Forecasting demand for organic products in order to maintain a cost effective inventory management

Organic food sales in the USA have reached from around $11 billion in 2004 to an estimated $27 billion and accounted for more than 3.5 percent of total U.S. food sales in 2012, according to the Nutrition Business Journal [1]. Markets for organic food had witnessed a great progress for decades in the USA. Below is a chart for organic food sales and annual growth for 2004-2013.

The main reasons for this rise in the forecast for organic product sales are the increasing awareness due to the use of environment and animal friendly organic farming methods. Along with the residential sector, education sector and restaurant sector are also expected to contribute substantially in the organic food market. The universities and restaurants have also started offering organic food in the USA. According to “The United States Organic Food Market Forecast & Opportunities, 2018”, the organic food market of the US will grow at about 14% during 2013-18.[2]

Organic product retailers must know the demand side in order to forecast well to buy the right products from their suppliers. When forecast is done well, the inventory management will be much more cost effective. However, for new products, sales forecasting is hard. However, predictive analytics can be used to make these forecasts in a rigorous and repeated fashion.

Forecasting the sales at the macro level is defined as doing so at a business or line item level, which is very important for strategic planning. The model, known as the Bass model, is based on the assumption that the first adopters of a product influence other potential adopters in the future. Below is an image illustrating a system of new product diffusion as consumers respond or do not respond to a product having an organic seal.

                                      

Forecasting the sales at the micro level is defined as doing so for specific customer segments, assumed smaller than business line items, which is very important for tactical operational planning. In order to profile the consumers, their demographic and psychographic data are used and the products they buy are studied. Another approach is to survey the consumers on their product perceptions and purchase behavior. [3]

To this end, investigation of the demographic profile of the organic consumer gains importance for those making inventory planning and management decisions. According to some studies[4], income and education increase the likelihood of organic product purchase. Zepeda et al. found that African Americans were less apt to purchase organic products compared to Caucasians, since many were unfamiliar with the products, or had little access to them. [5]

As the organic product market is expected to grow in the near future, it is important to know the consumer profile in order to forecast the demand well to achieve a successful inventory management. For instance, “Why minorities are less likely to purchase organic products?” might be a good question to start for research. The needs and the expectations of the potential customers are important to fill the gap in the market.

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[1] “Consumer demand drives growth in the organic food sector" Web. 01/27/2014.

<http://www.ers.usda.gov/data-products/chart-gallery/detail.aspx?chartId=35003&#.UuXFD8VRaIU>.

[2] “United States Organic Food Market Forecast and Opportunities, 2018” Web. 01/27/2014. <http://www.techsciresearch.com/2605>.

[3] “Macro and Micro Level New Organic Food Sales Forecasting via Predictive Analytics”, Sean S, Web. 01/27/2014. <http://decision-analytics-blog.lumina.com/decision-analytics/macro-and-micro-level-new-organic-food-sales-forecasting-via-predictive-analytics/>.

[4] “Organic Produce: Who’s Eating it? A Demographic Profile of Organic Produce Consumers”, Rachael L. Dettmann. Web. 01/27/2014. <http://ageconsearch.umn.edu/bitstream/6446/2/467595.pdf>.

[5] Ibid.