What Does Demand Forecasting Mean?
Demand forecasting is an aspect of business analytics that focuses on predicting the level of need for a specific product or service in the future.
Demand forecasts can be either subjective or objective. Subjective forecasts, which are based on opinions and educated guesses, are useful for predicting demand when products and services are new and historical data is not available. Objective forecasts, on the other hand, are entirely quantitative. This type of forecast uses historical data—as well as statistical, data mining and machine learning software tools—to quantify forecasts with mathematical scores.
To handle the increasing variety and complexity of demand forecasts, three basic types of demand forecasting have developed in recent years:
- Qualitative demand forecasting predicts future sales using the opinions and instincts of potential customers, sellers and industry experts.
- Time series demand forecasting relies on historical data and assumes demand trends will not vary significantly year over year.
Casual demand forecasting takes external economic indicators into account and uses regression models to look for relationships between dependent and independent variables.
Demand forecasting plays an important role in supply chain management, resource allocation, logistics, inventory management and staffing. Inaccurate demand forecasts can lead to bloated inventory levels, significant cost increases, poor customer satisfaction and a loss of competitive advantage.