What is Annual Demand?
The annual demand represents the amount of inventory a company requires to fulfill its sales demands and revenue goals each year or for a particular accounting period. A company can determine the annual demand by checking its income statement for the previous year and identifying the average number of products it sells annually.
Significance of Annual Demand Formula in E-commerce Business
- The value of annual demand is useful for calculating the EOQ (Economic Order Quantity)
- The annual demand formula can be applied to each product type a company sells. You can use the annual demand for every product when calculating total annual demand.
- In case actual units are unavailable, the annual demand formula allows you to use expected sales figures depending on your sales trend
Applications of the Annual Demand Formula
The annual demand formula helps you to calculate the total number of orders your company needs and the total order cost for the period. You can also maintain an optimal order size with an annual demand formula to meet customer demand.
Annual Demand Formula
Annual Demand =
(12 x average number of products sold annually)
average ordering cycle
Average number of products sold annually: It denotes the average lot size of products a company sells annually.
Average ordering cycle: It denotes the average duration of ordering the products.
How to Use the Annual Demand Formula to Calculate a Business’ Annual Demand?
Suppose company XYZ sells 100 units of schoolbags annually. Its ordering cycle averages to 2 months. As per the formula, annual demand is calculated as follows,
Annual Demand = (12 * 100) /2 = 600
So, company XYZ needs to maintain 600 school bags in its inventory to meet the sales demand for each year.
The value of annual demand obtained from this formula helps companies forecast their sales demands each year. Therefore, they can understand the amount of inventory they require to maintain in the stock to ensure customer satisfaction. Also, the result of this formula helps companies to have profitable business.