Forecasting plays a key role in supply chain planning and decision-making. Accurate forecasts are needed for production scheduling, inventory management, marketing activities, finance, and personnel planning. However, forecasts are never perfectly accurate. A variety of quantitative and qualitative forecasting methods are used, from time series analysis to surveys of customer intentions. Managing both supply and demand can help address predictable variability in demand over time. Inventory, capacity, pricing, and promotions all need to be considered to balance costs and customer service.

1. Forecasting in Demand Management

2. FORECASTING

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.
7-3

4. Characteristics of Forecasts
• Forecasts are always wrong.
• Long-term forecasts are less accurate than short-term
forecasts
• Aggregate forecasts are more accurate than disaggregate
forecasts (National GDP vs. annual performance of a company,
annual performance of a department, annual performance of a
worker)
7-4

5. Basic Approach to
Demand Forecasting
• Understand the objectives of forecasting
• Integrate demand planning and forecasting
• 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
7-5

6. Forecasting Methods
• Qualitative: primarily subjective; rely on judgment and opinion
• Time Series: use historical demand only
• Static
• Adaptive
• Causal: use the relationship between demand and some other
factor to develop forecast
• Simulation
• Imitate consumer choices that give rise to demand
• Can combine time series and causal methods
7-6

7. Methods of Forecasting Demand
1.Quantitative methods: numerical and statistical
methods for forecasting demand - more objective.
2.Qualitative Methods: subjective, base on judgements
of managers - subjective and depends on managers
judgement.
Combination of two might be used.

8. Methods of Forecasting Demand
 Quantitative methods:
 Trend analysis
 Simple and multiple regression
 Percentage of sales method
 Qualitative Methods:
1- Survey of buyers intention: marketer ask buyers about how
many units that they would like to purchase from ABC
company’s products for coming period of time.
 Well defined buyers
 Limited in number
 Advantage: Simple and Easy
 Disadvantage: buyers might change their opinions, there is no
enforcement on buyers to buy that much, buyers might over or
under estimate.

9. Methods of Forecasting Demand
2- Test Marketing: this research method is heavily preferred
when company offers a new product to the market
(innovation).
• Before offering product to the market, marketers need to get
some real feedback from market.
• Marketer: choose a specific region or a store to test the
product in real market conditions.
• Advantage: provide real feedbacks about customers reactions
and make estimates upon that.
• Disadvantage: no control over who will purchase our new
product.
• Rivals might get aware of it and company loose all of its
competitive advantage.

10. Methods of Forecasting Demand
4- Executive method (jury of executive method): Company
forms a committee to make forecast from members from different
departments (marketing, accounting, R&D, production)
 Make their own forecast and send to committee at a written form
 Committee members came together and discuss forecasts and
agree one of the estimates or come up with a new estimate for
whole company.
 Advantage: easy and simple to use.
 Disadvantage:
 estimates are for whole markets and difficult to separate
them to specific market or product line;
 Reliability and accuracy of estimate depend on how to up-to-
date;
 Members can easily influence each other (objectivity is in
question).

11. Methods of Forecasting Demand
5- Delphi method:
 Very similar to jury of executives method but this time
members are both inside and outside the company
 Members do not know each other and never come together. A
moderator from company organize all the contacts
 Moderator prepare data and send it to members to make their
own estimate
 Members send their estimate to moderator as a written form
and moderator makes analysis on estimates and form a new
data set and conditions and send back to members for further
estimate
 This will continue until all members agree on same forecast.
(it is suitable for long-term forecasts).
 Advantage: No group pressure, more objective
 Disadvantage: Takes long time.

