By: Aaron Rubin, Founder & CEO at ShipHero
While seeing into the future of your supply chain may be impossible, predicting what may happen can be estimated by looking at the past. When a company wants to know how their finances, supply chain, and marketing may perform in the future, they often examine how things went in previous years.
Historical business data can help you successfully estimate things like seasonal trends and product success. One of the processes for looking at this data in the supply chain world is called demand forecasting.
What is demand forecasting?
Demand forecasting is the practice of looking at a company’s historical data for things such as finances, marketing, and supply to understand likely future trends. Demand forecasting methods end up within one of three categories, either qualitative forecasting, time-series analysis, or casual models. Forecasting can include looking at different lengths of time, using statistical methods, or looking at external influences on your future business.
Importance of demand forecasting for ecommerce
Businesses use forecasting in many ways to help gain an advantage over the competition. From inventory and supply chain management to cash flow and spend, there are many areas where you can use demand forecasting within your planning.
Preparing your budget
When preparing your budget, demand forecasting helps you get a glimpse into your company’s needs during an upcoming season or year. By knowing positive (and negative) trends, your business is better able to reduce risk and plan through data-backed decision-making. Whether it be inventory needs, staffing, or cash flow, you will be able to estimate your budget more accurately when forecasting.
For example, in the ecommerce industry, the holiday shopping season is one of the busiest times of the year. Ecommerce merchants use past holiday shopping data to forecast how much inventory they’ll need for the holiday season.
Planning and scheduling production
One area that demand forecasting is extremely useful for is production management. Through analysis of your past seasonal demand, your company can better prepare for needed production before running out. Ramping up production only when needed means customers get items when they want them, and you don’t have to put in guesswork and waste money by overproducing.
Warehouse stock needs can be hard to predict, which is why demand forecasting for inventory can help identify your future needs. Looking at inventory needs of the past and rising or falling demand trends, you can better gauge how much stock you will need throughout the year. Like production, having enough to continue providing services and goods is necessary, while having too much inventory can cost you unnecessary storage fees.
Developing a pricing strategy
External and internal forecasting are two of the many ways to garner insight into the market and potential areas of business growth. Looking at the competition and trends in the historical market, you can better price your items advantageously in relation to rising and falling trends.
The types of demand forecasting
There are different types of demand forecasting methods, all using unique forecasting techniques and statistical methods to examine potential future demand. Understanding which demand forecasting you should use is vital to gauge possible trends and future customer demand accurately.
Passive demand forecasting
Passive forecasting is the most straightforward when looking for a basic, non-nuanced prediction. In this type of forecasting, you look at historical data from your sales in the past to estimate future sales. Unfortunately, this model doesn’t take into account variables, such as retailers that will have seasonal fluctuations. Passive forecasting models often can only be accurately used for analytics with businesses that are highly steady in sales and have robust historical sales data.
Active demand forecasting
The active demand model is most commonly used for businesses that are either very new or have aggressive growth within their marketing campaigns. Because your company may not have the past sales data to have accurate demand forecasts, active forecasting often looks at other resources such as market research, economic data, and supply chain management data.
In the short-term forecast method, insights such as seasonal demand, cyclical patterns, and other similar anomalies are included in the trend projection, making this a great way to examine your inventory management and supply chain. You can also use short-term forecasts to think about new products and their performance. The time span that the short-term method looks at is from three to 12 months.
Compared to short-term projections, long-term forecasting looks quite a bit further out from one to four years into the future. Rather than thinking about recent data sets and sales trends, future projections look at long-term demand, potential business decisions, business growth planning, and marketing planning.
External macro forecasting
When examining your company’s goals, sometimes you will want to look at how outside forces may affect your forecast accuracy and sales channels. Whether you look at competitor and market trends or other outside factors, external macro forecasting can help you look at some complex factors that may affect your goals. Using external forecasting is excellent if you have concerns about your supply chain, are thinking about expansion, or are concerned about risk mitigation.
Internal business forecasting
If you are looking to create accurate forecasts on your internal operations, such as your sales, a specific product, or a manufacturing division, internal business forecasting is ideal. Internal forecasting is excellent if you need an expert opinion on how things such as your warehouse distribution, purchases, cash flow, or profit margins are trending.
