Supply Chain

AI in Demand Forecasting: A New Way to Solve Inventory Issues

What do the stock market and weather forecasting have in common? Here’s a clue: stocks are valued based on trend projections, whereas changes in weather are tracked using prevailing atmospheric conditions and meteorological data. 

If you guessed “forecasting”, congratulations!

Planning and execution are the two main pillars of Supply Chain Management (SCM). Demand planning kicks off the planning side of SCM. For businesses, it answers the crucial questions of what, when, where, why and how people will demand goods/services.

Demand planning creates a strategy with inputs from historical sales, inventory and marketing data to meet anticipated demand. The plan feeds into subsequent supply chain processing steps, material requirements planning (MRP) and product planning.

Accurate demand forecasting reduces the risk of overstocking or under-producing, while realistic sales goals enhance the efficiency of supply management execution.

Organizations face challenges in demand forecasting due to an extensive product range and vast consumer base. Therefore, they require business intelligence tools equipped with precise demand forecasting capabilities.

AI for demand forecasting

Data and analysis form the basis of accurate forecasting. Artificial intelligence (AI) is frequently mentioned while discussing data because of its unmatched data processing and predicting powers.

There are five benefits that AI tools bring to demand forecasting:

1. Data consolidation and organizing

Let us take an example of demand forecasting for the coming quarter. The preparatory phase involves gathering data scattered throughout the ERP system and organizing it. With the massive volume of information businesses generate these days, preparation will take several weeks if done manually. By this time, the data will be outdated and projection numbers won’t account for recent developments.

With AI, not only can data from all relevant departments (purchasing, sales, etc.) be consolidated with the push of a button, but it can also be formatted appropriately for analysis and demand forecasting.

2. Automate replenishment planning

Where does the current inventory level of a product get assessed? How fast does each product move? How long does it take to replenish each product? The basis for all significant supply chain decisions depends on accurate and real-time answers to these questions.

Does it seem daunting? Wait, the challenge has just begun. If you add to that unpredictable supplier lead times, your inventory planning is likely to be thrown off course. Not if you rely on AI, though.

AI tools can automatically update ordering plans to accommodate supply and demand restrictions. Therefore, your replenishment plan can always be current, as well as realistic.

3. Quick response to demand fluctuations

The COVID-19 pandemic taught us that anything can change anytime. Demand for certain products increased suddenly, and businesses that adapted to fluctuations survived.

How do you create effective ordering plans for upcoming products without historical sales data?

AI can use automatic demand analysis to quickly respond to such ad hoc demands and enable proactive planning. In terms of profitability and consumer satisfaction, this offers a significant advantage over rivals.

4. Add clarity to supply chain decisions

Historical sales information is the basis for demand forecasting. But does flash clearance sales data represent typical demand? No. These are outliers that must be omitted from demand planning considerations. 

AI-based systems detect them effortlessly, launch efficient countermeasures and help businesses make the right decisions.

5. Minimize too-much & too-little stock scenarios

The key to effective inventory planning is placing orders for precisely the right amount of merchandise to satisfy client demand. With AI-based tools continuously evaluating supply and demand in real-time, supply chain managers may easily implement an optimum purchasing plan.

Demand forecasting is crucial for today and tomorrow

Demand forecasting is a crucial process for businesses that enables planners to make informed decisions across the organization and plan inventory levels appropriately. This ensures that warehouse space is utilized optimally and orders for fast-moving products are easy to fulfill. 

Furthermore, it allows businesses to make intelligent decisions regarding budgeting, resource allocation, pricing and staffing, which ultimately leads to increased profitability and customer satisfaction while decreasing overhead costs.

When businesses implement proper demand forecasting, they can gain valuable insights that help them be better positioned to meet customer needs. In fact, studies show that an increase in forecast accuracy can result in at least a 15% improvement in shareholder value.

As businesses expand their operations, AI-powered demand forecasting tools will become increasingly necessary to ensure long-term, sustained growth.