Forecasting & Demand Planning - Chapter 3

Forecasting

The process of predicting future events and drives all other business decisions

Planning

The process of selecting actions in anticipation of the forecast. It requires organizing resources in anticipation of the forecast

Planning Process

Scheduling existing resource, determining future resource needs, and acquiring new resources

Demand Management

the process of influencing demand (promotional campaigns, advertisements, etc.)

How does forecasting impact marketing?

Estimates of demand and future trends

How does forecasting impact finance?

Set budgets and predict stock prices

How does forecasting impact operations?

Capacity planning, scheduling, and inventory levels

How does forecasting impact sourcing?

Making purchasing decisions and selecting suppliers

How does demand forecast affect supply chain?

Affects the plans made by each member of the supply chain

What does independent forecasting among supply chain members do?

Causes a mismatch between supply and demand and gives rise to the bullwhip effect

What are the principles of forecasting?

Forecasts are rarely perfect, are more accurate for groups than for individual items, and are more accurate for shorter than longer time horizons

What is the first step in the forecasting process?

Deciding what to forecast

Long-term Forecasts

Typically for a period beyond three years and are used for strategic planning, such as entering a new market or launching a revolutionary product

Medium-term forecasts

Spanning from one to three years, these forecasts guide budgeting decisions on expansion plans

Short-term Forecasts

These are for periods less than a year and are crucial for operational decisions like inventory management or staffing

What is the second step in the forecasting process?

Analyzing appropriate data by following patterns as well as data that can contain random variation

Historical Data

This encompasses past demand data and factors that influence demand, such as advertising campaigns, promotions, or price changes

Economic Indicators

Both historical and prospective data on GDP growth, money supply, inflation rates, and other economic factors can influence demand patterns

Demographic and Trends Data

Information on population growth, age distribution, urbanization trends, and other societal patterns can be pivotal, especially for consumer goods and services

Expert Knowledge

Sometimes, the best insights come from individuals with deep industry knowledge or those who have a pulse on market sentiments

What is the third step in the forecasting process?

Select the model best suited for the identified data pattern

What is the fourth step in the forecasting process?

Generate the forecast

What is the fifth step in the forecasting process?

Monitoring forecast accuracy by measuring forecast error to improve the forecast process

What should be considered when selecting a forecasting method?

Amount and type of available data, degree of accuracy required, patterns in the data, and the length of forecast horizon

Qualitative Forecasting Method

Based on subjective opinions and often called judgmental methods

Quantitative Forecasting Method

Based on mathematical modeling, objective and consistent, can handle large amounts of data and uncover complex relationships

Strengths of qualitative forecasting

Highly responsive to latest changes in environment, can include "inside' and "soft" information difficult to quantify, can compensate for "one-time" or unusual events, and provide user with a sense of ownership

Weaknesses of qualitative forecasting

Cannot consider many variables, influenced by short term memory, difficulty in understanding relationships, biased

Strengths of quantitative forecasting

Can consider many variables and complex relationships, objective, consistent, can process large amounts of information

Weaknesses of quantitative forecasting

Only as good as the data and model, slow to react to changing environments, costly and time consuming to model 'soft' information, and requires technical understanding

Expert Judgment (Qualitative)

Involves soliciting forecasts from individuals who possess deep knowledge in the field being forecasted

Delphi Method (Qualitative)

A more structured approach to harnessing expert opinion. It involves a series of surveys conducted among a panel of experts. After each round, the responses are shared anonymously with the panelists, allowing them to refine their forecasts based on the feedback of their peers

Market Research (Qualitative)

Dives into understanding customer needs, preferences, and behaviors in order to forecast demand for new offerings or anticipate shifts in demand for their current products or services

Customer Surveys (Qualitative)

A subset of market research, consumer surveys directly engage with consumers, asking them about their spending habits, product preferences, and future intentions

Sales Force Polling (Qualitative)

Survey of salespeople about their expectations for sales in their territories or product lines. Salespeople's direct interactions with customers give companies a unique perspective, allowing them to offer forecasts that might be more attuned to real-time market conditions than historical data alone

Brainstorming (Qualitative)

Involves gathering a diverse group of individuals to generate a wide array of ideas and predictions about future demand

Time Series Models (Quantitative)

Generate the forecast from an analysis of a "time series" of the data

Causal Models (Quantitative)

Assume that the variable being forecast is related to other variables in the environment

Mean (Time Series Model)

Forecast is made by taking an average

Moving Averages (Time Series Model)

Forecast is made by averaging a specified number, n, of the most recent data

Seasonality Judgement (Time Series Model)

Compute average demand for each season, compute a seasonal index for each season, and adjust the average forecast for next year by the seasonal index

Linear Regression (Causal Models)

A forecasting model that assumes a straight line relationship between an independent variable and a single dependent variable

Multiple Regression (Causal Models)

Extends linear regression by looking at a relationship between an independent variable and multiple dependent variables

Neural Networks (Modern Forecasting Model)

Computing systems inspired by the human brain's structure, consisting of layers of interconnected nodes that process information. They excel at recognizing patterns in large datasets, making them invaluable for complex forecasting tasks

Machine Learning (Modern Forecasting Model)

Enables computers to learn from data by training itself using data to make predictions. In forecasting, it can sift through historical data, pinpoint patterns, and refine its predictions as more data is fed into it

Artificial Intelligence (Modern Forecasting Model)

Aims to create machines mimicking human intelligence. In forecasting, AI can amalgamate various data sources, analyze them, and even adapt its forecasting strategy based on changing variables

Collaborative Planning, Forecasting, and Replenishment (CPFR)

Collaborative process of developing joint forecasts and plans with supply chain partners

What are the steps of CPFR?

Create joint objectives, develop a business plan, create a joint forecast, agree on replenishment strategies, and agree on a technology partner to bring CPFR to fruition

Sales and Operations Planning (S&OP)

A collaborative process for generating forecasts that all functional areas agree upon

What are the steps of S&OP?

Generate quantitative sales forecast, marketing adjusts the forecast, operations checks forecast against existing capability, marketing/operations/finance jointly review forecast and resource issues, executives finalize forecast and capacity decisions

Bias

Measures the average forecast error and indicates whether the forecast is consistently overestimating or underestimating the actual demand

Mean Absolute Deviation

Measures the average magnitude of forecast errors, regardless of their direction

Mean Absolute Percent Error

Expresses the forecast errors as a percentage of actual values, providing a relative measure of accuracy

Jenco Inc. produces dolls. Annual cost of goods sold is $10,000,000 and average inventory is $2,000,000. What is the annual inventory turnover?

5 inventory turns/year

What is the forecast for May using a three-period moving average?

January Sales - 38, February Sales - 27, March Sales - 42, April Sales - 42, May - ?

37

Product Characteristics

A type of forecasting variable that influences overall demand for the product