12. Chapter15-Forecasting
7-12
Figure 15.1
Forms of Forecast Movement: (a) Trend, (b) Cycle, (c) Seasonal Pattern, (d) Trend with
Seasonal Pattern
Forecasting Components Patterns

13. SUPPLY AND DEMAND
MANAGEMENT

14. 9-14
Responding to Predictable
Variability in a Supply Chain
• Predictable variability is change in demand that can be forecasted
• Can cause increased costs and decreased responsiveness in the
supply chain
• A firm can handle predictable variability using two broad
approaches:
• Manage supply using capacity, inventory, subcontracting, and backlogs
• Manage demand using short-term price discounts and trade
promotions

15. 9-15
Managing Supply
• Managing capacity
• Time flexibility from workforce
• Use of seasonal workforce
• Use of subcontracting
• Use of dual facilities – dedicated and flexible
• Designing product flexibility into production processes
• Managing inventory
• Using common components across multiple products
• Building inventory of high demand or predictable demand products

16. 9-16
Inventory/Capacity Trade-off
• Leveling capacity forces inventory to build up in anticipation of
seasonal variation in demand
• Carrying low levels of inventory requires capacity to vary with
seasonal variation in demand or enough capacity to cover peak
demand during season

17. 9-17
Managing Demand
• Promotion
• Pricing
• Timing of promotion and pricing changes is important
• Demand increases can result from a combination of three
factors:
• Market growth (increased sales, increased market size)
• Stealing share (increased sales, same market size)
• Forward buying (same sales, same market size)

18. 9-18
Demand Management
• Pricing and aggregate planning must be done jointly
• Factors affecting discount timing
• Product margin
• Consumption
• Forward buying

19. MANAGING UNCERTAINTY

20. 11-20
Role of Inventory in the Supply
Chain
Improve Matching of Supply
and Demand
Improved Forecasting
Reduce Material Flow Time
Reduce Waiting Time
Reduce Buffer Inventory
Economies of Scale
Supply / Demand
Variability
Seasonal
Variability
Cycle Inventory Safety Inventory
Figure Error! No text of
Seasonal Inventory

21. 11-21
The Role of Safety Inventory
in a Supply Chain
• Forecasts are rarely completely accurate
• If average demand is 1000 units per week, then half the
time actual demand will be greater than 1000, and half
the time actual demand will be less than 1000; what
happens when actual demand is greater than 1000?
• If you kept only enough inventory in stock to satisfy
average demand, half the time you would run out
• Safety inventory: Inventory carried for the purpose of
satisfying demand that exceeds the amount forecasted
in a given period

22. 11-22
Role of Safety Inventory
• Average inventory is therefore cycle inventory plus safety
inventory
• There is a fundamental tradeoff:
• Raising the level of safety inventory provides higher levels of product
availability and customer service
• Raising the level of safety inventory also raises the level of average
inventory and therefore increases holding costs
• Very important in high-tech or other industries where obsolescence is a
significant risk (where the value of inventory, such as PCs, can drop in
value)
• Compaq and Dell in PCs

23. 11-23
Determining the Appropriate
Level of Safety Inventory
• Measuring demand uncertainty
• Measuring product availability
• Replenishment policies
• Evaluating cycle service level and fill rate
• Evaluating safety level given desired cycle service level or fill rate
• Impact of required product availability and uncertainty on safety
inventory

24. 11-24
Determining the Appropriate
Level of Demand Uncertainty
• Appropriate level of safety inventory determined by:
• supply or demand uncertainty
• desired level of product availability
• Higher levels of uncertainty require higher levels of safety
inventory given a particular desired level of product availability
• Higher levels of desired product availability require higher levels
of safety inventory given a particular level of uncertainty

25. 11-25
Measuring Product
Availability
• Product availability: a firm’s ability to fill a customer’s order out
of available inventory
• Stockout: a customer order arrives when product is not available
• Product fill rate (fr): fraction of demand that is satisfied from
product in inventory
• Order fill rate: fraction of orders that are filled from available
inventory
• Cycle service level: fraction of replenishment cycles that end with
all customer demand met

26. 11-26
Replenishment Policies
• Replenishment policy: decisions regarding when to reorder and
how much to reorder
• Continuous review: inventory is continuously monitored and an
order of size Q is placed when the inventory level reaches the
reorder point ROP
• Periodic review: inventory is checked at regular (periodic) intervals
and an order is placed to raise the inventory to a specified
threshold (the “order-up-to” level)