inventory levels, raw material availability and expected orders. In effect better capacity utilisation.
  • Proper Demand Forecasting reduces the Bull Whip Effect and leads to optimal inventory levels and reduction in stock-out and over-stocked situations.
  • For businesses with wide distribution networks it can result in balanced inventory across the network and facilitates better and more favourable terms with transporters.
  • All of the above in turn result in better metrics for customer service like on-time delivery, on-time-in-full etc.
  • Long range Demand Forecasting helps in synchronising all of the above to support better new product launches.

In short Demand Forecasting can facilitate performance management with targets for Sales, Purchase, Production, Logistics and Finance. It also plays a crucial role in building budgets by estimating costs and expected revenue. It helps in fulfilling business objectives and targets.

The 3 main roles of Demand Forecasting in Supply Chain Management are:
  1. It is the most significant basis for hypothesis for strategic expansion planning, budgeting, risk assessment and mitigation, not to mention its role in turnover, profit margins and expenses etc.
  2. It can be pivotal to all processes like raw material planning, logistics(inbound) and manufacturing and helps in optimising capacity utilisation and inventory.
  3. Can be used to drive all the pull-processes of supply chain like order management, distribution and logistics. This helps increase service levels.
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