What Is Supply Chain Forecasting? Let’s Break It Down
by Lori Boyer
Supply chain forecasting might sound boring, but it is a super important part of a successful business. In fact, McKinsey found that a 10-20% improvement in forecast accuracy could lead to a 5% reduction in inventory costs and a 2-3% increase in revenue. Those numbers can add up quickly! Taking advantage of your business smarts (and a little bit of data magic) to figure out what’s coming next—whether it’s demand, supply, or prices—can be the difference between success and failure. It’s like having a cheat sheet for the future that helps you stay ahead and keep your shelves stocked just right. Forecasting in supply chain management plays a crucial role in keeping your operations running smoothly.
When done right, supply chain forecasting helps businesses dodge big problems like running out of stock (hello, frustrated customers) or having way too much stuff sitting around (hello, wasted money). The goal? Keep things flowing smoothly and keep your customers happy! With effective supply chain forecasting, you’re not just guessing—you’re preparing for the future with precision.
Types of supply chain forecasting
There are a few different ways to look into that supply chain forecasting crystal ball:
- Demand forecasting: This is all about guessing what your customers will want and when. By knowing what’s coming, you can make sure you’ve got enough product on hand to keep everyone happy, without overdoing it.
- Example: Imagine you run an online store that sells trendy sneakers. If you know that sales usually spike in December thanks to holiday shopping, you can plan ahead, stocking up on the latest styles to meet demand. No one wants to see a “sold out” message right when they’re ready to buy the perfect gift!
- Supply forecasting: Here’s where you predict how much product or raw material you’ll actually be able to get from your suppliers. This helps you avoid any nasty surprises, like delays or shortages that could throw a wrench in your plans.
- Example: Let’s say you sell handmade candles, and your wax supplier is located in a region prone to seasonal storms. By using supply chain forecasting to predict potential supply issues during storm season, you can stock up on extra wax beforehand and avoid any disruptions in your production schedule when the storms hit.
- Price forecasting: Prices can change faster than the weather! Supply chain forecasting helps you get ahead of any potential spikes or drops in costs, so you can make smarter buying decisions and save some cash.
- Example: If you’re a business that buys bulk packaging materials, you might notice that prices for cardboard tend to go up during certain times of the year. With supply chain forecasting, you can buy your materials before the price hike, saving money and protecting your bottom line.
Which is most important?
When it comes down to it, demand forecasting usually takes the top spot because it has the biggest impact on keeping your customers happy and your revenue flowing. If you can nail demand predictions, everything else—like supply and price forecasting—falls into place. You’ll know what to order and when, plus you can manage your costs better. That said, if you’re in a market where supply chain disruptions are the norm (looking at you, tech and manufacturing), supply chain forecasting might edge you ahead so you’re always ready for whatever curveballs come your way. By improving forecasting in supply chain management, companies can avoid stockouts and overstock issues, ensuring smooth operations.
What are the benefits of accurate supply chain forecasting?
Nailing your supply chain forecasting can work wonders for your business. With accurate forecasting, you can achieve inventory optimization, keeping your stock levels just right—not too much, not too little. It’s like Goldilocks, but for your business. On top of that, you’ll experience cost reduction by avoiding the pitfalls of overordering or underordering, which means fewer surprise expenses like paying for extra storage or scrambling to restock at the last minute.
And let’s not forget about improved customer satisfaction. When your supply chain forecasting is on point, you’ll have fewer out-of-stock items and faster deliveries, which makes customers happy (and who doesn’t want that?). By hitting these three key benefits, your business will be running smoothly, keeping both your customers and your bottom line in great shape. Forecasting supply chain trends can give businesses a competitive edge by helping them stay ahead of demand fluctuations and supply challenges.
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What are the most common forecasting methods in supply chain?
When it comes to forecasting in supply chain management, businesses can choose from a variety of supply chain forecasting methods to predict future trends. Some are more about gut feeling (well, expert opinions), while others rely on crunching the numbers. Let’s break them down:
Qualitative methods (expert opinions):
- Historical analysis: This is like looking into the past to predict the future. By reviewing past sales, demand, or market trends, you get a better idea of what to expect. It’s like studying history so you don’t repeat mistakes—or miss out on opportunities.
- Market research: Ask the people. Market research involves gathering feedback from customers, surveys, or reports to spot potential shifts in demand. This method is all about listening to what people want before they even know they want it!
- Internal analysis: Dig into your company’s data—whether it's sales records or customer feedback—to predict what’s coming next.
- Delphi method: This method gathers opinions from a panel of experts to reach a consensus on future forecasts. Think of it as a brainstorming session with people who really know their stuff.
- Panel consensus: Similar to the Delphi Method but a bit less formal. Experts discuss and debate their predictions in a more open format, bringing together a group to share insights.
Quantitative methods (the old number crunching):
- Moving average: This method averages out past data points to smooth out any wild fluctuations and give you a clearer picture of the trend. For example, if sales data from the last three months shows a steady increase, the moving average method helps you predict continued growth in the next quarter.
