3 Common Demand Forecasting Mistakes & How to Fix Them
Article written by Jennifer Birch
No modern business can survive without a proper inventory forecasting system. When businesses don’t plan their stock according to well-researched predictions, they risk lowering customer satisfaction levels, reducing profit margins, and miscalculating production. Amidst the recent COVID-19 crisis, failure of proper demand forecasting led to hospitals overestimating the number of beds they needed. In Michigan, for example, hospitals are forced to turn away customers due to labor shortages. Meanwhile, in nursing homes in Massachusetts, one out of five beds remain because no staff can accommodate them. These problems could have been avoided if the hospitals had better demand forecasting systems.
However, as necessary as demand forecasting may be, there are many ways the strategy can be implemented incorrectly. Improper demand forecasting results in wasted products, lost profits, and, in worst cases, damage to the company’s reputation. Below, we’ll highlight some of the most common demand forecasting mistakes and how to fix them.
Building the Forecast Around the Target
In 2020, former Disney chairman Jeffrey Katzenberg launched a new video streaming platform called Quibi. Short for Quick Bites, Quibi was meant to serve as a short-form Netflix alternative catered to mobile users. However, in just seven months, the platform was forced to shut down, only returning a measly $350 million in revenue against their $1.65 billion investment.
Many wrong decisions contributed to the failure of Quibi, but perhaps the most egregious was the company’s insistence on building their demand forecast around ideal sales, rather than reality. This led Quibi to overestimate how much they needed to spend on production.
To avoid a Quibi situation, base your forecasts on both qualitative and quantitative research. If past sales records are not available, study the market. Conduct research with your target audience and analyze the factors that contribute to your competitor’s success.
Not Adapting to Market Trends
In 2021, film camera company Kodak filed for bankruptcy. Though Kodak was one of the biggest names in the camera industry years prior, the rise of digital cameras significantly reduced its competitive edge. Stubbornly, Kodak clung to its film cameras, insistent that its history of success would be replicated despite the evolving market. Ultimately, their failure to adapt rendered them obsolete.
Although analyzing the past is usually a reliable way of predicting future performance, it shouldn’t be the only piece of data your company studies. Instead of saying “sales were good last January, so they should be good this January,” take note of the factors that contributed to sales success. Then, see how these factors match up to present conditions. Perhaps if Kodak acknowledged the emerging competition and adjusted their production to meet the new demand for digital cameras, their company would have survived longer.
Not Understanding Drivers of Demand
For the longest time, Coca-Cola was the top dog in the soft-drink market. That is, until their biggest competitor Pepsi, launched a smart new marketing campaign: the Pepsi Challenge. In this series of tests, participants were tasked to take sips of two unlabeled soft drinks, one coke, and one Pepsi. The participants were then asked to pick the drink they liked better. By a large margin, Pepsi won.
Coke, intimidated by the campaign, fought back immediately. Deciding that the product was the problem, they painstakingly designed a new drink and measured its effectiveness with consumers Pepsi Challenge style: through blind testing. However, when this new product, dubbed The New Coke, was launched, it was met with severe consumer backlash. The New Coke was so unpopular that Coca-Cola was forced to bring back the original less than three months later.
Coca-Cola’s issue was that it didn’t look deep enough into the factors driving demand for Pepsi. It turned out that the blind taste tests only paid attention to sips, and that consumers felt differently about the drinks when they drank them for longer than just a sip. The problem was never the product. Pepsi simply created artificial levels of demand through a misleading marketing strategy. Had Coca-Cola paid better attention to why people bought their drinks, they wouldn't have committed such a huge marketing blunder. Therefore, to keep demand planning accurate, companies must pay close attention to the reasons consumers buy their products.
How to Improve Demand Forecasting
The best way to improve demand forecasting is to seek professional solutions. Professionals from business data analysis programs can use their education to improve the outcomes of your business. A good data professional will help you analyze big data, such as past performance and market trends. This will allow you to create actionable insights for optimizing production, decreasing costs, and increasing profits.
You can also make use of demand forecasting software. Avercast’s Demand Forecasting Software uses over 200 algorithms to create sales forecasts for as far as 60 months into the future. Additionally, it connects your business with effective Enterprise resource planning and business intelligence tools. Customizable reporting tools can also help you translate data in a way that’s easy to understand.
Demand planning can make or break your business. Incomplete forecasts will not just cause miscalculations in production, they will also decrease customer satisfaction, reduce profit margins, and potentially mar the name of your business. Keep demand forecasting accurate by making use of accurate and reliable demand forecasting software.