Supply Chain Management

Topic VII

Demand Forecasting & Collaborative Planning

Forecasting & Supply Chain Management



Need for forecasting

  

Estimate of future demand Basis for planning Basis for decision making

Goal of forecasting technique :

 

Minimum deviation in Forecasted Demand Vs. Actual Demand

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Forecasting & Supply Chain Management



For developing effective forecast, one needs to study

  

Factors that influence demand Impact of factors Will these factors continue to influence demand For this purpose buyers & sellers should
Share relevant information  Generate single consensus forecast

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Benefits of better forecasts

    

Reduction in inventories level Reduction in stock out Smoother production plans Improved Customer Services Overall reduction in costs

CASE STUDIES


Sony PS II  Launched in 2000.  Sony website crashed  Hits exceeded 50,000  Advance booking  Sony unable to predict tremendous response from PS I customers  Defending their market share against  Nintendo  Microsoft  X-Box Procter & Gamble  Retailers lose customers 41% if time  Groceries stores sales loss estimated up to $6 billion annually due to out of stock items.

Losses due to poor communication



Poor communication leads to

       

Inaccurate forecasts Bull whip effect Stock Outs Lost Sales High inventory costs Material Shortage Poor response to market needs Poor profitability
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Supply & Demand Variation



Manufacturers / Buyers
  

Pull environment From suppliers Product quantity and time Quantity, Price, Time Stock out
  

Retailer
 

Sales reduction Profit loss Customer relationship

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Conventional methods of matching supply & demand



To hold plenty of stock

  

Maximum Sales revenue Higher level of costs Write downs at end of season Price go up during heavy demand period
 

Flexible Pricing


Lost sales due to competition Stock out

Price discount during low demand period with excessive inventory



Lo profitability

NonNon-partnership friendly approach

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Sales Forecast


    

 

estimate of sales (dollars/physical units) of specified company for a future period under particular marketing programme under assumed set of economic factors could be for a single product / entire product line could be for entire marketing department or for subsubdivision short term (in nature) quarterly, annually also termed as operating sales forecasts.
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Forecasting Techniques


Improvement in forecast by


Qualitative Techniques


based on

opinions,  intuition,  when data not available,  low cost,  skill and expertise of forecasting is important.

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Forecasting Techniques


Quantitative
mathematical models,  analysis of historical data such as

 

Time series Associative Models such as moving averages and simple trend.

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Qualitative Techniques

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Executive Board Opinion



Senior Management group makes the sales forecast as they have the knowledge of
   

Industry outlook Company s position /capability Future marketing programme of company Suitable when
  

quick and easy method suitable especially if no historical data available pooling of experience

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Delphi Method
 

Similar to the above method Internal and external experts are surveyed who are not physically present Answers accumulated and then sent to each expert Each participant can modify their response on other member s opinions Especially useful for high risk and large projects and new product introduction
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Limitations


But these methods has some limitations

   

based on opinion one member can dominate the board lack of factual evidence workload on executives increase

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Sales force Composite / Poll of sales force opinion



 

Individual sales person forecast for their respective territory combined and modified as per management perception Responsibility of forecasting assigned to those who are required to produce the result Sales force operate closely to market conditions Have more confidence in meeting sales targets based on this forecast Easy to breakdown this forecast into per product and per territory

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Limitations
 

   

Sales force usually is not trained enough to calculate the forecast Sales force estimate could be overly optimistic or pessimistic. There could be individual biases and hidden motives to reach target more easily Sales force are usually unaware of broad economic changes which effect sales business greatly Hence there is a need to adjust this forecast for biases and train the sales force. But high turnover tendencies among sale people makes this difficult. However this method can still be used very beneficially as an alternative tool to benchmark the forecast arrived at through other methods.

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Survey of Customer Buying Plan


 

This method is based on the assumption that customers know what

they are going to buy (i.e. future buying plans are already formed) once made these plans will not change


   

more useful for industrial marketer where

there are limited number of customers and prospects substantial amount of sales is made to individual accounts majority of sales are made directly to users who are concentrated in few geographical areas

Input taken from customers include future buying plans, new product ideas and opinions /feedback about existing products of the company.