- Exponential smoothing: Like the moving average, but with a twist. It gives more weight to recent data, assuming that the most recent trends are more relevant than older data. In this case, if a product’s popularity has skyrocketed in the last two weeks, exponential smoothing will emphasize that surge more than the data from a slower month.
- Regression analysis: This one looks at the relationship between different factors to see how a change in one might impact the other. You can use regression analysis to forecast how a discount on your product could drive sales—or if raising prices might reduce demand.
- Adaptive smoothing: The cool, flexible sibling of exponential smoothing. This method adapts to new trends in real time. If demand for your product fluctuates frequently, adaptive smoothing can help make more precise forecasts by continuously adapting to new patterns.
- Life cycle modeling: Products go through phases—from launch to growth, maturity, and decline. Life cycle modeling helps you predict how demand will change at each stage. A new product launch will likely see slow initial growth, rapid uptake during maturity, and a gradual decline as the market becomes saturated.
- ARIMA (autoregressive integrated moving average): For the data geeks out there, ARIMA analyzes time series data to predict long-term trends.
- MAPA (multiple aggregation prediction algorithm): This method takes time series data and breaks it into multiple layers to give you more accurate predictions over different timeframes. This is perfect for planning around both short-term spikes (hello, Black Friday!) and long-term trends.
Hybrid methods:
- Hybrid approaches: Why choose one when you can mix and match? Many businesses combine qualitative and quantitative methods to get a fuller picture of what’s coming. By blending expert insights with hard data, they can create more accurate and well-rounded forecasts.
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Challenges in supply chain forecasting
While supply chain forecasting can do wonders for your business, it’s not without its challenges. Watch out for these common hurdles that can trip you up if you’re not careful:
- Stockouts or overstock: One of the biggest challenges is finding that balance between having too much or too little inventory. Stockouts leave customers frustrated, while overstock ties up capital and storage space. Supply chain forecasting helps strike that perfect balance.
- Poor customer loyalty: If you consistently fail to meet customer demand due to inaccurate forecasts, your customers might start shopping elsewhere.
- Higher costs due to inaccurate forecasting: Poor forecasting can result in extra costs like emergency shipments, overtime labor, or excess storage fees. You might have to pay extra to rush-deliver products that weren’t ordered in time or to store unsold goods that didn’t move as expected.
- Changing regulations: New laws or rules can pop up unexpectedly, affecting your ability to forecast supply chain needs accurately.
- Return policies: Increased returns (especially with online shopping) can mess with forecasts by skewing actual demand numbers.
- Trends: It’s tough to predict what’s going to be trendy and how long the trend will last. Remember fidget spinners? Huge one minute, forgotten the next. If you over-forecast trendy products, you might end up with a warehouse full of outdated items.
- Seasonal products: Predicting demand for seasonal products can be tricky, especially when external factors like weather or holiday shopping habits change unexpectedly. You might forecast heavy demand for winter coats in December, but an unseasonably warm winter could leave you with a ton of unsold inventory.
- Production or supplier turnaround time: If your suppliers can’t deliver products on time, even the best forecast won’t save you. There may be times when you forecast accurately, but if your supplier takes too long to get the product to you, you’re still going to have frustrated customers.
- Siloed or skewed data: Inaccurate or incomplete data can lead to poor forecasts. If different teams aren’t sharing information, your forecast might be way off.
Strategies for effective supply chain forecasting
Even with all the challenges, some solid strategies can help make supply chain forecasting a lot easier. One big one is setting up a control tower. Think of it as air traffic control for your supply chain—it gives you a 360-degree view of everything, from suppliers to warehouses to shipments. When something goes off track, you can quickly adjust and get things back on course.
Then there’s AI, and it’s a total game-changer. AI can sift through mountains of data and spot patterns that people might miss. It can predict when demand might spike so you’re not caught off guard. Picture a sudden cold snap driving up sales of winter gear—AI sees that coming. Plus, advanced analytics let you dive even deeper into your data, looking at customer behavior and market trends to not only see what’s happening but also understand why. That’s the key to making smarter forecasts, like figuring out why a certain product suddenly took off or why sales dropped.
And finally, collaboration is a must. Forecasting works best when everyone’s on the same page. When sales, marketing, and ops teams share data and insights, your forecasts get way more accurate. It's all about teamwork!
Supply chain forecasting the easy way
Ready to make supply chain forecasting a breeze? EasyPost Analytics has you covered. With real-time data access, you’ll get a complete, up-to-the-minute view of your supply chain so you can make decisions on the fly without second-guessing. Our advanced analytics tools help you dive deep into your data, spotting trends and patterns to make your forecasting smarter and more accurate.
Whether you’re a small ecommerce business just getting started or a growing enterprise, our scalable solutions are built to adapt as you grow. You can count on EasyPost to keep your supply chain optimized and efficient, no matter how big or complex things get.
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