Chap 4: Demand Forecasting

Role of Demand Forecasting

A forecast is an estimate of future demand & provides the basic for planning decisions 

The goal is to minimize deviation between actual demand and forecast

The factors that influence demand must be considered when forecasting

Buyers and sellers should share relevant information to generate a single consensus forecast

Good forecasting provides reduced inventories, costs and stockout, improved production plans and customer service 

Forecast characteristics

Always inaccurate -> include both the expected value of the forecast and a measure of forecast error 

Long-term forecasts are usually less accurate than short-term forecasts → Long-term forecasts have a larger standard deviation of error relative to the short-term forecasts

Aggregate forecasts are usually more accurate than disaggregate forecasts → Tend to have a smaller standard deviation of error relative to the mean 

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The farther up/down the supply chain a company is → the greater the distortion of information it receives

Independent demand

demand for an inventory item is not reliant on or not related to the demand for another.

Ex: The demand for bicycles is influenced by various factors such as consumer preferences, marketing efforts, pricing, and overall market conditions. The company would need to forecast and manage the independent demand for bicycles separately from the dependent demand for bicycle tires.

Dependent demand

demand for inventory of an item is reliant upon another item.

Ex: In this case, the demand for bicycle tires would be considered dependent demand. The number of bicycle tires needed is directly dependent on the number of bicycles being produced. For each bicycle produced, two tires are required. Therefore, the demand for bicycle tires is directly linked to the production schedule of bicycles.

Inventory management system and process different for both categories:

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* Dependent demand: managed with sales order process, supply chain management processes, sale forecasts
* Independent demand: managed through MRP - Material Resources Planning or ERP - Enterprise Resource Planning

LACK OF COORDINATION ACROSS THE SC increase the variability —>**increase the costs and decrease the responsiveness**

Increase manufacturing cost

Increase inventory cost

Increase replenishment lead time

Increase Transportation Cost

Hurt responsiveness

Qualitative Methods

based on intuition or judgmental evaluation and are generally used when data are limited, unavailable, or not currently relevant.

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develop long-range projections when current data is no longer very useful, and for new product introductions when current data does not exist. 

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\+ low cost

\- its effectiveness depends to a large extent on the skill and experience of the forecaster(s) and the amount of relevant information available. 

Qualitative Method: Jury of Executive Opinion

A group of senior management executives who are knowledgeable about the market, their competitors and the business environment collectively develop the forecast.

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\+ several individuals with considerable experience working together

\+ applicable for long-range planning and new product introductions

\- if one member’s views dominate the discussion, then the value and reliability of the outcome can be diminished.

Qualitative Method: Delphi Method

A group of internal and external experts are surveyed during several rounds in terms of future events and long-term forecasts of demand. 

Group members do not physically meet

The answers from the experts are accumulated after each round of the survey and summarized. 

The summary of responses is then sent out to all the experts in the next round, wherein individual experts can modify their responses based on the group’s response summary.

This iterative process continues until a consensus is reached.

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\+ applicable for high-risk technology forecasting; large, expensive projects; or major, new product introductions

\+ The quality of the forecast depends largely on the knowledge of the experts.

\- The process can be both time-consuming and very expensive

Qualitative Method: Sales Force Composite

This type of forecast is generated based on the sales force’s knowledge of the market and estimates of customer needs.

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\+ Due to the proximity of the sales personnel to the consumers, the forecast tends to be reliable

\- Individual biases could negatively impact the effectiveness of this approach

Consumer Survey

A questionnaire is developed that seeks input from customers on important issues such as future buying habits, new product ideas and opinions about existing products.

The survey is administered through telephone, mail, Internet, or personal interviews.

\+ Data collected from the survey are analyzed using statistical tools and judgment to derive a set of meaningful results

\- The challenge is to identify a sample of respondents who are representative of the larger population and to get an acceptable response rate.

Quantitative Methods

Quantitative forecasting models use mathematical techniques that are based on historical data and can include causal variables to forecast demand

Quantitative Methods: Time series forecasting

* based on the assumption that the future is an extension of the past; thus, historical data
* can be used to predict future demand.

CPFR

Collaborative planning, forecasting, and replenishment

a set of business processes that entities in a supply chain can use for collaboration on a number of retailer/manufacturer functions towards overall efficiency in the supply chain

Simple moving average

The simple moving average forecast uses historical data to generate a forecast and works well when the demand is fairly stable over time.

**Cause-and-effect** forecasting

assumes that one or more factors (independent variables) are related to demand and, therefore, can be used to predict future demand.

Bullwhip effect

refers to the amplification of demand variability as we move upstream in the supply chain.

The amplifications and subsequent demand variations cause problems with capacity planning, inventory control, and workforce production scheduling. Some of the end results may be product shortages which may upset customers, or high inventories which increase total supply chain costs.

Reason of bullwhip

* Demand Forecast Updating
* Order Batching
* Price Fluctuations
* Rationing and Shortage Gaming

Effect of bullwhip

* causing stockouts
* lost sales
* high costs of inventory
* obsolescence
* material shortages
* poor responsiveness to market dynamics
* poor profitability.