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

Characteristics of Forecasts

Forecasts are always wrong. Should include expected value

and measure of error. Ex.100-1900 and 900-1100
Long-term forecasts are less accurate (large standard
deviation) than short-term forecasts (forecast horizon is
important) Aggregate forecasts are more accurate (small standard
deviation) than disaggregate forecasts. Ex GDP (2%
accuracy) - Sector-Industry-Firm.

Forecasting

Prediction

Forecasting involves the projection of the

past into the future.
Forecast involves estimating the level of
demand of a product on the basis of
factors that generated the demand in the
past months.
Forecasting is more scientific.
It is relatively free from personal bias.
It is more objective.
It is generally called as Throw Ahead
technique.
Error analysis is possible.
Forecasting is reproducible, i.e., every
time same result would be obtained by
any particular technique.

Prediction involves judgment in

management after taking all available
information into account.
Prediction involves the anticipated
change into the future. It may include
even new factors that may affect future
demand.
Prediction is more intuitive.
It is more governed by personal bias and
preferences.
It is more subjective.
It is generally called as Saying
Beforehand technique.
Prediction does not contain error
analysis.
It is non-producible.

Factors Considered For

Selection of a method

the context of the forecast

the relevance and availability of historical data
the degree of accuracy desirable
the time period to be forecast
the cost/ benefit (or value) of the forecast to the company
the time available for making the analysis

Forecasting Methods

Qualitative: primarily subjective; rely on judgment and

opinion-no or little historical data
Time Series: use historical demand only
Causal: use the relationship between demand and some
other factor to develop forecast (Interest rates-cement,
power cuts-inverter, coffee-tea)

Qualitative Technique
used when data is scarce
use human judgment and rating schemes to turn qualitative
information into quantitative estimates
frequently used in new-technology areas
Classified as
1. Delphi Method
2. Market Research
3. Panel consensus
4. Visionary forecast
5. Historical Analogy

Time Series Analysis

Statistical techniques used when several years data for a
product
Relationships and trends are both clear and relatively stable.
Rates and trends are not immediately obvious; they are
mixed up with seasonal variations
Time series is a set of chronologically ordered points of raw
data
More likely to be correct over the short term than it is over
the long term
A period of slow growth in sales will suddenly change to a
period of rapid decay, such points are called turning points

Time Series
Analysis(contd..,)

Types
1. Moving Average
2. Exponential Smoothing
3. Box Jenkins
4. X-11
5. Trend Projections

Causal Method
A causal model is the most sophisticated kind of forecasting
tool
When historical data are available and enough analysis has
been performed to spell out explicitly the relationships
between the factor to be forecast and other factors (such as
related businesses, economic forces, and socioeconomic
factors), the forecaster often constructs a causal model.
May also directly incorporate the results of a time series
analysis.
Continually revised as more knowledge about the system
becomes available.

Causal Method(contd..,)

Types
1. Regression Model
2. Econometric Model
3. Surveys
4. Diffusion Index
5. Input-output Model
6. Leading Indicator
7. Life-cycle Analysis

10

Basic Forecastinag
Techniques

11

Basic Forecastinag
Techniques

12

Basic Forecastinag
Techniques

13

Basic Forecastinag
Techniques

14

Basic Forecastinag
Techniques

15

16