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Retail Demand Forecasting: How CFOs Utilise AI To Optimise Working Capital

Table of Contents
Estimated Reading: 7 minutes
Post Author: Giuseppe Iafulli
Reviewed By: Michael Davies

Demand forecasting is essential for sustained profitability and strategic growth because it directly influences inventory management, which is a critical component of working capital.

When businesses accurately forecast demand, they can optimise their inventory levels, ensuring they neither overstock nor understock products. This balance is crucial because fluctuations in inventory directly affect working capital. Healthy working exactement is necessary for a business’s success, as it enables the company to meet its operational needs and invest in growth opportunities.

Effective demand forecasting helps ensure that inventory supports, rather than hinders, the achievement of healthy working capital.

CFOs are increasingly turning to AI-powered solutions to fortify forecasting capabilities, work through uncertainty with confidence and unlock capital for strategic investments. This article will explore why retail demand forecasting comes with a broad range of benefits and how your team can begin to explore them.

As a retail CFO, are you:

  • Finding it challenging to allocate capital effectively due to uncertainty in demand forecasting?
  • Seeking ways to leverage AI technology to optimise demand forecasting and unlock capital?
  • Struggling to accurately predict consumer demand in the fast-paced retail industry?

This article is for:

  • CFOs in the retail sector seeking innovative solutions to enhance demand forecasting accuracy.
  • Retail executives seeking to optimise working capital through better demand forecasting.
  • Decision-makers interested in using AI to improve financial performance and drive growth.

Table of Contents:

What Is Demand Forecasting In Retail?

Demand forecasting in retail is all about looking ahead and anticipating the future consumer demand for products or services. With the right data at your disposal, this serves as the bedrock upon which financial decisions are anchored. For CFOs, demand forecasting offers insights into market dynamics, consumer behaviour and operational efficiency. This can inform resource allocation and inventory management.

Why Does Forecasting Accuracy Matter In Retail?

Optimised capital allocation depends upon precise forecasts. Accurate predictions enable CFOs to strategically deploy financial resources, minimise working capital requirements, and optimise investment decisions. When CFOs can align capital expenditure with anticipated demand to mitigate the risk of overinvestment or underutilisation of resources. This can improve financial resilience and agility.

Forecasting accuracy directly impacts financial performance metrics such as profitability and liquidity. By gaining insights into future demand patterns, CFOs can optimise pricing strategies, streamline inventory management processes and maximise revenue streams. Retailers can achieve higher margins, enhanced profitability and improved cash flow. These are metrics that resonate with CFOs and stakeholders alike.

CFOs must navigate through uncertainty with precision and foresight. Using accurate forecasts, they can proactively identify emerging opportunities, anticipate market trends and pivot swiftly in response to changing consumer preferences. This strategic agility enables retailers to outmaneuver competitors, capture market share and sustain long-term growth.

Key Benefits Of Accurate Retail Demand Forecasting

The benefits of accurate demand forecasting within the retail domain are manifold. These align closely with the strategic imperatives and fiduciary responsibilities of retail CFOs.

Improved Financial Performance

Precise demand forecasting can translate into improved financial performance and shareholder value. When supply aligns with anticipated demand, retailers can optimise sales volumes, minimise inventory costs, and enhance overall profitability. This is a narrative that resonates deeply with CFOs and investors alike. Accurate forecasts also enable CFOs to make data-driven decisions for sustained value creation.

Increased visibility

Increased visibility allows CFOs to allocate resources more efficiently. With insights into future demand patterns, CFOs can streamline supply chain operations, optimise inventory management processes, and eliminate inefficiencies. Retailers can operate with greater agility, responsiveness and cost-effectiveness, positioning themselves for sustained success amid fluctuating market conditions.

Fosters A Culture Of Collaboration

CFOs must collaborate closely with cross-functional teams to drive value creation and mitigate risk. They foster a culture of collaboration, transparency and accountability within an organisation by offering accurate demand forecasts. Teams can align their objectives, optimise resource allocation and execute strategic initiatives with the precision and confidence necessary for success.

Unlock Capital For Strategic Investments

Accurate demand forecasting enables CFOs to unlock capital for strategic investments and growth initiatives. When you optimise inventory levels, minimise working capital requirements and maximising cash flow, CFOs can free up financial resources for investment in innovation, expansion and market differentiation. This ensures retailers can pursue strategic initiatives with confidence.

Retail Demand Forecasting Methods: How To Forecast Better

As you look to improve your forecasting, CFOs must adopt a multifaceted approach and begin leveraging advanced methodologies and cutting-edge technology to unlock actionable insights and optimise capital allocation. Effective forecasting methods and tools can make all the difference. Finding the right tools for your retail business are important to shaping your organisational strategy.

Picking The Right Methodologies & Tools

Selecting the appropriate demand forecasting methodologies and tools is a critical decision for CFOs, with far-reaching implications for financial performance and strategic agility. In evaluating prospective solutions, CFOs should consider the following:

Grounding in Statistical Principles and Predictive Analytics

The methodologies and tools must be grounded in sound statistical principles and predictive analytics. CFOs must ensure that the chosen methodologies and tools can effectively model complex demand patterns, account for seasonality, trends, external factors and generate accurate forecasts with high levels of confidence. They must offer robust validation and testing capabilities, enabling CFOs to assess the accuracy and reliability of forecasts and make informed decisions accordingly.

