What is the purpose of demand forecasting?

The purpose of demand forecasting is fundamentally to predict future customer demand for planning, making it essential for effective operations and supply chain management. Accurate demand forecasting allows businesses to anticipate what products or services customers will want and when they will want them. This foresight enables companies to plan their production schedules, inventory levels, staff requirements, and resource allocation effectively, ensuring they can meet customer needs without excessive overproduction or stockouts.

By understanding projected demand, organizations can make informed decisions to optimize their operations, minimize costs, and enhance customer satisfaction. It creates a strategic advantage as it helps in balancing supply and demand, ultimately leading to improved efficiency and profitability.

In contrast, merely assessing historical sales data would provide limited insight into future trends as it does not take into account changes in consumer behavior or market conditions. Focusing solely on existing customer demand does not incorporate future growth potential or shifts in demand patterns. Additionally, increasing inventory levels indefinitely can lead to excess stock, higher holding costs, and potential waste, which is counterproductive to effective inventory management and operational efficiency.