Demand Forecasting in Supply Chain
7-2 Outline
The role of forecasting in a supply chain
Characteristics of forecasts
Components of forecasts and forecasting methods
Basic approach to demand forecasting
Time series forecasting methods
Forecasting in practice
7-3 Role of Forecasting
in a Supply Chain
The basis for all strategic and planning decisions in a supply chain
Used for both push and pull processes
Examples:
Production: scheduling, inventory, aggregate planning
Marketing: sales force allocation, promotions, new production introduction
Finance: plant/equipment investment, budgetary planning
Personnel: workforce planning, hiring, layoffs
All of these decisions are interrelated
7-4 Characteristics of Forecasts
Forecasts are always wrong. Should include expected value and measure of
error.
Long-term forecasts are less accurate than short-term forecasts (forecast
horizon is important) (e.g. monthly shopping of groceries)
Aggregate forecasts are more accurate than disaggregate forecasts (e.g.
company growth vs sku level growth)
Forecast error increases as the distance from customer increases (e.g.
bullwhip effect)
7-5 Forecasting Methods
Qualitative: primarily subjective; rely on judgment and opinion (e.g. new
products)
Time Series: use historical demand only
Causal: use the relationship between demand and some other factor to
develop forecast (e.g. discounts)
Simulation
Imitate consumer choices that give rise to demand
Can combine time series and causal methods
7-6 Basic Approach to
Demand Forecasting
Understand the objectives of forecasting (who all are affected?)
Integrate demand planning and forecasting throughout the supply chain
(retailer’s forecast must match the company’s forecast)
Identify major factors that influence the demand forecast
Understand and identify customer segments
Determine the appropriate forecasting technique
Establish performance and error measures for the forecast
7-7 Time Series
Forecasting Methods
Goal is to predict systematic component of demand
Multiplicative: (level)(trend)(seasonal factor)
Additive: level + trend + seasonal factor
Mixed: (level + trend)(seasonal factor)
Static methods
Adaptive forecasting
Risk Management in Forecasting
Examples contributing to forecasting error
Long lead times require forecast to be provided in advance, hence reliability of forecast reduces
Seasonality
Continuously shortening product life cycles
Inconsistent customer base (e.g. kirana store in remote location)
How do you mitigate the risk?
Pooling of demand (e.g. consolidating warehouse)
Increasing responsiveness of supply chain thereby reducing lead time, hence forecast can be given
for shorter durations.
Collaborative forecasting
7-9 Forecasting in Practice
Collaborate in building forecasts
The value of data depends on where you are in the supply chain
Be sure to distinguish between demand and sales
Thank you
