Knowing what products and services will sell, to whom, for how much, and in what quantity is vital to your business' success. You should plan carefully in order to maximise revenue and profits for the business.
Forecasting and planning are ways of predicting the future. By forecasting you can anticipate and predict what is required to fulfil your objectives.
The most commonly used methods of forecasting are either subjective or objective. The subjective method is used when contemplating buying new items while the objective method is more appropriate for frequently used items.
Subjective or judgmental forecasting is useful when a product does not have an order history, for example, new products or product upgrades. This method can also be used on existing products when time constraints mean that objective forecasting cannot be applied. More often than not, subjective forecasts are subject to biases like optimism and overconfidence. Therefore the main disadvantage of this type of forecasting is the possibility of misleading information, which could prove costly to the business.
Objective forecasting is most often used on existing product lines. This involves research and analysis to determine what you need based on empirical data. In order to gather the most accurate data on future product usage, you should:
- Examine historical data
- Identify and interpret trends
- Analyse existing usage
- Factor in known changes in future demand
Objective forecasting is less risky than subjective methods, as it relies on past performance and quantitative facts to create more accurate forecasts. While businesses should always aim to use objective forecasting, there is still something to be said for the gut instinct – nobody knows your business like you do!
Doing a forecast
In order to prepare a forecast you need to consider:
- Lead times – could be anything from a week up to four months. You need to know what your time frame is
- Predicted usage – weekly, monthly, or yearly. Are there any 'special events' or peaks and troughs?
- Expert advice/market analysis reports
- Customer information – what are the trends? Who are you targeting? What age group?
- What are the risks involved if it is a new product?
- Who are your competitors?
- Are they perishable or non-perishable items?
- Availability – are the items readily available from the supplier?
- Product price – are your prices competitive? Are your margins sustainable? What savings can be made?
- Safety stock level – what is the minimum amount you would like to hold in inventory at any given time?