Expert Q&A: Demand Forecasting Challenges and Opportunities

Demand forecasting accuracy

Why is accurate demand forecasting so critical for manufacturers? 

Forecast accuracy helps align everything, from capacity to planning, so getting it right is extremely important.

Poor demand forecasting makes it hard for companies to adequately plan capacity and procurement. You’ll often see things like excess inventory, rushed or delayed orders, and inadequate scheduling or staffing. One company I spoke with had a business unit that was only 40% accurate in forecasting. At that point, it’s basically a coin toss when deciding whether or not to hire more workers.

And even though it’s costly, many manufacturers fear losing revenue more than holding on to excess inventory. We had one customer that held $14 million in extra “just-in-case” inventory. This tied up capital they could have used for other investments, like making acquisitions or expanding into new markets.

Improving demand forecast accuracy is often a major challenge for manufacturers. Why?

Demand forecasting is complex, and the challenges to improving accuracy are numerous, varied, and quite frankly, annoying.

Forecasting is often done manually, with people relying on gut feelings to decide demand. Improving accuracy means you’d have to work with each person involved, making it more of a cultural and people issue.

Another challenge is that sales targets can drive forecasts. For example, a salesperson might estimate they can sell $1 million to a customer, but their manager might push them to aim for $1.2 million. Bonuses then get tied to that higher number, adding yet another layer of difficulty in predicting demand.

Key metrics to track

What are the key metrics manufacturers should track to successfully measure forecast accuracy?

Manufacturers should compare actual sales to forecasted sales, both in dollars and quantities. Many companies get forecasts from customers, sometimes with contracts committing to specific amounts like 3,000 tons of material. Most businesses compare their forecast to actual sales, and lead time is a key factor.

For example, if it takes three months to go from placing an order to shipping, you should look at the forecast from three months earlier. To assess how well you forecasted September sales, you should check June’s forecast.

Companies often adjust forecasts as they get closer to the month. But to fairly evaluate procurement or operations, you need to base it on the original lead-time forecast.

Benefits for manufacturers

What are the biggest benefits manufacturers can achieve with accurate demand forecasting?

The more accurate the demand forecasting, the smoother everything runs downstream. For example, it’s easier to plan ahead and hire full-time weekend staff than to scramble and pay a premium for temporary workers at the last minute.

Good capacity planning also helps with product shortages. If you don’t give procurement enough time, you’ll either be unable to produce what you need or end up overpaying for rushed orders.

How to improve demand forecasting

How can manufacturers improve demand forecasting processes?

Life would be simple if companies only sold one product, but that’s not the case. Every business has different product lines, serves different industries, and operates in different markets. Companies sell complementary products and services, leading to varied sales patterns—some smooth, some lumpy, some erratic.

Many manufacturers base their forecasts on general demand trends, but the key is having a solution tailored to your business, your product lines, and the industries you serve. Off-the-shelf tools might help, but they won’t give you the full benefit like a customized solution can.

AI-powered solutions like MCA Connect’s Demand Genius™ can help.