Predicting future demand is an essential part of evaluating a business's long and short-term profitability. When conducted effectively and accurately, it can assist business owners and managers with optimal supply chain planning and employee scheduling.
Through mathematical estimations using historical data and other factors, such as seasonal sales fluctuations, forecasting demand provides useful information about the business's future sales potential within the given market.
When equipped with accurate demand planning information, management can focus on formulating effective growth strategies and make the most informed decisions to encourage profitability.
However, producing accurate forecasts involves complex calculations and data analysis. When businesses attempt to undergo this process manually, they increase the chances of human errors and bias, often failing to account for external factors such as weather or seasonality, which could affect demand.
Therefore, the most efficient and cost-effective option is to invest in demand forecasting and planning software technology. An automated system can use data from sales and inventory to make insightful predictions and identify key consumer patterns and trends in seconds.
Indirect vs. Hard Cost Savings
When it comes to considering the potential cost savings associated with utilizing software, there are two ways to review this - indirect cost savings and hard cost savings.
Indirect Cost Savings
Among the main indirect savings are time and energy. Forecasting using software technology will drastically reduce the amount of time and labor spent on creating and managing the production of projections. Therefore, businesses can redirect this energy and resources on improving other aspects of operations. As a result, companies will begin to see improvements in efficiency in regards to planning and scheduling.
Hard Cost Savings
Accurate forecasts can optimize supply chain processes by signaling if the company is under or overstocking on certain products. Under stocking would mean the company is failing to reach its full potential in regards to sales and is missing out on profit due to missed opportunities.
On the other hand, overstocking leads to increased inventory-related costs, including holding/carrying expenses, handling (labor) costs, and purchasing costs. Utilizing forecasting software can effortlessly increase the accuracy of projections by instantly pulling current and historical data from point of sales systems, then running these numbers through necessary calculations. In fact, increasing forecast accuracy can result in a 0.5% - 3% increase in revenue.
Determining the ROI
As a business, it makes sense to wonder when to expect a return on investment (ROI). Although this time frame will depend on the business and its size, generally, most technology implementation payback should be noticeable in less than 24 months, with most showing ROI in less than 18 months.
When it comes to calculating the exact ROI on IT projects, there are a number of factors that can affect the outcome. Businesses should first work out what financial benefits they may gain from software implementation.
1. Revenue enhancement - This includes any IT investment that has increased revenue by allowing the business to implement a new product or service.
2. Reduced cost - For example, lowered maintenance costs associated with operations due to improved technology.
3. Avoided costs - This includes expenses that have been removed completely due to the implementation of IT.
4. Capital reduction - This includes reductions in expenses such as storage costs and server capacity.
After considering the above, the ROI calculation equation is relatively straightforward-
ROI = (gain Cost)/Cost
This formula will show the quantifiable gains associated with software implementation and can also apply to other non-IT related investments as well. Non-quantifiable gains such as customer satisfaction or better usability should be measured separately.
Key Software Features to Look For
Software needs will vary depending on the budget, maturity, and resources of the business. However, when it comes to looking for top quality forecasting software there are some key features to prioritize-
- Ability to conduct various quantitative forecasting methods instantly
- Ability to generate forecast using multiple hierarchies, pricing models, and what-if scenarios
- Overrides available at a number of levels by a variety of users baring different hierarchical positions within the business
- Ability to measure the percentage of error and bias for demand forecasts
- Provides a variety of statistical graphics
- Ability to integrate with the point of sale system for up to date sales data
- A wide variety of languages and global usage (including for its available support)
- Utilizes numerous calendars (for examples production and fiscal, etc.)
According to research from the Aberdeen Group, businesses that are able to produce accurate demand and sales forecasts are 7.3% more likely to hit their quotas and 10% more likely to make improvements to their bottom line.
While implementing demand forecasting software may be an investment for newcomers, business owners can expect to see a return on investment in less than a year. Therefore, it's only logical to enlist the help of this technology to increase efficiency and optimize operations.