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Why Is Demand Forecasting Important?

  Reviewed by: Michelle Seidel, B.Sc., LL.B., MBA
  Written by: Neil Kokemuller      Updated February 05, 2019

Part of serving customers effectively is learning how to predict what they will want, how much of it and when, in order to serve customers well while still making a profit. Otherwise known as demand forecasting, this process uses data and analytics to predict as precisely as possible the customer demand for a specific period in order to satisfy customers, minimize inventory costs and optimize cash flow. When cash flow is good, so are our salaries, and we can also increase our impact on the community by offering additional or better paying jobs, all of which contribute to our reputation and draw in potential customers.

Satisfying Your 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 Netstock. You could even lose a previously loyal customer for the long term by consistently failing to deliver.

In contrast, when customers are satisfied with you, your product and your service, they are likely to return and bring their friends. Satisfied customers write positive reviews on social media that draw in additional customers, and continue to shop with you for the long haul. Satisfied customers contribute to your growth rate, which contributes to your bottom line and your positive impact in the community.

Minimizing Inventory Costs

While customer satisfaction is the number one goal in demand forecasting, minimizing inventory costs is a close second. When you accurately forecast demand, you only need space and people to manage the inventory your customers want in the short term. This frees your business up to enjoy increased profits, as well as focus on product development and sustainable job creation.

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.
  • Unsustainable Jobs: The more excess, the more people you need to move it and manage it. When your demand forecast is off-base, you lose your reputation as a reliable job creator and become more well known for laying people off. 
  • 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.There's nothing more disheartening than seeing your hard earned investment flushed down the drain when you have to dispose of expired products that customers cannot safely use. 

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Optimizing 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.

About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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