Forecasting in Demand Management

FORECASTING

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.

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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)

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Basic Approach toDemand 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

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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

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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.

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.

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.

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).

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.

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Figure 15.1Forms of Forecast Movement: (a) Trend, (b) Cycle, (c) Seasonal Pattern, (d) Trend with

Seasonal Pattern

Forecasting Components Patterns

SUPPLY AND DEMAND MANAGEMENT

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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

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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

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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

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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)

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Demand Management

• Pricing and aggregate planning must be done jointly• Factors affecting discount timing• Product margin• Consumption• Forward buying

MANAGING UNCERTAINTY

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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

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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

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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

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Determining the AppropriateLevel 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

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Determining the AppropriateLevel 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

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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

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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)