Demand forecasting is the procedure of predicting future customer demand for a product or service. Demand forecasting can be accomplished in three ways: top-down, bottom-up, and middle-out. In each approach, the goal is to analyze historical data and make predictions.
However, there are a lot of techniques to do this, and some methods are more effective than others. Through this blog, we will explore how inaccurate demand forecasts affect operation planning in the supply chain.
What is a Demand Forecast?
Demand forecasting estimates future customer demand over a predetermined period using historical data and other information.
For managers to make wise decisions about pricing, business growth strategies, and market potential, effective demand forecasting provides valuable information about their potential in both their current market and other markets.
Without demand forecasting, companies risk making wrong decisions about their products and target markets. Wrong choices can significantly affect inventory maintenance costs, customer satisfaction, supply chain management, and profitability.
What are the Causes of Demand Forecasting Errors?
Distributors may believe that the same demand for the same goods will occur simultaneously and in the same amount every year when planning demand. This complacency can lead to forecast errors, which are detrimental to the business and its clients.
Reducing forecast error is even more crucial when an external shock significantly shifts demand, like the global COVID-19 pandemic. Distributors can no longer solely rely on past sales to predict future ones.
The gap between expected and actual demand is known as the forecast error. The impact on your money increases with the size of the difference.
The Effects of Demand Forecasting Errors on Operation Planning in Supply Chain
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Effect 1: Complexity in Operations Planning
Operations planning involves the management of an organization's resources to achieve desired output levels. Operations planning requires accurate forecasting of demand, supply, and other related variables. The success of operations planning depends on the accuracy of demand and supply forecasts. However, demand forecasting errors will always exist, even with sophisticated supply chain management techniques.
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Effect 2: Poor Performance in Forecasting Demand
Subtle changes can occur, like a break in the supply chain. Or they could be significant, like when new laws drastically alter the playing field. Over-reliance on outdated data is a typical cause of forecasting failure because historical patterns can diverge from current events.
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Effect 3: Increased Variability in Supply Levels
Variability in the context of the Supply Chain refers to the degree of irregularity or volatility in the movement of materials from one end to the other.
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Effect 4: Change in Scheduling of Operations
The order of operations gets specified on the production route. The scheduling sets aside space for the resource groups based on the defined operation times for the production route.
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