How to forecast demand?

How to forecast demand? | Imperia
Imperia Article
Published: 08/3/2021

Sales forecasting is a crucial point in any organization. Without it, the future needs of customers could never be met, leading to their dissatisfaction and a lack of recurring future sales.

In the current moment, where the outbreak of COVID-19 has driven improvements in supply chains worldwide, demand forecasting for any company has become even more important. On the one hand, it can tend to increase due to the high demand for certain products/services, such as food products or home delivery services.

On the other hand, there are sectors that are declining rapidly, like textiles, automotive, and tourism, which now have a smaller share in the country's economy.

How reliable are sales forecasts?

No sales forecast can be guaranteed, no matter how sophisticated the trend analysis is. The reliability of a forecast varies depending on whether it provides overall figures or segmented figures by models, customers, or seasons. Nevertheless, sales forecasting serves to prepare sales strategies and tactics, develop budgets, plan human and technical resources, purchase materials, arrange financing, etc.

Sales forecasting generally aims to anticipate what a company can achieve and what portion of the potential market it can access (out of the total demand). For this, its economic, technical, and human capabilities are taken into account, based on the following levers:

Market size:

It is crucial to determine if there is a potential market and if it is large enough to generate total sales that exceed the day-to-day costs of the activity. Additionally, the company must be able to recover the initial investment within a reasonable timeframe.

Market accessibility:

Every market has entry barriers. Those already operating in the market have the advantage of being known and having experience in the sector. Therefore, if a company intends to enter an unexplored market, it must identify what unique attribute or specificity it can bring. The company needs to achieve a strong enough positioning to gain market share from established competitors.

Competitive analysis:

It is essential to identify any market factor that is being overlooked, in order to emphasize it and quickly gain market share. If existing companies satisfy their customers but are not offering the features that customers value the most, it is an opportunity to leverage that competitive advantage.

Market penetration rate:

It is important to understand the percentage and subtypes of consumers who might be more interested in the offering within the market. Similarly, efforts should be made to attract a group of customers that other companies have not considered as potential customers.

The challenge lies in establishing the relationship between all these levers and connecting sales forecasting from a theoretical perspective with practical application. Sales forecasting is not about making guesses; it requires analyzing trends and trying to deduce to what extent the past will influence the future. It is also necessary to identify which past results should be isolated and which will not recur in the future. Therefore, it is vital to exercise caution and consider all factors that directly influence future sales expectations.

What is the importance of sales forecasts?

Regardless of their accuracy, making sales forecasts is a necessity. Without reasonable sales predictions, there is little that can be done in the business world. Sales forecasts are the result of considerable efforts and the application of complex and constantly evolving mathematical techniques. Additionally, there are increasing forces within businesses that predict how things will be, and they need to be coordinated at the managerial level. Finally, sales managers are becoming more involved, whether they like it or not.

What methodologies exist for making demand forecasts?

One approach is to employ statistical analysis of trends, which assumes that the future is already more or less written in the past and that we are capable of detecting it.

The accuracy of trend analysis is intrinsically tied to how many future variable factors we can ensure. In other words, the more knowledge we have about the market and the factors that cause variations in it, the more accurate the forecast will be. This also increases the chances of entering the market correctly and with strength.

However, this does not necessarily mean that a multivariable system (considering multiple factors) is always better than a univariable one (considering only historical trends), although in most cases it is. It is evident that the more factors we analyze, the more accurate the result will be. However, it is necessary to analyze those aspects that truly affect the market and define them. Otherwise, there will be flaws to address.

Intuitive analysis is also an option: the opinions of colleagues, the evolution of the economy, competitors, etc. It involves studying trends with an open mind. Combining these two methodologies and obtaining a final result that incorporates both analyses requires the collaboration and participation of all those involved.

Sales forecasts based on opinion surveys are not inherently accurate, but they become more reliable when the number of respondents and their experience are higher. The direct opinion of consumers should always be taken into account.

It is crucial to understand that the overall sales forecast will determine the objectives set for our salespeople. If the forecasts are exaggerated, the motivation of the sales team will plummet due to the perceived impossibility of achieving them.

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