How to manage seasonality of demand to increase forecasting accuracy
- What is seasonality of demand?
- Optimise your competitiveness by forecasting seasonality of demand
- How to forecast for seasonality of demand
Fact: not every product in your warehouse sells at the same pace throughout the year. Some will experience peaks and troughs in their sales due to the coming and going of seasons and months.
Whilst you may think this is an obvious statement to make, many businesses still struggle to forecast for seasonal highs and lows in demand, despite them happening every year.
If you’re one of them, read on to understand more about how your can plan better for seasonal demand fluctuations and why doing so can improve your forecasting accuracy and optimise your competitiveness.
What is seasonality of demand?
Seasonality of demand is defined as a certain time series with repetitive or predictable patterns of demand, due to re-occurring events. These patterns can re-occur over days, weeks, months or quarters and can make it harder for businesses to forecast future demand trends.
Religious festivals such as Christmas or Ramadan, annual events like Valentines Day or Bonfire Night and seasonal weather patterns, including snow in winter and a hot climate in summer, can all lead to seasonal variances in demand for many products.
Optimise your competitiveness by forecasting seasonality of demand
Have you experienced stockouts during your peak demand seasons and lost out on sales, or had to sell products off in end-of-season sales, due to excess stock levels?
Both these scenarios are common for businesses who fail to forecast correctly for seasonality of demand. But, get it right and you can gain a competitive advantage over others and revel in the following benefits.
Take advantage of peaks in demand
Forecasting for seasonal variances will ensure you have sufficient levels of stock available to take advantage of increases in product demand at peak times of the year. If you rely on your busy seasons to make most of your money, you need to be on top of your game and ensure optimum product availability during these times.
Prevent excess stock levels
Equally, it’s important that you don’t over forecast for seasonal demand fluctuations. Investing too much money in inventory can lead to cashflow problems and an unhealthy balance sheet.
If you have excess stock at the end of a season, you face the dilemma of selling it off at a discounted rate or taking on the burden of inflated carrying costs until demand picks up again.
Keep suppliers informed and orders on time
It’s easy to forget the importance of preparing your suppliers for seasonal demand fluctuations. Smart businesses will work closely with their suppliers, giving them visibility of their needs with plenty of time to react. By planning their orders upfront, they can help guarantee deliveries to meet customer demand.
With accurate demand forecasts that account for seasonality you can optimise stock levels and make informed decisions on safety stock levels and replenishment rules. With the right stock available you can achieve your service level targets, and free up working capital that’s usually sunk into excess inventory. Both factors could have drastic impact on your profitability and competitiveness.
How to forecast for seasonality of demand
There are four basic rules to forecasting seasonal demand.
1. Identify which products are affected by seasonal demand
It’s important to remember that seasonality only refers to the portion of demand fluctuation accounted for by a reoccurring pattern. Therefore, you only need to identify demand patterns that repeat systematically over time.
Below is an example of other demand factors that can impact or inflate your normal base demand.
When analysing seasonal demand for each sku, be sure to ask the following questions:
- Can you see the same demand pattern year-on-year? Analyse the correlation between each year, if there’s an underlying pattern, you have a seasonal demand you can rely on.
- Are you sure the change in demand is a seasonal variance and not just a trend upwards/downwards over time? De-seasonalise the demand e.g ignore the seasonal demand trend and check whether the demand is still increasing.
- Is the seasonal demand strong enough to warrant treating the product differently? Analyse the amplitude of the variance.
2. Understand when the peaks will happen
Read our post, 8 factors to improve inventory demand forecasting accuracy, for tips on demand forecasting best practice.
3. Accurately forecast the relative size of those peaks compared to normal demand
If seasonality is relevant to an item, you should adjust the demand accordingly before using it in a forecast calculation. Best practice is to keep seasonal demand and other variable factors separated from your base demand calculations, in order to keep the data clean, and easy to use for forecasting going forward.
4. Understand the level of uncertainty associated with those forecasted peaks
Marketplaces are more dynamic than ever, so it’s rare for a demand forecast to be 100% accurate, especially when seasonality is part of the equation.
It’s therefore important to consider the accuracy of your forecast.
There are many techniques to improve the accuracy of your forecasts, such as identifying demand outliers and investigating their impact on your calculations. In addition, working out forecast error will help you understand the level of error in your previous demand forecasts. You can then factor this into future ones and adjust stock rules, such as safety stock levels or re-order points, accordingly.
If forecasting seasonality of demand still feels like a tall order, perhaps you should consider investing in an inventory optimisation tool, such as EazyStock. With EazyStock you can save time and the hassle of manually calculating seasonality and forecasting demand. Instead EazyStock does all the hard work for you, providing up-to-date, accurate and detailed demand forecasts, that consider factors such as seasonality, trends, supplier lead times and delivery schedules.
If you find inventory forecasting a challenge, contact the EazyStock team today. Our demand forecasting software gives you advanced inventory management capabilities that you can utilise to improve the day-to-day running of your business – fast.