What is the purpose of demand forecasting?

• A. To estimate future customer demand to plan capacity, inventory, and replenishment.
• B. To determine current safety stock levels only.
• C. To set marketing budgets.
• D. To calculate supplier payment terms.

Answer: (A)

Demand forecasting estimates future customer demand to guide capacity, inventory, and replenishment decisions. By predicting how much customers will want in the coming weeks or months, a company can plan how much production to schedule, how many units to keep on hand, and when to reorder materials so service levels stay high while costs stay sensible. It also helps set lead times and buffer levels to reduce stockouts or excess inventory, especially when there are seasonal patterns or trends.

This focus is broader than just setting safety stock, which is only a buffer needed to maintain service during uncertainty. It’s also not about marketing budgets, which are about demand generation and allocation, or about supplier payment terms, which are financial arrangements with vendors.