Demand Forecasting 101: A Guide for Modern Businesses

Demand forecasting is all about knowing what your business will need next week, next month, and next season. Whether you are a construction firm anticipating material needs for a new project or a medical clinic ensuring you have enough supplies for flu season, predicting demand is the key to a smooth operation.

In this guide, we’ll define demand forecasting, discuss the benefits for service and goods-oriented businesses, and review key types and methods of forecasting.

What is demand forecasting?

Demand forecasting is the process of analyzing previous usage data and project history to predict what future demand for certain materials, supplies, or services might be.

By practicing effective forecasting, companies can swiftly meet the needs of their clients or projects without overstocking—a key element of inventory control. While many people associate “demand” with retail sales, it is equally vital for:

• Construction: Predicting the lumber, steel, or specialized hardware needed for upcoming jobs.

• Medical/Healthcare: Forecasting medical supply needs or specialized equipment usage based on patient volume.

• Field Services: Ensuring technicians have the right parts on their trucks before they head to a job site.

The benefits of accurate demand forecasting

If your business practices accurate and effective demand forecasting, there are tons of rewards to reap. Here are some of the most stand-out benefits:

1. A more accurate budget

Your budget is instantly more accurate when you know how much inventory your business plans to buy, store, use, or sell. When your team can adequately forecast demand, you’ll find that preparing budgets is a whole lot easier. 

2. A clear project schedule

When you forecast demand, you aren’t just anticipating what you’ll need. You’re also armed with information about when you’ll need it. You can use historical usage data to work backward, creating a project schedule that ensures the right materials arrive just before they are needed on-site.

To ensure your entire network of suppliers, vendors, manufacturers, and wholesalers are on the same page, you might want to look into inventory strategies to avoid supply chain disruptions.

3. Optimized inventory storage

Whether you manage a warehouse or a small supply closet, space is money. If you can forecast that you’ll only need 50 units of a specific supply this month, you don’t need to waste valuable square footage storing 500 units

 

Types of demand forecasting

Now that you know why to forecast demand, here’s a closer look at some of the most popular versions of demand forecasting.

Before we begin, here’s what you need to know: Not all forecasting strategies yield the same result. Because of this, many businesses rely on multiple forecasting types to make confident decisions about future demand.

Another benefit of choosing two or three forecasting types? By fleshing out a few different estimates, you’ll highlight discrepancies in your forecasting model. And those discrepancies can illuminate some areas of your data that might need a bit more research or consideration.

So, on that note, here are six types of demand forecasting you might consider for your business:

1. Active demand forecasting

Active demand forecasting is perfect for businesses that are expanding quickly. This strategy considers ambitious plans to grow—like a landscaping company bidding on larger commercial contracts—and takes into account future marketing and equipment acquisition.

2. Passive demand forecasting

Passive demand forecasting is relatively simple. Instead of analyzing the broader economy, it considers only historical usage data. This works well for stable businesses, such as a dental office that sees a consistent number of patients and uses a predictable amount of consumables each year.

3. Short-term demand forecasting

This is helpful if your business manages “just-in-time” supplies or works on short-cycle projects. A catering company, for example, uses short-term forecasting to order fresh ingredients based on the specific events booked for the upcoming two weeks.

Short-term demand forecasting is helpful if your business orders inventory “just-in-time” or if the types of inventory you use or sell frequently changes. But do note that most companies will use a combination of short-term and long-term forecasting together. 

 

Methods of demand forecasting

Now that you know the different types of demand forecasting, let’s look at some of the most popular demand forecasting methods. 

1. Trend projection method

Trend projection is the most straightforward forecasting technique we’ll cover in this guide. It requires your team to dive into past sales data to project what’s likely to happen in the future. 

But that doesn’t mean that growth is a straight line, or that unexplained ebbs and flows are likely to happen again. If accurate and reliable forecasting is the goal, sudden demand spikes and downfalls should be investigated and understood. 

2. Market research method

Your company’s historical inventory usage or sales data is great—but it doesn’t necessarily reflect macro trends that are influencing your ideal customers. That’s what market research is for; it looks at external factors that may influence demand in your industry. For a medical laboratory, this might mean looking at regional health data to forecast the need for specific diagnostic kits, or looking at economic trends that will influence residential construction demand in the year to come.

3. Sales force composite method

The sales force composite method leverages the knowledge of your sales team, and uses their feedback to estimate future customer demand. This leverages the knowledge of your team on the ground. Your project managers or lead foremen provide feedback on what they are seeing at job sites to help estimate future material needs.

What’s the benefit of this type of forecasting? It relies on internal expertise. Your employees know a ton about your customers, what’s in, what’s out, and what competing businesses might be up to. 

 

What causes demand fluctuations?

As you can see, forecasting demand is a complex process that can have major implications for your business in the short and long term. But what causes demand to fluctuate in the first place? There are myriad factors that can cause demand fluctuations, but here are a few of the most common:

• Seasonality: A roofing company will see higher demand for shingles in the dry season, while a medical clinic may see a spike in respiratory supplies during winter.

• Competition: If a new competitor enters your service area, your “demand” (the number of jobs you win) may fluctuate, requiring you to adjust your material orders.

• External events: Global supply chain shifts or changes in building codes can suddenly change what materials are in high demand.

How Sortly inventory software helps with demand forecasting

Demand forecasting is a standard part of operational excellence. It helps you keep the right items on hand, prevents you from wasting capital on “dead” stock, and ensures your team has exactly what they need to finish the job on time. Utilizing inventory management software can automate this data collection, making your forecasts more accurate with less manual effort.

Sortly helps you track, manage, and organize all your inventory—from any device, in any location. We’re an easy-to-use inventory solution that’s perfect for small businesses. Sortly builds inventory tracking seamlessly into your workday so you can save time and money, satisfy your customers, and help your business succeed.

With Sortly, you can track consumable inventory like supplies, parts, and raw materials, assets like equipment and machinery, and anything else that matters to your business. It comes equipped with smart features like barcoding & QR coding, low stock alerts, customizable inventory folders, smart reporting, and much more. Best of all, you can update inventory right from your smartphone—and so can your team.

Whether you’re just getting started with inventory management or you’re an expert looking for a more efficient solution, we can transform how your company manages inventory—so you can focus on building your small business. That’s why over 15,000 businesses globally trust us as their inventory management solution.

Start your two-week free trial of Sortly today.