Importance for Forecasting in Supply Chain Management

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Forecasting allows companies to keep materials and products on hand to meet customer demand.
Forecasting allows companies to keep materials and products on hand to meet customer demand. (Image: Jupiterimages/Photos.com/Getty Images)

Forecasting in business allows companies to make accurate predictions regarding customer demand based on past data. Businesses can use forecasting to estimate sales, demand, the lifetime value of a customer and the supply chain ordering demands of the company. Supply chain management relies on forecasting data to manage the flow of inventory through the organization.

Accurate Inventory Levels

Accuracy in sales forecasting allows supply chain managers to make accurate predictions in the level of inventory required to meet customer demand. An organization that practices lean philosophies must have the ability to make accurate predictions on the level of inventory necessary to produce products. Lean management requires the company to keep the lowest level of inventory in stock to meet the demand. With lower levels of inventory, the accuracy of the amount stored on hand becomes even more important. Inaccurate forecasts can result in overstocking or stock outs. Purchasing, planning and production rely on accurate inventory levels.

Timing of Deliveries

Forecasting sales help a company predict the timing of increases or decreases in inventory needs. For example, forecasting may use historical sales data to show an increase in demand during specific times of the year. The company can prepare to increase the inventory levels during those times. Likewise, the company can plan to decrease inventory levels during times of forecasted demand decreases.

Improved Customer Satisfaction

The accuracy of the inventory levels established through sales forecasting prevents stock outs or overstocking inventory. Stock outs can lead to late deliveries and decreasing customer satisfaction. Consistent late deliveries may drive customers to competitors, which decreases sales for the organization as well.

Cost Savings

Forecasting that leads to accuracy in purchasing, planning and inventory levels can also provide savings to the organization. Spending on excessive inventory prevents the organization from making investments in the company that could lead to growth and development. Smaller quantities of inventory allow the company to remain flexible and quickly respond to changes in customer demand.

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