Demand Forecasting: What happens when it fails

Demand plays a vital role in the decision’s businesses make and being able to forecast it is one of the most important aspects for businesses in achieving their objectives.

But forecasting demand is tricky and all too easy to get wrong. To try to accurately forecast demand, businesses use a range of tools available to them including historical data, industry trends, AI, market research and expert opinions. By forecasting, businesses can then make decisions about production volumes, staffing, capacity planning, inventory management and sales.

When done well, demand forecasting can help companies make informed decisions that help them create enough supply to fulfil customer demand, gain insight to circumvent possible supply chain constraints, and potentially gain an advantage over their competitors.

When done poorly, numerous problems can occur which can negatively affect the overall business, including operations, growth, and reputation.

Possible implications from poor demand forecasting include:

• Higher risk of stock-outs
• Excess and obsolete stock
• Poor customer satisfaction
• Reputation damage
• Harder to manage supplier lead times
• Understaffing
• Lost revenue

Air Travel: An Example

The chaos we’re currently seeing in the air travel industry is a good example of what can happen when businesses fail to accurately forecast demand.

When the Jubilee weekend arrived, it became apparent that the airlines and airports were not prepared for the spike in passenger traffic.

Since then, the travel industry has continued to struggle with demand with much of the problems surrounding Heathrow Airport which has received a huge amount of negative press in recent weeks with cancelled flights, stranded passengers and images of luggage carpets reaching the papers. To ease its capacity issues, Heathrow recently imposed a two-month cap on daily passenger traffic, limiting numbers to 100,000 per day until 11 September.

But how has the chaos come about?

While Heathrow blames the uncertainty surrounding travel restrictions as well as the mass exodus of workers seen since the pandemic, a recent article in The Telegraph shows how Heathrow’s demand forecasting did not meet reality.

The email exchange published but The Telegraph shows how Heathrow’s chief executive did not heed warnings from airlines who felt the airport was seriously underprepared for a glut of summer holiday bookings.

The article reported that at the end of 2021, airlines flying out of Heathrow told its CEO John Holland-Kane they were “deeply concerned” about the airport’s planning for the 2022 summer season. However, Mr Holland-Kane said suggestions that travel would surge from Covid lows were “simply not credible”.

He said that at the time of the warning from airlines on 1 December, Heathrow was expecting 43m passengers in 2022. Airlines, however, believed demand would hit 72m, equivalent to 89% of pre-pandemic levels. Heathrow then subsequently increased its annual forecasts to 54m people.

Urging Mr Holland-Kaye to reconsider his estimates last year, Nick ­Wicking, head of the airlines group, said Heathrow’s plans could have “a ­significant impact on performance and service standards for both arrivals and departures”.

He also raised concerns about possible restrictions on flights and passenger numbers if Heathrow failed to recruit. “We would urge (Heathrow) to listen to its airline customers and the market insights they are providing,” he wrote.

However Heathrow’s chief executive wasn’t convinced and responded: “The approach the airlines have taken on passenger forecasts seems to be part of a strategy to game the regulatory process (in order to reduce landing fees).”

Clearly, Heathrow’s chef executive got this vital call wrong and the knock-on effect has led to a slew of bad press, unhappy customers, and financial losses.

By contrast, Liverpool’s John Lennon airport, albeit much smaller than Heathrow, has had relatively few flight cancellations with just 22 out of 2,600 scheduled departures this year. On a recent BBC Panorama episode Liverpool Airport’s CEO put this down to its decision to start recruiting back in January to allow enough time to recruit and train in time for the busy summer season. It seems that they were able to more accurately predict their spike in demand and plan accordingly.

While getting a forecast right is near on impossible, that doesn’t mean businesses shouldn’t forecast. While it won’t eliminate uncertainty; it does give businesses a chance to minimise and manage it.

Turnaround professionals often work with companies experiencing cashflow issues which can often stem from supply chain payment pressure, ordering too much stock, or not being able to fulfil sales orders. For many of the issues businesses face, demand forecasting can significantly improve the ability to manage cash flow and is something that every business should be doing.