How your ecommerce business benefits from demand forecasting
Examining your current trends and predicting future possibilities makes demand forecasting important for any company. Even just using the most straightforward methods can help a company of any size gain insight into how to follow their goals and which goals to set.
Reveal seasonal trends
Using methods such as short-term forecasting, you can closely examine seasonal trends around your products. By predicting and understanding your customer demand spikes, you can better know how to handle your supply chain and inventory needs. Knowing your seasonal trends can also reveal markets and niches you have yet to tap into during your slower months.
Rationalize your cash flow
Examining your past cash flow and comparing it to future predictions can help you better understand where your cash flow is going and how much you will have to invest in the future. Having a better understanding of your potential financial health in the future can help you make crucial decisions and goals.
Plan your supply chain
Looking at demand trends, especially seasonal spikes, can help you better plan your supply chain needs. Rather than running out of inventory during your peak seasons, you can invest in more from your suppliers before these higher-demand periods. Knowing when your lulls are in demand for certain products, you can better plan your marketing strategy and only stock as much inventory as is needed during these periods.
Understand how outside factors will influence your sales
External macro forecasting gives you an in-depth look at how outside factors can influence your product performance, sales, marketing, and supply chain. As you understand how different risks may harm your suppliers, products, or business, you can appropriately prepare for changes in external markets to better protect your company. Looking at outside influences can also help your company become more flexible and robust to react to these changes and take advantage of them quicker.
Prepare for the future
Predictions are a great way to gather data about potential future trends for your company. From threats that you need to prepare for to new markets you should break into, forecasts can help your company make big moves for the future. Whether changing your marketing strategies or reinforcing your supply chain, different forecasts will help you make decisions across your business to bring future success.
Make demand forecasting easy with ShipHero
ShipHero makes demand forecasting simple, helping you easily gain insight into fulfillment operations, products, shipments, and returns. Our data reporting helps you see everything going on in your warehouse operations to help you make educated and data-backed decisions.
We facilitate day-to-day actionable reporting to help keep your team organized while streamlining the process, actionable shipping reporting, and individual team member stats. ShipHero tracks:
- How quickly products are selling
- Which items are slow-moving
- How many days of inventory you have until you are expected to run out (based on SKU velocity)
- Where your customers are and where you’re shipping from (with the ability to compare current and ideal distribution)
- Profitability by order, how much you are spending on shipping, and the average order amount that customers are spending at your store
- Daily order status and performance
- How your current demand compares to previous time periods
- How your sales are affected by different seasons and months
- A breakdown of transit times and average cart value by shipping method (to see which shipping methods are most attractive to your customers)
- How much your customers are spending by shipping method (to help you test different pricing strategies)
- How much inventory you were holding at any ShipHero fulfillment centers at any point in the past
- Your best selling items and the percentage of your business they account for (and how they are performing compared to other periods)
- How many orders are held up, where they are located, and which items are driving a backlog (so you can prioritize the replenishment of stock that are affecting sales)
Demand forecasting and data analysis help your company make big decisions to give you an edge over the competition. From inventory analysis to marketing initiatives, your company will be able to reduce risks for new endeavors and make profitable decisions. Programs like ShipHero can help.
Schedule a meeting today with our experts to learn more about our WMS software built for ecommerce brands & 3PLs looking to run their best warehouse and how ShipHero works to ensure that organizations invest in the solutions that match their needs, to improve productivity, revenue, and success.
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Aaron Rubin, Founder & CEO
About the author: Aaron Rubin is the Founder & CEO of ShipHero. He is responsible for planning and executing the overall vision and strategy of the organization. Rubin’s greatest strengths are leadership, change management, strategic planning and a passion for progression. He is known for having his finger on the pulse of ShipHero’s major initiatives, his entrepreneurial spirit, and keen business acumen. His leadership of ShipHero is grounded in providing excellent customer service that drives improved business operations. His passion for ShipHero comes from the culture and his ability to have an impact on the lives of employees, customers, partners, and investors.