How Promotions Impact your Demand Forecasts

Many supply chains serve promotion-driven markets. Including promotions in their forecasting models will drastically improve forecasting accuracy while reducing planners’ workload. This article discusses how promotions impact demand and which models to use to forecast promotion-driven products.

If you do business in a promotion-driven market, promotions most likely have a massive impact on demand. As they can be easily tracked and planned, they should be included in your model.

Figure 1 Impact of promotions on demand and forecast (FMCG distributor).

When running promotions, you will face two different effects: self-cannibalization (promotions often result in a down-up-down sales cycle) and cross-cannibalization (promoting one article often impacts the sales of other similar products). First, let’s review these two effects in detail. Then, we will discuss how forecasting models can capture these effects.

Self-Cannibalization

Promotions are challenging to model as they often result in preorders, clients delaying their purchases in expectation, and rebound effects. As Figure 2 illustrates, when doing recurring (or announced) promotions, you can expect lower…