Why Is Demand Forecasting Important?

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Demanding forecasting is the use of data and analytics to predict as precisely as possible the customer demand for a specific period. Accurate demand forecasting is important to satisfy customers, minimize inventory costs and optimize cash flow.

Satisfy Customers

Meeting customer expectations for product availability is primary in demand forecasting. If you underestimate or fail to provide the amount of inventory your customers want, you risk losing them to competitors, according to PricewaterhouseCoopers. You could even lose a previously loyal customer for the long term by consistently failing to deliver.

Minimize Inventory Costs

Minimizing inventory costs come in a close second in demand forecasting. When you accurately forecast demand, you only need space and people to manage the inventory your customers want in the short term. In contrast, poorly projected inventory levels leads to a number of related costs, including:

  • Extra space: The more inventory you hold, the more building space you need to hold it. This problem is especially problematic for retailers that emphasize sales turnover per square footage. Your utilities expenses are also typically higher.
  • Extra people: The more excess, the more people you need to move it and manage it.
  • Waste: Throwing out perished items or obsolete inventory, or marking it down to clear it out, are among the other wastes that result from poor demand forecasting.

Optimize Cash Flow

Accurate demand forecasting has a significant impact on your efficient use of working capital and preservation of cash flow, according to Terra Technology. If you buy too much inventory to meet current demand, you expend cash that you could put to better uses until demand picks up. Instead, your cash is tied up paying for inventory that sits in a storage room. Being hamstrung on cash flow stresses your company's ability to make debt payments and inhibits your investments in growth and development.

Warning

  • Underestimating demand also deters your ability to optimize revenue, which has a negative effect on bottom-line profits.

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