Forecasting demand has never been easy, but in an economic downturn the task brings new challenges because the ground rules that usually guide forecasters shift. In a recession, companies need to retune their approaches to reading markets.
"If demand never varied there would be no need to forecast, so the main job of the forecaster is to try and figure out what made demand vary before and what will make it vary in the future," said Dr. Larry Lapide, Director of Demand Management, at the MIT Center for Transportation & Logistics (MIT CTL). In a downturn that requires a change in perspective. "Forecasters don't have to change what they do, but what they focus on," Lapide said.
To clarify what the new areas of focus should be, he pointed to five key components of demand variation:
1. Promotions and special events--These include price cuts and new product launches.
2. The business cycle and economic conditions--An example is consumers switching from luxury to value-priced goods when the economy sours.
3. Seasonal variations--The traditional demand spikes during peak buying seasons that recur from year to year.
4. Trends--Broad variations as sales rise and fall over the lifecycles of products.
5. Unknowns--The demand changes that are difficult to explain.
Each of these components can move demand, but the degree to which they influence buying patterns changes when an economy transitions from growth to recession mode, Lapide explained. When the economy is in a healthy growth phase, the trend piece of the demand pie is important because "products are growing and everyone is doing well." When the economy stalls much of that influence is transferred to the business cycle/economic conditions component. "We are going to see more impact from the economy than we've seen from a forecasting perspective," said Lapide.
In addition, the promotions and events component has a greater bearing on demand when the economy turns south. As demand slackens, companies compete more aggressively for the shrinking pool of buyers. This happens at the expense of seasonality and overall trends, as the triggers that prompt buyers to make purchases in good times are overridden by the rigors of a tougher economic climate.
Forecasters now have to grapple with the challenge of finding out what impact promotions and events and business cycles will have on the future demand for their products. As Lapide pointed out, when all the growth indicators are pointing upwards--as was the case a year or more ago - it is easier to discern demand trends.
Another important change is that a different mix of forecasting methods is needed in recessionary times. For instance, projecting from historic data becomes less reliable in highly volatile markets, and there needs to be more emphasis on understanding the impact of aggressively promoted products on sales, Lapide said. These aspects of the demand picture may be harder to assess, but forecasters will have to come to grips with them as long as the current economic climate persists. "There are going to be more demand variations than we've seen in a long time," Lapide said.
MIT's Center for Transportation & Logistics
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