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What Is Supply Chain Forecasting?

An illustration of a supply chain.
Teams and leaders on the manufacturing floor use the supply chain forecast to develop production plans.
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  • Written By: Kevin P. Hanson
  • Edited By: Lauren Fritsky
  • Last Modified Date: 04 September 2014
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Supply chain forecasting is a method companies use to reorder components and other materials that they need on a regular basis. Sometimes called material forecasting or demand forecasting, the process of supply chain forecasting primarily involves recognizing a need for items and communicating it to the proper supplier. Companies that manufacture a large volume of the same or similar merchandise and hold it in their inventory tend to incorporate this forecasting system into their overall supply chain management plan. This type of logistics management generally is not feasible in businesses that custom-build products to individual customers’ specifications.

The process by which a company goes about designing, executing and modifying how raw materials are moved from supplier to production to customer is called a supply chain. The first step to developing a supply chain forecasting plan is defining all the links in the chain. For most companies, that can include suppliers, intermediaries and other businesses with which they need to establish coordination and collaboration. Once all the links in the chain are identified, the company’s on-hand inventory supply should be synchronized with its production demand.

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In the majority of business organizations that use it, the primary objectives of supply chain forecasting are to establish the best method to meet the demands of customers and make the most efficient use of resources, including distribution methods, inventory capacity and the workforce elements. The basic reasoning behind the supply chain is to find the best way to match supply with demand by using the least amount of inventory possible. Many manufacturing businesses utilize supply chain forecasting to help them find a balance between supply and demand. In an effort to create this balance, a supply chain forecast must ensure that the level of items produced satisfies customer demand without creating a surplus inventory. By the same token, a company’s supply chain forecast cannot be less than customer demand, which would cause the manufacturer to fail to deliver finished products to its customers.

Teams and leaders on the manufacturing floor use the supply chain forecast to develop production plans. In these plans, the components on hand are scrutinized so that purchase orders can be created for the components that will need to be ordered from suppliers. Forecasts should be designed for each link in the supply chain, such as components, service parts and finished merchandise. In order for a forecast to be effective, companies usually need to consistently review it at regular intervals throughout the year. This will typically predict some future trend information that allows for the most accurate supply chain forecast calculation.

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