Demand Forecasting

In a Supply Chain
1. The Role of Forecasting in a Supply Chain:
 Demand forecasts form the basis of all supply chain planning. Consider the push/pull view of
the supply chain discussed in Chapter 1. All push processes in the supply chain are performed
in anticipation of customer demand, whereas all pull processes are performed in response to
customer demand. For push processes, a manager must plan the level of activity, be it
production, transportation, or any other planned activity. For pull processes, a manager
must plan the level of available capacity and inventory, but not the actual amount to be
executed. In both instances, the first step a manager must take is to forecast what customer
demand will be.
 Paint shop owner keeps inventory of paint boxes and dyes according to his forecast while
paint manufacturer produces paints and keeps in inventory according to their forecast and
supplier keeps stocks according to his forecast so if each leader is doing their own forecast,
chances of error in forecast is more. On the other hand if collaborative forecasting is done
chances of error decreases.
 Ex of collaborative forecasting: At the time of promotion only coca cola provide it bottlers
updated demand forecast of next quarter so that bottler can plan their capacity and
production decisions. Or else supply chain profits may get affected.
 Mature products like milk, soap are easy to forecast while products like fashion goods and hi
tech are hard to forecast.
2. Characteristics of forecast:
 Forecasts are always inaccurate and should thus include both the expected value of the
forecast and a measure of forecast error. Ex: two car manufacturers with forecast range of
sale as 100-1900 other one 900-1100 both have average of 1000 but their sourcing policies
will be very different.
 Long-term forecasts are usually less accurate than short-term forecasts. Seven-Eleven Japan
has exploited this key property to improve its performance. The company has instituted a
replenishment process that enables it to respond to an order within hours. For example, if a
store manager places an order by 10 a.m., the order is delivered by 7 p.m. the same day. This
way manager is able to forecast sale of next day according to season and it is more accurate
than if he had to make forecast a week before.
 Aggregate forecasts are usually more accurate than disaggregate forecasts, as they tend to
have a smaller standard deviation of error relative to the mean. For example, it is easy to
forecast the gross domestic product (GDP) of the United States for a given year with less than
a 2 percent error. However, it is much more difficult to forecast yearly revenue for a company
with less than a 2 percent error.
 The farther up the supply chain a company is the greater the distortion of information it
receives. One classic example of this phenomenon is the bullwhip effect and its solution is
collaborative forecasting.