What Is Demand Forecasting?

Demand forecasting is an important process in data science where companies can predict the demand for the products and services down the road, allowing them to prepare their company with the resources needed to make the most profit. Demand forecasting can be a simple process of tracking past performance, or it can be a more complex statistical analysis of a variety of data sources. Whichever strategy and methodology of demand forecasting you use, it’s clear that you need this insight to prepare your budget, inventory, and supply chain. 

Learn more about demand forecasting and explore types of demand forecasting, careers in the field, and the benefits and challenges of forecasting demand. 

What is demand forecasting?

Demand forecasting is the art and science of predicting what people will want, how much of it they will want, and when they will want it. To use a simple example, imagine a child running a lemonade stand. The child wants to have enough stock to offer lemonade to every customer, but they want to control their supply costs by not buying too many of any one ingredient. Demand forecasting empowers you with the information you need to figure out future needs and to prepare your company now. 

Sometimes, you might use historical data for demand forecasting, such as looking at past performance to guess how the future will go. If you sold 100 lemonades today, you should prepare enough supplies to sell 100 lemonades tomorrow. You might look at events in your area or try to understand who your customers are and why they purchase lemonade. You might collect daily data on a long-term basis to make a prediction based on factors like weather and seasonality. All of these strategies are examples of demand forecasting. 

Factors that influence demand forecasting

Demand for your products and services will vary based on a variety of factors that make demand forecasting a more complex process. For example, factors that can impact your demand forecasting include:

• Seasonality: If your product has a seasonal use, you will see an increase in demand during one season and a decline in another. Demand forecasting can help you consider these ebbs and flows so you can plan to be successful all year long. 

• Marketing, branding, and access: The story you tell about your product, the values you present to your customers, and how your customers access your product are all factors that can change your demand. For example, you might increase demand by sharing more information about your environmentally responsible practices with your customers. Or, you might increase demand by offering customers a new way to purchase your product. 

• Trends: When your product relates to a trend, you may see demand increase. However, your demand will decrease if your product goes out of fashion. You can use demand forecasting to help you stay on top of trends in your industry. You can prepare to meet demand if your product gets swept up in a viral trend, or you can pivot if your product starts to look like yesterday’s trend. 

6 types of demand forecasting

You can conduct several different types of demand forecasting. These include active and passive demand forecasting, internal or external demand forecasting, and short-term or long-term demand forecasting. 

1. Passive demand forecasting

Passive demand forecasting is a technique where you use data from your past performance to predict how your company will perform in the future without doing anything to influence or adjust the data. A company with stable sales not experiencing strategic growth can automate passive demand forecasting to anticipate roughly the same amount as they needed before. 

2. Active demand forecasting

In contrast to passive demand forecasting, an active approach means that you use other kinds of data to customize your forecast to consider various factors like overall demand in your industry or economic outlook. Active demand forecasting is an important tool for rapidly growing companies or start-ups that don’t have prior data for prediction.

3. Short-term forecasting

Short-term forecasting is a technique to help you predict demand in the next short period of time, such as the next quarter or year. Short-term forecasting is important because it helps you manage your supply chain by consulting the real-time data of how your company is performing and making changes as needed. On the other hand, short-term forecasting doesn’t give you a bigger-picture view of how your overall strategy might play out. 

4. Long-term forecasting

Long-term forecasting, on the other hand, allows you to project years into the future to predict how your company will perform based on your strategy vision moving forward. Long-term forecasting is important for companies planning to make future strategic moves like expansion, acquisition, or partnerships. Long-term forecasting isn’t meant to be an exact prediction but a starting point for you to make informed decisions about your path forward. 

5. External forecasting 

External forecasting considers outside factors that your company likely has little to no control over, such as the overall industry, competitor innovations, availability of materials, and overall economic trends. Considering external, sometimes called macro, forecasting can help you prepare for what’s ahead. 

6. Internal forecasting

In contrast, internal forecasting refers to factors within your company that impact demand. For example, do you have the cash flow you need to purchase supplies before you make a profit? Other factors that can increase or decrease your ability to meet demand include your staff, profit margins, or other financial estimates. 

Why is demand forecasting important?

Demand forecasting is important for businesses to create thoughtful, strategic plans. Demand forecasting can help your company: 

• Grow sustainably: Demand forecasting can help you plan your expansion sustainably, ensuring demand is ready when you’re preparing to open in new markets. 

• Manage budget: Demand forecasting can help you plan your budget because it gives you insight into what you’ll need regarding supply and labor costs. 

• Manage inventory: You can plan to have the supplies you need on hand and avoid costly warehousing for products you can’t sell right away. 

• Reveal trends: Demand forecasting may help you uncover trends in your data that you can not consider before, such as unexpected seasonal fluctuations. 

• Improve resource allocation: Demand forecasting can help you understand where resources like time, money, and staff are needed most. 

Challenges of demand forecasting

At the same time, demand forecasting presents several challenges. Some disadvantages you may encounter include: 

• Data is difficult to gather: Data comes from various places. Without a comprehensive data capture system, you may need to pull data from various systems. 

• Lack of sales history: Conducting demand forecasting without historical sales data can be challenging.  However, you can use active demand forecasting techniques to overcome this issue. 

• Less than great data: It’s important that you have great data in accessible formats for demand forecasting, but you may find that some data isn’t as accurate as you’d like or in the correct format for analysis. 

Who uses demand forecasting?

Demand forecasting is an important tool for professionals in many different industries. A few careers to consider that directly use demand forecasting are demand planner, supply chain planner, and inventory analyst. 

1. Demand planner

Median annual base salary (US): $88,011 [1]

Job outlook (projected growth from 2022 to 2032): 19 percent [2]

As a demand planner, you conduct demand forecasting and help companies plan to meet their business goals. To guide your research, you will consider consumer needs, industry trends, internal influence, and other factors. In this role, you can help your company optimize its budget, inventory, and supply chain. 

2. Supply chain planner

Median annual base salary (US): $91,519 [3]

Job outlook (projected growth from 2022 to 2032): 19 percent [2] 

As a supply chain planner, you will focus on ensuring every aspect of the supply chain runs smoothly and that your company always has the necessary inventory. You will work with other professionals to schedule and plan how resources will be used, where they will come from, and that all supply chain activities relate to company goals. 

Read more: What Does a Supply Chain Planner Do? Your Guide

3. Inventory analyst

Median annual base salary (US): $66,299 [4]

Job outlook (projected growth from 2022 to 2032): 19 percent [2]

As an inventory analyst, you will likely work for a company in an industry that manages a stock of products, like retail, wholesale, or manufacturing. In this role, you will manage orders and shipments as well as perform demand forecasting. 

Read more: What Does an Inventory Control Analyst Do, And How Can You Become One?

Enhancing your demand forecasting skills on Coursera

Demand forecasting is an important process for any company to determine its business needs and plan to reach strategic goals. Learn more about demand forecasting on Coursera with the Supply Chain Analytics Specialization offered by Rutgers University, where you’ll learn demand planning and forecasting, data visualization, marketing analytics, and regression analysis.