Demand Forecasting: The Art of Knowing What You Need Before You Need It

Estimated reading time: 3 minutes

Of the many tests in global manufacturing, few are as challenging as mastering the art of demand forecasting. Even some of the best in business can make a mess of it. Forecasting is a skill born out of experience, intuition, and most of all, knowledge. But what do you need to know when you’re creating an accurate demand forecast? What data is needed? Are there tools you can use? Where do you start?

Let’s start by defining a demand forecast. The forecast is a document that plans and controls inventory. It’s used to order material or product from the supplier to the customer, typically making stops along the way at the factory and warehouse. The forecast is built by the manufacturer customer service representative (CSR) taking a customer’s historical sales data and projected sales data and figuring out how much product the customer needs in stock, how much product needs to be in the warehouse, how much product needs to be in production at any given time.

While the customer’s input is important, the CSR’s own data is vital. They look at how much the customer has ordered in the past and don’t just take the customer’s word for it.

Here’s a hypothetical example:

Smart Company says it uses 500 PCBAs each month. Armed with that information and knowing that the manufacturer needs to hold components worth three months of production, Smart Company’s purchasing team stocks 1,500 diodes and resistors in the warehouse. There’s just one problem. Smart Company overestimated their usage. They only consume 200 PCBAs a month. The manufacturer only needed to stock components for 600 PCBAs in the warehouse, but now they have additional inventory for 900 PCBAs.

Not a great feeling.

But the inverse is just as bad. In fact, shortages might be even worse because it’s more difficult and expensive to get product to the customer on short notice. Raise your hand if you’ve had one or more electronic component on backorder for months on end in the past 18 months. There’s good news. Overages and shortages can be remedied, or at least mitigated, by building accurate forecasts.

10 Tips for Accurate Forecasting

1. Ask your CSR what they need from you. Make sure to get the information to them when they need it.

2. Better data means a better forecast. To get an accurate picture of your business, look at 12 months of sales data. This will give you the best idea of what you need to order and when you need it.

3. Tell your CSR of anything out of the ordinary on the horizon. If your product was just profiled in an industry publication and you anticipate a spike in sales or if you just lost a major customer, both will affect your forecast.

4. An accurate forecast is always better than a timely forecast. What do we mean? It’s better to have a correct forecast made once a month than an incorrect forecast made once a week.

5. Take heed of events that can affect the forecast. Holidays are on the calendar; everyone knows they are coming, but year after year people make the mistake of not preparing for them. Talk to your CSR and find out how early you should be ordering for Chinese New Year, Tet or any other holiday that could disrupt the flow of your products.

6. Know the lead time for your product and keep it in mind when creating your forecast.

7. If you lack experience in forecasting hire someone who has it. Work with suppliers with experience in overseas shipping.

8. Ask questions. You’re not going to be an expert at forecasting to begin with, but you can learn. Your CSR will be happy to help; there are webinars and tutorials galore. Become a student of the art of forecasting.

9. Stay vigilant! Forecasts are living documents and are easily affected by outside forces. Whether bottlenecks at the ports after the holidays, labor, or bad weather, you have to build recovery time into your forecast.

10. Schedule a regular “audit” of your account. Make sure your records and data are up-to-date. Put the upcoming holidays and suggested ‘order by’ dates on the calendar for next year (even if it’s just in pencil). Has anything changed that needs to be communicated to your CSR?

Randy Strang, vice president of Global Program Management at UPS, spent the majority of his career designing and implementing global supply chain strategies. He knows a thing or two about forecasting and several years ago suggested manufacturers ask the following questions to improve their forecast accuracy.

To read the full version of this article, which appeared in the July 2018 issue of SMT007 Magazine, click here.