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Survey of Customer Buying Plan



 

If the number of customers is large then it is not economical enough to conduct the survey for every customer. Instead a sample needs to be taken which then arises the issue of selection of those respondents who reflect the entire customer base accurately. This issue can create non sampling error. Moreover the forecast derived from this method needs to be adjusted with the
 

specialised knowledge of market business conditions and changes in the marketing programme of the company and its competitors.

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Quantitative Methods

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Quantitative Methods
 

projection of next period s sales based on historical data (extrapolating past into future) assumption is that future is an extension of past

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Time Series Analysis

 

statistical procedure for studying historical sales data involves isolating and measuring 4 chief types of sales variations or components These are Trend Variations


increasing or decreasing movements over many years due to factors such as

  

population growth / shifts cultural and lifestyle changes income level shifts

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Time Series Analysis



Cyclical Variations
 

wave like movements which are usually longer than 1 year. These are influenced by macro economic and political factors. Example : 2004-05 Real estate boom, Sept 2001 terrorist attack, 20041997 Asian economies crises.

Seasonal Variations
 

these are the highs (peaks) and lows (valleys) which repeat after consistent interval such as hours/days/weeks/months Example restaurant business has peak hours during breakfast, lunch, hi-tea, dinner and local holidays or weekends. hi-

Random Variations


variations due to unexpected and unpredictable events such as natural disasters, hurricanes, tsunami, earthquakes.
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Time Series Forecasting Models

Simple moving averages forecasting model  This can be done by calculating the mean of the previous period s sales  F t+1 = At /n  Although it is a simple to use and easy to understand method  This method has some limitations:
  

random event or variation in 1 period can effect the average adversely this method is more responsive only when fewer data points are used inability to respond to trend changes quickly

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Time Series Forecasting Models

Weighted moving averages forecasting model  Weights are assigned to different data point for different periods and weighted average is calculated  F t+1 = wiAi /n wi=1
 

 

The sum of all weights assigned to different periods is equal to 1. this method makes its possible to put more emphasis on recent data assigning of weights is however based on experience of forecaster again trend changed not tracked comprehensively forecast still lags demand because of averaging effect
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Time Series Forecasting Models

Exponential Smoothing Method  is a weighted moving average sales forecasting technique  sales forecast for next period s is estimated by adjusting the current period s forecast by fraction of difference between current period s actual sales and its forecast i.e.  F t+1 = F t + (A t - F t )
   

near 1 means greater emphasis on recent data far 1 more weight on past data Summing up this method is a partial adjustment to most recent forecast error. However it still may lag any trend present in actual data

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Associative Forecasting Models

Under this heading we will discuss the most common techniques Simple Regression  It is calculated through the equation ^  Y = bo + b1 x  Where bo is intercept value  b1 is slope  ^  Y is dependent variable (for e.g. Sales)  b 1 is independent variable ( for e.g. Advertising)  This method will determine a linear relationship between a dependent variable and an independent variable e.g. between advertising and sales. So this method will find out one dollar increase in advertising will lead to how much increase in sales.  For example sales of tires can depend on sales of automobiles.

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Associative Forecasting Models

Multiple Regression  If there are 2 or more variables then multiple regression can be used. The equation will be ^  Y = bo + b 1 x1 + b2 x2  So this can determine and measure a company sales in relation to other variables.  Such an equation can help explain sales fluctuations in terms of related and casual variables.
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Associative Forecasting Models

 

To sum up Forecaster needs information about



 

competitor s plans to launch new and improved products advertising and selling plans of the company pricing strategies of the company Past and future trends Impending changes in competitive relationships
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In the above methods we need to examine both

 

Limitations of Quantitative Methods



Quantitative forecasts rely on past demand data All quantitative methods become less accurate as forecast time horizon increases. Recommendation for long term time horizon a combination of qualitative and quantitative techniques may be used.
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