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Demand Forecasting
in a Supply Chain
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
Measures of forecast error
Forecasting demand at Tahoe Salt
Forecasting in practice
2007 Pearson Education
7-2
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
7-3
Characteristics of Forecasts
Forecasts are always wrong. Should include
expected value and measure of error.
Long-term forecasts are less accurate than shortterm forecasts (forecast horizon is important)
Aggregate forecasts are more accurate than
disaggregate forecasts
7-4
Forecasting Methods
Qualitative: primarily subjective; rely on judgment and
opinion
Time Series: use historical demand only
Static
Adaptive
7-5
Components of an Observation
Observed demand (O) =
Systematic component (S) + Random component (R)
Level (current deseasonalized demand)
Trend (growth or decline in demand)
Seasonality (predictable seasonal fluctuation)
Systematic component: Expected value of demand
Random component: The part of the forecast that deviates
from the systematic component
Forecast error: difference between forecast and actual demand
2007 Pearson Education
7-6
Demand Dt
8000
13000
23000
34000
10000
18000
23000
38000
12000
13000
32000
41000
7-7
7-8
Forecasting Methods
Static
Adaptive
Moving average
Simple exponential smoothing
Holts model (with trend)
Winters model (with trend and seasonality)
7-9
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
7-10
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
7-11
Static Methods
Estimating level and trend
Estimating seasonal factors
7-12
7-13
Demand Dt
8000
13000
23000
34000
10000
18000
23000
38000
12000
13000
32000
41000
7-14
7-15
7-16
Deseasonalizing Demand
Di / p for p odd
(sum is from i = t-(p/2) to t+(p/2)), p/2 truncated to lower integer
7-17
Deseasonalizing Demand
For the example, p = 4 is even
For t = 3:
D3 = {D1 + D5 + Sum(i=2 to 4) [2Di]}/8
= {8000+10000+[(2)(13000)+(2)(23000)+(2)(34000)]}/8
= 19750
D4 = {D2 + D6 + Sum(i=3 to 5) [2Di]}/8
= {13000+18000+[(2)(23000)+(2)(34000)+(2)(10000)]/8
= 20625
7-18
Deseasonalizing Demand
Then include trend
Dt = L + tT
where Dt = deseasonalized demand in period t
L = level (deseasonalized demand at period 0)
T = trend (rate of growth of deseasonalized demand)
Trend is determined by linear regression using deseasonalized
demand as the dependent variable and period as the
independent variable (can be done in Excel)
In the example, L = 18,439 and T = 524
7-19
Demand
40000
30000
Dt
Dt-bar
20000
10000
0
1 2 3 4 5 6 7 8 9 10 11 12
Period
7-20
7-21
7-22
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
7-23
7-24