Scalability & Flexibility

CFOs should evaluate the scalability and flexibility of the methodologies and tools, ensuring they can accommodate evolving business needs and dynamic market conditions. Whether it’s regional analysis or scenario planning, the methodologies and tools must offer robust features and customisation options to cater to the organisation’s unique requirements. By providing flexibility and scalability, CFOs can future-proof their forecasting capabilities and drive sustained value creation for the organisation.

Comprehensive Data Integration

CFOs must choose tools that integrate comprehensive data sets when producing forecasts, surpassing traditional ERP systems that often have limitations in the scope and variety of data they can process. Advanced forecasting tools should be capable of ingesting and analysing data from diverse sources, including but not limited to sales history, customer behavior, economic indicators, and market trends. With big data analytics, these tools can uncover hidden patterns that traditional systems might miss.

Key Features For Demand Forecasting Methodologies & Tools

Comprehensive Data Analysis

Advanced forecasting methodologies and tools empower CFOs to analyse vast datasets with unparalleled granularity and precision. Using advanced analytics and machine learning algorithms, CFOs can derive actionable insights from diverse data sources, including historical sales data, market trends, and external factors such as economic indicators and weather patterns. Such comprehensive data analysis enables CFOs to anticipate market trends, identify emerging opportunities, and optimise resource allocation strategies proactively.

Trendhim, a Denmark-based online store for men’s accessories and jewellery, faced challenges with forecasting accuracy and manual supply chain management. Implementing an AI-powered inventory management app with advanced forecasting capabilities allowed them to better integrate demand signals, marketing plans, and external factors. This led to a significant reduction in stockouts and overstocks. As a result, Trendhim improved their forecasting accuracy, positively impacting their profit and loss statements. This case highlights the critical role of data-driven decision-making in modern retail operations.

Customisable Models

No two retail organisations are alike, and thus, demand forecasting methodologies and tools must offer robust customisation options to accommodate diverse business requirements and operational nuances. Whether it pertains to demand patterns, seasonality factors, or market dynamics, CFOs must have the flexibility to tailor forecasting models to their unique needs and preferences. Offering customisable forecasting models, methodologies, and tools can empower CFOs to unlock actionable insights and drive strategic decision-making with precision and confidence.

Consider a UK-based retailer specialising in organic baby food, facing unique market challenges due to the niche nature of its products and the variability in consumer preferences. To manage their inventory effectively, the retailer implemented a customisable demand forecasting model. This model accommodated factors unique to the baby food market, such as demographic trends like birth rates and changing parental preferences towards organic ingredients.

It also integrated seasonality, accounting for fluctuations in the availability of organic produce. By customising their forecasting tools, the CFO and supply chain managers could input specific variables relevant to their operations, like promotional campaigns and social media trends. This customisation enabled the retailer to predict demand more accurately, reducing overstocks and understocks, minimising waste, and optimising cash flow.

Collaborative Tools

Effective demand forecasting is a collaborative endeavor, requiring seamless communication and alignment across various functional domains within the organisation. As stewards of financial strategy and guardians of capital allocation, CFOs must ensure that demand forecasting methodologies and tools facilitate cross-functional collaboration and alignment. 

Accordingly, CFOs should seek out methodologies and tools that offer robust collaboration features, enabling teams to share insights, collaborate on forecasting assumptions, and align on strategic objectives. By fostering a culture of collaboration and knowledge-sharing, methodologies and tools empower CFOs to harness the collective intelligence of their teams, driving innovation and agility across the organisation.

Using Kleene For Retail Demand Forecasting

While there are many demand forecasting solutions available in the market, Kleene offers a range of features. These are designed to take your retail demand forecasting capabilities to new heights.

Kleene empowers CFOs to:

  • Enhance the accuracy of demand planning by identifying complex patterns and trends that human analysts might overlook.
  • Increase visibility of how cash is allocated leading to better predicting how to best allocate resources
  • Increasing fill in rates and reduce overstock, thereby freeing up working capital
  • Anticipate changes in consumer demand by forecasting future trends based on current data, enabling proactive decision-making.

The AI-powered demand model offers the following capabilities:

  • Integrating multiple data sources to exponentially increase forecast accuracy.
  • Precisely tailor the algorithm to your business specific needs –
  • Making hyper-granular predictions by considering various inputs from the supply chain and other departments
  • Predicting future inventory levels to optimise inventory management and meet service level agreements (SLAs).
  • Automating supply workflows to streamline operations and minimise manual effort.

Demand forecasting for CFOs, enabling them to make informed decisions, optimise capital allocation, and drive sustainable growth in the retail domain. Leveraging advanced methodologies, tools and AI-powered solutions like Kleene, CFOs can unlock actionable insights and work through uncertainty with confidence. 

Download our free e-book on how CFOs can master working capital in retail.

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