Forecasting is an imperfect science, but it is also a necessity for most businesses. That’s particularly true when it comes to supply chain management. Proper forecasting helps ensure you have enough supply on hand to satisfy demand. Business analysts use supply chain management systems and other tools to forecast demand weeks and months in advance.
Forecasting demand, and coordinating activities to meet demand, are full-time jobs. Companies with global operations use sophisticated software and systems to forecast demand, but your small business can forecast supply chain needs using simple techniques. The methods of moving averages and exponential smoothing try to smooth out demand to allow for seasonality in the results.
With moving averages, you drop the oldest sales numbers and add newer numbers, making the average move over time. For example, to calculate sales over a four-week moving average, add weeks two through five, drop the sales from week one and divide by four. Exponential smoothing is similar to moving averages except that older data receives progressively less weight and new data receives greater weight. When there is definitive trend, however, the moving averages and exponential smoothing forecasts might lag behind the trend.
If your business overestimates demand, it ends up with more inventory than it needs. This can increase your labor and storage costs if workers have to move this inventory to another storage facility to make way for new inventory. If your business supplies perishable goods, you might incur a further loss due to deterioration of unsold inventory. In such a case, you might need to sell inventory at a discount, which reduces your company’s profit margins and income.
Suppose you suddenly find yourself inundated with large orders. This is a nice problem to have – if you have enough inventory to meet demand. It’s not so nice if you didn’t forecast how much supply you would need and end up with an inventory shortage. In such a case, some customers might take their business elsewhere. One option is to make a large, last-minute rush order, but this usually leads to much higher supplier prices, which reduces your profit margins and net income.
Hence, it does not necessarily mean forecasting requires a software. Even with the easiest of methods like mentioned above, forecasting can be done in an effective manner.