In the dynamic realm of e-commerce, where demand ebbs and flows like the tide, mastering the art of forecasting is essential for navigating your business to success. Especially for growing e-commerce businesses and Direct-to-Consumer (D2C) brands with limited historical data, the journey can be particularly challenging.
Demand forecasting acts as a crucial guide, steering e-commerce businesses through uncertainty. By utilising historical data, it enables precise budgeting, supply chain optimisation, and improved inventory management, ultimately enhancing customer satisfaction. This strategic approach not only aids in navigating the unpredictable market but also in seizing opportunities for growth and competitive advantage, transforming potential setbacks into routes toward success.
In this blog post, we'll take you on a journey through the complexities of demand forecasting, offering insights into our internal processes and industry best practices to empower your supply chain.
In our supply chain department, forecasts are not just predictions but calculated strategies. We calculate weekly order forecasts per customer, ensuring accuracy in our projections. Recognising the ever-evolving nature of e-commerce, we update forecasts bi-monthly and fine-tune them monthly based on the latest order volume trends.
Previously, we used quarterly forecasts to set up our operations based on merchants’ internal information. However, actual shipping volumes often differed significantly from the anticipated amounts, prompting us to reconsider our approach. To address our forecasting needs as a growing scale-up, we've strategically adapted our methodology to leverage the Exponential Smoothing (ETS) model.
This decision was driven by our initial challenges, particularly the limited amount of qualitative historical quarterly data available for analysis. These limitations were largely due to unprecedented events, including the COVID-19 pandemic and subsequent supply chain disruptions. By implementing the ETS model in our operational environment, we better account for the volatile nature of the logistics industry.
A key challenge remains in predicting volumes for new merchants who entrust their fulfilment to us. To overcome this, we engage in qualitative analysis, evaluating product types to adjust our forecasts accordingly.
Starting can be challenging, and you will need to gather 6-8 weeks of consistent weekly order data to create a foundation. As you continuously accumulate more data and experience, you will be able to forecast for seasonality and plan in more detail for product launches, promotions, and product discontinuations. Here are the essential steps to consider:
1. Set Objectives:
Clearly define what you want to know, such as identifying fast or slow-selling items and planning for peaks. Here are some objectives closely related to each other that highlight the importance of forecasting for sustainable e-commerce success:
- Inventory Management
Objective: Optimise stock levels to prevent overstock or stockouts.
Why: Ensures products are available to meet customer demand while minimising excess inventory costs.
- Order Fulfilment Efficiency
Objective: Streamline order fulfilment processes.
Why: Improves efficiency by aligning resources with anticipated demand, reducing fulfilment time, and enhancing customer satisfaction.
- Cash Flow Management
Objective: Improve cash flow by managing inventory investments wisely.
Why: Helps in timing restocks appropriately, preventing unnecessary tying up of capital in excess inventory.
- Operating Cost Reduction
Objective: Minimise operating costs related to inventory storage and management.
Why: By aligning inventory levels with demand, businesses can reduce warehousing and holding costs.
- Supply Chain Optimisation
Objective: Streamline the supply chain to avoid disruptions.
Why: Helps in maintaining a smooth flow from suppliers to warehouses, reducing lead times, and ensuring timely reorders.
- Minimise Dead Stock
Objective: Reduce the risk of holding obsolete or slow-moving inventory.
Why: Prevents tying up capital in products that have low demand, minimising losses associated with dead stock.
- Customer Satisfaction
Objective: Ensure products are available when customers want them.
Why: Enhances customer experience by preventing stockouts, backorders, and delayed deliveries.
- Promotion and Marketing Planning
Objective: Plan for promotions and marketing campaigns effectively.
Why: Allows businesses to align inventory levels with expected demand spikes during promotions, preventing stockouts and maximising promotional impact.
2. Collect Historical Data:
Access to historical data is crucial. The more factors you consider, the better your forecast will become. Best practices include examining the following parameters:
- SKU performance: How are the various SKUs performing, and what does it mean for your planning?
- Marketing campaign performance: Which channels are performing best and might lead to peaks?
- Sales channel performance: How are the different sales channels contributing to the inflow of orders? Which marketplaces are you selling on, and is there a seasonality to consider? What’s the return rate for the different sales channels, and how does this affect your operations and inventory levels?
3. Evaluate Data:
After collecting the data, analyse it to derive meaningful conclusions. Run reports to answer the questions raised above and consider the following factors:
- Promotions: What promotions are planned, and how will they impact order volumes and specific SKUs? Certain SKUs might require specific packaging material, which needs to be checked.
- Product launches: Are there upcoming product launches? Is the fulfilment warehouse aware of them, and is the labelling done correctly? Are all specifications clarified?
- Product discontinuations: These products won’t be sold anymore and can be removed from the warehouse or put into another area to make space for new SKUs.
4. Adjust for Success:
Continuously adapt by setting reorder points and making informed decisions based on the evolving data landscape.
Following these steps allows for precise planning, saving money, enhancing customer experience, and ensuring seamless fulfilment.
Understanding the nuances of different forecasting types is vital. Let’s look at the different types of forecasting, each fulfilling different purposes and closely related to the objectives discussed earlier.
Macro Forecasting
Gain insights into your sales trends within the broader economic or industry context. Analyse how external factors such as trade regulations or supply chain disruptions impact your sales trajectory. Utilise market research and expert consultation to inform strategic planning and anticipate market influences on your business.
Micro Forecasting
Take a detailed approach by analysing specific factors influencing product sales, such as profit margins, past performance, and production costs for individual SKUs. Generate multiple forecasts and consolidate them for comprehensive analysis. Micro forecasting is crucial for product-level planning and optimisation.
Short Term Forecasting
Forecast sales and strategise for the immediate 3-12 months, considering seasonal variations and product performance fluctuations. This model aids in preparing for short-term demand shifts and optimising inventory management. Short-term forecasting is particularly useful for understanding seasonal demand patterns and optimising resource allocation accordingly.
Long Term Forecasting
Leverage sales data and analytics to plan for future periods spanning one to five years, informing overarching business strategies beyond individual product investments. Evaluate factors like supply chain resilience, sales channels, and partnerships for long-term performance enhancement. Long-term forecasting enables proactive business positioning and cost optimisation for sustained success.
Demand forecasting brings valuable advantages, especially in anticipating shifts in your average sales. Specifically, it provides the following benefits for e-commerce businesses and D2C brands:
Communication with your e-commerce fulfilment provider is crucial. Sharing your demand forecasting insights fosters a strong partnership. Whether you're a new business or an established one, keeping your fulfilment service in the loop helps prepare for spikes in demand and ensures a seamless transition in your product line.
Providing your fulfilment service with a realistic demand forecasting plan is like charting your course on a map. It ensures they have the right resources to fulfil your orders efficiently. Regular communication, especially during peak seasons, helps manage increased sales and prepares for impactful changes.
IIn the vast sea of e-commerce, mastering demand forecasting is the compass that steers your ship to success. By understanding the internal intricacies of forecasting and incorporating external insights, businesses shipping between 1,000-10,000 monthly shipments can navigate the unpredictable waters with confidence. So, set sail with a robust demand forecasting strategy and let your fulfilment journey be one of seamless success.