Introduction to Demand Forecasting
Demand Forecasting is a feature that will help you estimate your future sales quantity and place purchase orders for your stock on time to meet the demand. This will help prevent your products from going out of stock or from over-ordering variants that aren't selling well.
Before we start, here are some of the terms that you will need to know.
- Stock cover - The number of days of stock you want to have on hand for a variant.
- Lead time - The number of days to receive stock from a supplier.
- Safety stock - The amount of stock you should always have on hand regardless of sales volume.
Building your first forecast
You can access Demand Forecasting by going to Intelligence > Forecasting. We automatically build your first forecast using default values. See the settings section for more information on how to change these values.
The 2 values we need for a successful forecast are:
- Stock cover period
- Lead time
Optionally, you can also provide us with your safety stock levels. You will see an example forecast below.
We will show the recommended order quantity for your variants based on your historical sales data on the Forecast Detail tab. We forecast every variant at each of your locations.
If you see a dash on the forecast column, that means we do not have enough data to forecast your sales. We need at least 2 windows of data (14 days, 8 weeks, or 4 months) to create a forecast. At the moment, we automatically aggregate your data into weeks or months if we do not find enough data.
You can also view your historical sales trends by clicking on a row. Once you have decided on the quantity to order, hit “Add” to generate draft purchase orders.
Things to take note of:
- Building your forecast will take time. After this, we will rebuild your sales forecast weekly.
- If you make any changes to lead time, stock cover, safety stock, or have any changes to your stock, you will need to rebuild your forecast. To do this, go to Intelligence > Settings and hit the “Recalculate Forecast” button.
Viewing past sales trends and future stock levels
You need to check the recommended reorder quantity before adding items to a purchase order. You can do so by clicking on a row.
You can also see your future stock levels starting from tomorrow. Just click on the dropdown and select 'Stock levels'.
If you want to zoom in on a specific time zone, click and drag your mouse over the chart.
To zoom out, click on the chart again.
Checking for intermittent demand
We use Smooth Moving Average as the model for Demand Forecasting. For an in-depth description of how this model work, please refer to this article.
We use a maximum lookback period of two years-- the first sales during that period will be the starting point for the forecast. Before we run your sales data through the model, we select the aggregation period based on whether a variant has enough sales data. A variant with insufficient sales is considered to have intermittent demand, and the threshold is 30% of the period.
Example: If you have 2 days of sales in a 14- day window (14%), this will be the intermittent demand.
We automatically aggregate by a larger period. Assuming that the sales were on the Monday of each week. When we aggregate by week, there are now 2 data points in the 14-day window (100%). We then divide by 7 to get daily sales. If it is still intermittent with a weekly aggregation, we aggregate by month-- dividing it by 30 to get daily sales.
We still need the value of the daily sales because the stock cover and lead-time are in days.
Let’s discuss the columns on your Forecast detail tab.
1. Stock out date - We know how much available inventory you have and forecasted your daily sales. This column shows you when you will run out of stock.
2. Order by date - This is the last date you should place your purchase order. We calculate this based on your lead times.
3. Reorder quantity - This is the quantity we suggest you reorder. Reorder quantity does not include incoming stock at the moment (We are working on adding this soon)
4. Available - The amount of available stock you have. This is calculated by subtracting your committed stock from your Stock on Hand.
5. Added to draft - This column refers to the total quantity of draft purchase orders that have been created through demand forecasting only. This does not include all draft purchase orders in QuickBooks Commerce.
6. Forecasted - This is the forecasted sales from our moving average model. Forecasted Sales are calculated using a Smooth Moving Average. To know more about how this model works, please refer to this article.
7. Supplier - This is the supplier of the product. As of the moment, QuickBooks Commerce only supports one supplier per product. We automatically populate this value.
Demand Forecasting Settings
Your forecasting settings allow you to change the default values of your Lead Time, Stock Cover, and Safety stock.
Aside from the settings tab, you can also set these values at a variant-location level. This will override the defaults on the forecasting settings tab.
You can also set these values in bulk via CSV by going to Settings > Location. From there, select the warehouse and fill in the default values on the downloaded CSV. Import the updated CSV, and you’ll have the default lead time, stock cover, and safety stock on your variants at a location level.
Creating a Purchase order
After the Forecast Details are generated, the next step is to create a purchase order. You can do this by clicking “Add” on the reorder quantity of the variant.
We consolidate purchase order line items for the same supplier and location into a single purchase order. When you click “Add” to a variant, we check if there is a draft purchase order for the same Supplier at that Location. If there is, then the variant will be added to that draft purchase order. If there is no existing draft purchase order for that Supplier and Location, then a new draft purchase order will be created. This prevents you from creating too many purchase orders per supplier and location.
It is also important to note that you will not add a variant to a purchase order if there is no Supplier selected.
Once a draft purchase order has been created, you will see the purchase order detail. You can immediately access it by clicking on the purchase order.
After you have verified the items, you may then approve the purchase order. If you wish to go back to the forecast, you can click on the forecast link on top.
Well done! You have completed generating a forecast and purchase order in line with the forecasted quantity.
Be advised that we do not support the ability to sum the reorder quantity for all locations and create one purchase order for the supplier. Also, you will only be able to add regular and pack size variants to a purchase order. You will not be able to add a bundle. Products that do not have Manage Stock enabled will also not show in the forecast.
- This feature currently does not support bulk workflows. This means that the ‘Bulk Action’ checkbox to select all and then create purchase orders at one go will not be available. You will need to add them to the PO manually.
- The sales quantity for bundle products is not added to the sales quantities of the individual SKUs.
Also, forecast models for the following are currently not supported.
- New products
- Spikes in demand
- Lost demand due to products going out of stock