Forecasting Demand vs Sales

One should understand the fact that Demand forecast is not same as Sales forecast and that by utilizing demand forecast rather than sales forecast for planning inventory level can reduce the risk of losing sales by matching the stock with forecasted demand.

On one hand where sales forecast is critical for any retailer for running their business, to make buying decisions and planning operations, it is also important for financial planning. But when retailers follow sales forecast they are not able to meet the actual demand of their merchandise, since they didn’t had the right inventory to meet the consumer demand resulting in lost sales. Also excess inventory for not required item increases the inventory carrying cost and hence eating out your profit.

Planning done based on sales forecast doesn’t capture effects of stocking, where in case of stock out the incoming demand is not converted into sales. Demand of item also decreases due of improper positioning/display of item in shelf; say a particular model of mobile not displayed in shelf might result in low sales of that model. Also in an instance where a competitor launches a new product with similar attributes or in case where there is an event planned to occur for promoting your market, the demand of your item will be impacted. Hence these factors need to be considered when planning is done and should be reflected in forecasted demand.

Forecasting Demand
Demand forecast is more than sales as it not merely represents relation between product and quantity, but also represents effects of pricing, merchandising, promotions, competitor events and other casual factors. Demand forecast includes input from partners, customers and other stakeholders to consider the effect of events and operations outside your territory of planning.

Promotional events effects the demand to a great extent and thus demand planners must take it’s effect on sales while planning. Also various market scenarios impact the demand curve and hence the product sale, proactive response is required for being prepared with proper inventory to exploit the market conditions.

Forecasting Methodology
-Market response based
Business decisions impact in form of market response should be simulated and studied before actual implementations. Ex effect of price change on demand should be analyzed considering price and demand elasticity. Also the impact of market conditions such as display arrangement, competitive offerings and seasonal demand need to be observed and absorbed in demand forecasting methodology.
-Time series based
Time series methods utilize historic happenings and events for future predictions. Based on business conditions suitable method is selected.
Example:
- Holt’s Method : fmcg or basic or staple merchandise
- Winter’s Method : seasonal merchandise
-Croston’s Method : merchandise with lesser turnover
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There are more than ten such methods which best suit a particular condition. All these methods learn from historic similar events and model seasonal variation, trend growth or decay, and lifecycle flow.

Sensing Demand
Since time series uses demand history the best pick for gathering this data is from Point Of Sale which is the best source of actual sales information. Adjustments on sales data should be made for full-filing the effect of loss of sales, by adding those extra quantities which would have got sold if it was in stock. Historical demand and related information should be collected from various reliable sources.

Shaping Demand
With knowledge of impact of various promotional and pricing strategies, you will be able to better make decisions in selecting price and promotions. You can align your business objectives with tactical planning options such as what promotions should be launched, when to launch them, in what price band product should be sold etc. Also with information of promotions plan the inventory stocking should be planned to meet that extra demand of right product, thus minimizing over stocks and stock out conditions.

Demand Driven Planning & Execution
The forecasted demand should be utilized by various stakeholders for further planning and execution purpose, to practically operate the demand plan. Business rules and operations should be enacted on for executing the plan so that the forecasted demand is actually converted into sales. Demand intelligence when not executed into the business will not see any fruits too. On the other hand when the same demand intelligence is utilized by the marketing, manufacturing, suppliers and partners for pricing decisions, promotion tactics, inventory planning and stocking purposes, then this all drives to result into intelligent Sales plan.