Chapter 5: Demand Forecasting & Collaborative Planning, Forecasting, and

Replenishment (CPFR)

Introduction to Demand Forecasting

 Forecasting involves estimating future demand for products or services. This is critical for
efficient supply chain management, as it helps companies prepare for future demand by
anticipating needs, and reducing uncertainty.

 Goal of Forecasting:

o The main aim is to minimize forecast error, meaning the difference between the
predicted demand and the actual demand.

 Factors Influencing Demand:

o Market trends, economic conditions, consumer behavior, and other external factors
should be considered in the forecasting process. These factors help predict if they
will continue influencing demand patterns.

 Benefits of Better Forecasting:

o Improved demand forecasting offers several benefits, such as:

 Lower inventories

 Fewer stock-outs (out-of-stock situations)

 Smoother production plans

 Reduced costs (as a result of reduced inventory or production inefficiencies)

 Improved customer service, because products are available when needed.

Matching Supply and Demand

 Suppliers need accurate forecasts to produce and deliver the correct quantities at the right
time and cost.

 Matching supply and demand is essential for staying competitive, and it involves balancing
several factors, including:

o Cost

o Quality

o Customer service

 Impact of Problems:

o Any problems in production or delivery affect the entire supply chain. Delays or
shortages in one area can create a ripple effect.
Forecasting Techniques
 Qualitative Forecasting:

o This method is used when data is limited, unavailable, or irrelevant. It relies on

experience and intuition.

o Some examples of qualitative methods include:

1. Jury of executive opinion: Group of experts makes a decision based on their

insights.

2. Delphi method: A panel of experts provides forecasts through multiple

rounds of questioning.

3. Sales force composite: Forecasts based on input from the sales team.

4. Consumer survey: Gathering consumer opinions to estimate future demand.

 Quantitative Forecasting:

o Uses mathematical models and historical data to predict future demand.

o Time series forecasting and associative forecasting are key quantitative methods:

 Time series forecasting assumes future demand follows the same patterns
as past demand.

 Associative forecasting looks for relationships between demand and other

influencing factors.

 Combination of Methods:

o A blend of qualitative and quantitative methods is often recommended for more

accurate forecasting.

Components of Time Series

Time series data, when plotted, reveals certain components that affect demand:

1. Trend Variations:

o Long-term upward or downward movement of demand over time.

2. Cyclical Variations:

o Long-term wave-like patterns, often influenced by economic cycles.

3. Seasonal Variations:

o Demand peaks and valleys at regular intervals (daily, weekly, yearly).

4. Random Variations:
 o Unexpected fluctuations due to unforeseen events (e.g., natural disasters, political
events).

Time Series Forecasting Models

1. Simple Moving Average (SMA):

o How it works: The forecast is the average of a set number of previous periods’ data.
This model is good when demand is stable.

2. Weighted Moving Average (WMA):

o How it works: Similar to SMA but assigns different weights to data points, typically
giving more weight to recent data.

Forecast Accuracy
Forecast Error:

 Formula:
et=At−Fte_t = A_t - F_tet=At−Ft Where:

o ete_tet = Forecast error for period ttt

o AtA_tAt = Actual demand for period ttt

o FtF_tFt = Forecast demand for period ttt

 Accuracy Measures:

o Mean Absolute Deviation (MAD): Measures average forecast error, the closer to 0,
the better the forecast.

o Mean Absolute Percentage Error (MAPE): Measures the magnitude of forecast

errors in percentage terms, providing a clearer picture of the forecast's reliability.

Collaborative Planning, Forecasting, and Replenishment (CPFR)

 CPFR is a collaborative process between supply chain partners to plan key activities such as:

o Production of raw materials

o Delivery of products to customers

 Objective:

o The aim is to optimize the supply chain through improved forecasting and planning,
ensuring that the right products are available at the right time, at the right place,
and with reduced inventory.
  Value of CPFR:

o Enhances forecasting accuracy by sharing information among partners on sales,

promotions, new product launches, and store activities.

