Demand forecasting gives businesses a look into the future. It allows them to preempt where things are going, which in turn guides the business decisions they make today. Everything from seasonality to broader economic trends can impact demand, and modern businesses have many tools to help them make accurate predictions.
Modern Demand Forecasting
There are two types of analysis that modern businesses focus on when forecasting demand: quantitative and qualitative. Quantitative forecasting is numbers-based. It refers to using historical data to predict how the future may look, and this is an ideal approach for table markets with consistent patterns.
On the other hand, qualitative forecasting relies more on expert opinions or market research, and this is useful in volatile markets or when launching new products. These two approaches can also work together. Combining the hard data from quantitative analysis with more interpretation-based qualitative analysis can help to give a strong understanding of the overall picture.
Seasonality or cyclical trends are also taken into account through time series analysis, a popular quantitative method. Essentially, this is a method where you look at the trends of the past on the assumption that the market will continue to follow the same patterns.
Causal forecasting adds another layer to the process by considering external factors that could impact demand. Changes in competition, societal trends, and legislation are all external factors that could impact your business. Collectively, all of these different types of analysis are used to predict future demand.
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Navigating the Economic Climate
The current state of the economy is another external factor that needs attention. It’s all well and good to have a strong understanding of your specific market, but sometimes, external forces are much more powerful. As an example, an economic downturn could render historical seasonal trends irrelevant.
One way businesses can navigate the economic climate is through futures contracts. An instrument like the SP 500 futures provides insight into how investors see the future health of the US economy. If it looks as though things are headed for a downturn, a business could lower its demand expectations and not purchase as much inventory.
Similarly, a business might decide to delay inventory purchases altogether if there is a bearish sentiment, with the idea that manufacturers and suppliers may lower prices as the economy slows down. There are a lot of different ways a business can use futures to help predict demand and guide business decisions.
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Challenges of Demand Forecasting
Like all future predictions, demand forecasting is not without its challenges. Very simple mistakes can often have big impacts, too. Let’s say a business was basing its analysis on data that was either low quality or outdated. This could then lead to inaccurate forecasts and have many negative second and third-order effects.
Relying too heavily on one single forecasting technique is something else that can pose problems. All data analysis techniques have strengths and weaknesses, so using only one can leave you blind to potential problems that other techniques could reveal.
Forecasting is non-negotiable in modern business. Businesses must be flexible and continually refine their forecasting methods to make sure they are seeing the complete picture. Getting these decisions right could be the difference between success and failure.
