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In the dynamic world of e-commerce, where demand fluctuates like ocean waves, mastering the art of forecasting is key to sailing your business to success. Especially for scaling e-commerce businesses and Direct-to-Consumer (D2C) brands with limited historical data, the journey becomes even more intricate.
Demand forecasting serves as a vital compass, guiding e-commerce businesses through uncertainty. Utilizing historical data, it enables precise budgeting, supply chain optimization, and improved inventory management, ultimately enhancing customer satisfaction. This strategic approach not only helps in navigating the turbulent market waters but also in seizing opportunities for growth and competitive advantage, transforming potential setbacks into pathways toward success.
In this blog post, we'll take you on a voyage through the seas of demand forecasting, offering insights into our internal processes and best practices from the industry to empower your supply chain.
How byrd Goes about Forecasting to Ensure High Fulfillment Standards for our Merchants
In our supply chain department, forecasts are not mere predictions but calculated maneuvers. We calculate weekly order forecasts per customer, ensuring precision in our projections. Recognizing the ever-evolving nature of e-commerce, we update forecasts bi-monthly while also fine-tuning them monthly based on the latest order volume trends.
In the past, we used to apply quarterly forecasts which helped us to set up our operations when merchants were giving us forecasts based on their business-internal information. However, because oftentimes actual shipping volumes differed significantly from the anticipated amounts, we had to reconsider our approach. In addressing our forecasting needs as a growing scale-up, we've strategically adapted our methodology to leverage the Exponential Smoothing (ETS) model.
This decision comes in light of our initial challenges, particularly the limited amount of qualitative historical quarterly data available for analysis. Such limitations were mostly there due to unprecedented events, including the Corona pandemic and subsequent supply chain disruptions. By implementing the ETS model in our operational environment, the volatile nature of the logistics industry will be better taken into account
A key challenge still lies in predicting volumes for new merchants who entrust their fulfillment to us. To overcome this hurdle, we dive into a qualitative analysis, evaluating product types to adjust our forecasts accordingly.
Here Is a List of Steps You Need to Take when it Comes to Forecasting:
Getting started certainly is a challenge and you will need to gather 6-8 weeks of consistent weekly order data to create a foundation. After that, as you continuously accumulate an increasing amount of data and experience, you will be able to forecast for seasonality and plan in more detail for product launches, upcoming promotion as well as product discontinuations. To get there, you need to consider the following steps:
1. Set Objectives:
Clearly define what you want to know – whether it's identifying fast or slow-selling items, planning for peaks, and more. Here are some of the objectives you can think of which are closely related to each other and show the importance of forecasting for sustainable e-commerce success.
- Inventory Management
Objective: Optimize stock levels to prevent overstock or stockouts.
Why: Ensures that products are available to meet customer demand while minimizing excess inventory costs.
- Order Fulfillment Efficiency
Objective: Streamline order fulfillment processes.
Why: Improves efficiency by aligning resources with anticipated demand, reducing fulfillment 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: Minimize operating costs related to inventory storage and management.
Why: By aligning inventory levels with demand, businesses can reduce warehousing and holding costs.
- Supply Chain Optimization
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.
- Minimize Dead Stock
Objective: Reduce the risk of holding obsolete or slow-moving inventory.
Why: Prevents tying up capital in products that have low demand, minimizing 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 maximizing promotional impact.
2. Collect Historical Data:
As a next step, you need to have access to historical data to collect and analyze it. The more factors you take into consideration while doing that, the better your forecast will become. Best practices include taking a look at 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 be considered? What’s the return rate for the different sales channels and how does this affect your operations and inventory levels?
3. Evaluate Data:
After having collected the data in the previous step, it’s time to dive deep into analysis to derive meaningful conclusions. Run reports to answer the questions raised above and also make sure to consider the following factors:
- Promotions: What are promotions that are planned and will have an impact on order volumes and for which SKUs? Certain SKUs might require specific packaging material or similar, which needs to be checked as well.
- Product launches: Are there upcoming product launches planned? If yes, is the fulfillment warehouse aware of it and is the labelling done correctly? Are all specifications clarified?
- Product discontinuations: These products won’t be sold anymore moving forward 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 those steps allows for precise planning, saving money, enhancing customer experience, and ensuring seamless fulfillment.
Types of Demand Forecasting in E-Commerce
Understanding the nuances of different forecasting types is vital. So let’s take a look at the different types of forecasting. Each of them fulfills different purposes and is closely related to the different objectives discussed earlier.
Macro Forecasting
Gain insights into your sales trends within the broader economic or industry context. Analyze how external factors such as trade regulations or supply chain disruptions impact your sales trajectory. Utilize market research and expert consultation to inform strategic planning and anticipate market influences on your business.
Micro Forecasting
Take a detailed approach by analyzing 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. Microforecasting is crucial for product-level planning and optimization.
Short Term Forecasting
Forecast sales and strategize for the immediate 3-12 months, considering seasonal variations and product performance fluctuations. This model aids in preparing for short-term demand shifts and optimizing inventory management. Short-term forecasting is particularly useful for understanding seasonal demand patterns and optimizing 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 optimization for sustained success.
Benefits of Demand Forecasting: Sailing into 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:
- Understanding the impact of promotions or new products on overall order volumes.
- Planning effectively for significant selling events, such as Black Friday and Cyber Monday, to maximize revenue opportunities.
- Ensuring an optimal customer experience with swift delivery times, as products are consistently in stock, and fulfillment services have the necessary resources for quick order processing.
- Informed decision-making regarding inventory, including when to replenish stock at your fulfillment service.
- Cost savings by preventing the unnecessary dispatch of excess inventory, and avoiding associated inventory carrying and holding costs.
Informing Your Fulfillment Service: Smooth Sailing Together
Communication with your e-commerce fulfillment provider is crucial. Sharing your demand forecasting insights fosters a strong partnership. Whether you're a new business or an established one, keeping your fulfillment service in the loop helps prepare for spikes in demand and ensures a seamless transition in your product line.
Providing your fulfillment service with a realistic demand forecasting plan is like charting your course on a map. It ensures they have the right resources to fulfill your orders efficiently. Regular communication, especially during peak seasons, helps manage increased sales and prepares for impactful changes.
Conclusion: Charting a Course to E-commerce Success
In 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 1000-10000 monthly shipments can navigate the unpredictable waters with confidence. So, set sail with a robust demand forecasting strategy, and let your fulfillment journey be one of seamless success.