 Voluntary Interindustry Commerce Standards Process Model:

o Steps in CPFR include:

1. Develop Collaboration Arrangement

2. Create Joint Business Plan

3. Create Sales Forecast

4. Identify Exceptions in Sales Forecast

5. Resolve/Collaborate on Exceptions

6. Create Order Forecast

7. Identify Exceptions in Order Forecast

8. Resolve/Collaborate on Exceptions

9. Order Generation

Chapter 6: Aggregate Planning and Inventory Management

Introduction to Aggregate Planning and Inventory Management

 Scheduling and inventory management are crucial to efficiently deploying assets and
meeting demand.

 Issues like missed due dates or stock-outs can disrupt the entire supply chain, making it
important for operations managers to balance capacity and output effectively.

 Key Topics in This Chapter:

o Hierarchical planning process

o Dependent and independent demand

o Types of inventories

o Inventory management approaches

Operations Planning
Operations planning is typically hierarchical and involves three main categories:

1. Long-Range Planning:

o Involves large-scale decisions (e.g., facility construction, major equipment

purchases).

o An example: Aggregate Production Plan (APP), which spans a year or more and
helps in large-scale resource allocation.

2. Intermediate Planning:

o Focuses on the timing and quantities of end items.

o An example: Master Production Schedule (MPS), which specifies what needs to be

produced and when.

3. Short-Range Planning:

o Deals with detailed scheduling of materials and parts based on the MPS.

o An example: Materials Requirements Planning (MRP), which ensures that materials

and components are available for production.

Types of Planning Systems

1. Closed-loop MRP:

o A planning system that integrates the APP, MPS, MRP, and Capacity Requirements
Plan.

2. Manufacturing Resource Planning (MRP-II):

o Expands on closed-loop MRP by integrating business plans and sales forecasts.

3. Distribution Requirements Planning (DRP):

o Focuses on managing inventory levels across distribution centers and warehouses

based on demand and available stock.

Aggregate Production Plan (APP)

 APP is a high-level plan that aligns production and inventory levels with business and
marketing plans.

 Planning Horizon:

o Typically at least one year, updated quarterly.

  Costs to Consider:

o Inventory, setup, operation, hiring, training, and overtime costs.

Production Strategies in Aggregate Planning

1. Chase Strategy:

o Adjusts capacity to match actual demand, with workforce fluctuations but stable
finished goods inventory.

2. Level Strategy:

o Maintains constant output and capacity, varying inventory or backlogs to meet

fluctuating demand.

3. Mixed Strategy:

o Maintains a stable core workforce and uses overtime or subcontracting to handle

short-term demand changes.

Master Production Scheduling (MPS)

 MPS specifies exact quantities of finished products to be produced in a given period.

 Planning Horizon:

o Shorter than APP but must account for lead time needed for production.

 System Nervousness:

o Occurs when small changes in the higher-level plans cause significant shifts in the
lower-level plans.

 Time Fence System:

o A system to control nervousness by separating the planning horizon into:

 Firmed Segment: Fixed and unchangeable.

 Tentative Segment: Flexible and subject to change.

Available-to-Promise (ATP)
 ATP represents the difference between confirmed customer orders and the planned
production quantities, ensuring that the company doesn't overpromise its products.
Dependent & Independent Demand
 Dependent Demand: The need for components or parts based on the demand for the
finished product (e.g., subassemblies).

 Independent Demand: The demand for finished goods driven by external factors (e.g.,
seasonal sales).

Materials Requirements Planning (MRP)

 MRP: A computer-based system used to manage dependent demand and schedule material
orders.

 Advantages: Helps in inventory control and materials planning.

 Disadvantages: Assumes steady demand and does not account for capacity constraints.

Economic Order Quantity (EOQ)

 EOQ: The ideal order quantity that minimizes the total of ordering and holding costs.

 Assumptions:

o Constant demand

o Fixed order and holding costs

Inventory Systems
1. Independent Demand Inventory: Includes raw materials, work-in-process, and finished
goods.

2. ABC Inventory Control: Classifies inventory into three categories:

o A: Most critical items

o B: Moderately critical items

o C: Least critical items.