Why Is Forecasting Important in Supply Chain?

Manufacturers and retailers are interdependent like the links in a chain. Manufacturers are similarly linked with their suppliers who provide raw materials for the goods they produce. Hence the name: supply chain. Just as a chain is only as strong as its weakest link, so is a supply chain. Supply chain forecasting (SFC) is the use of historical data to predict future requirements. It requires analytical skills and experience. SFC is important to the global supply chain for a number of reasons.

Why Is Forecasting Important in Supply Chain?

Planning ahead

There are two requirements that supply chain managers try to predict. The first is the demand for their products. These predictions are based on the month on month, and year on year sales figures. The second prediction is the ability to meet the demand.

Though it is not a perfect science and subject to unforeseen circumstances, supply chain managers use SFC to make predictions well in advance. Finance teams are able to use these accurate forecasts to predict cash flow requirements. The product demand predictions can also be shared with manufacturers who in turn can then forecast future production. The chain becomes stronger when every piece of new sales data is added to the analysis.

Supply and Demand

Demand Fluctuates

The greatest advantage of supply chain forecasting is that it prevents a company from being under-stocked or over-stocked. The best products to sell are everyday, consumable products that are recession-proof. These types of products are still in demand regardless of circumstances. However, other products rely on fluctuating demand. Demand can fluctuate as it can be seasonal or aligned with particular events.

That’s what makes historical data relevant as it will provide a sense of seasonal demand expectations. Demand is also subject to macro and microeconomic performance in a country or region, booms, and busts, growth, and recession. More jobs create more demand. Conversely, layoffs diminish demand. Unforeseen circumstances like natural disasters also affect demand in the short term and in some cases, long term. That is why supply chain managers apply the Just-In-Time (JIT) principle when ordering stock. This allows for time to re-evaluate forecasting models, forecasting accuracy, and adjust order volumes accordingly.

Supply Fluctuates

Supply can fluctuate depending on the availability and price of raw materials for manufacturers. Scarcity drives prices up. An increase in the cost of production will be passed to the retailer. In turn, the retailer will then increase the sales price of goods to the consumer. As a result of price increases, demand typically suffers. Therefore, retailers must understand the historical ebb and flow of the availability and pricing of the raw materials used in their products. This supply chain strategy allows retailers to bulk order at cheaper prices, and ahead of potential or predictable material shortages.

Competitive advantage

SCF allows supply chain managers to inform the marketing and sales departments about stock availability and future pricing. These departments can then plan promotions and discounted prices, which create demand. Working together in this way will allow a company to flood the market with lower-priced goods and thereby gain market share.

Additional Reading: Supply Chain Forecasting Methods: Preventing Storms and Predicting Trends

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