LEC 5: DEMAND FORECASTING

I. Quantitative Methods

- Use mathematical techniques

- Based on historical data

- Can include causal variables

- Less accurate as the forecast’s time horizon increases

Models Approaches Explanation Formula Pros Cons

no consideration
the estimate for
inexpensive to of causal
the next period
understand, relationships, &
1. Naïve = the actual
A. Time develop, store the method may
Forecast demand for the
Series data for & not generate
immediate past
Forecasting operate accurate
period
Models forecasts
Assumption: uses historical
The future is data to
an extension calculate a
of the past 2. Simple moving
simple inability to
=> Moving average and
to use and easy respond to trend
Historical Average works well
to understand changes quickly
data can be Forecast when the
used to demand is
predict fairly stable
future over time
demand 3. Weighted An n-period less affected by lags demand
Moving weighted abrupt changes because
Average moving in recent data of the averaging
Forecast average => based on the effect => not do
 forecast is the experience of a good job of
weighted the forecaster tracking trend
moving changes in the
average of the data
n-period
observations,
using unequal
weight
the forecast for
the next
period’s
demand is the
lag any trend in
current simplicity and
the actual data
period’s minimal data
because
4. forecast requirement,
only partial
Exponential adjusted by a more responsive
adjustment to the
Smoothing fraction of the to changes in
most recent
Forecast difference Or the recent
forecast error can
between the demand
be made
current
period’s actual
demand and
forecast
using simple
linear
simple and
regression
5. Linear inexpensive, not always
(trend line) to
Trend provide a quick accurate &
fit a line to a
Forecast assessment of reliable
series of data
potential results
occurring over
time
 like the linear
B. Cause- trend model, Simple
and-Effect 1. Simple but the x implementation, Sensitive to
Forecasting Linear variable is an performance on outliers, assumes
Models Regression explanatory linearly that the data is
Assumption: Forecast variable of separable independent
One or more demand, datasets
factors instead of time
(independent a bit complex
like the Simple
variables) and require a
Linear help in
are related to high-levels of
Regression understanding
demand mathematical
2. Multiple Forecast, but the correlation
=> Can be calculation,
Regression instead of between
used to sometimes not
Forecast 1, there are dependent and
predict easy to interpret
several independent
future outputs, better
explanatory variables
demand for larger
variables.
datasets

II. Forecast Accuracy

1. Forecast error: the difference between the actual quantity and the forecast

2. Measures of forecasting accuracy

 RSFE < 0 RSFE = 0 RSFE > 0
At < Ft
At > Ft
=> excess inventory No bias in forecast
=> Stockouts
carrying costs

Tracking signal = RSFE / MAD

Acceptable control limit: tracking signal = [-3; 3]
III. Qualitative Methods
- Based on intuition or judgmental evaluation
- Used to develop long-range projections (current data is not very reliable), and for new product
introductions (current data is limited and/or unavailable)

Methods Explanation Pros Cons

- Basically a meeting of
senior management
executives to forecast the
1. Jury of
market
Executive
- Apply for long-range
Opinion
planning & new
product introductions,
general demand forecasting
Apply for high-risk
technology forecasting,
2. Delphi Method large, expensive projects, or
major new product
introductions
3. Sales Force - Based on the knowledge
Composite of sales team about the
If one member’s
They are views dominate the
knowledgeable and Discussion, then
experienced in their the value and
field, their forecast reliability of the
will be valuable outcome can be
diminished.
Group members do
not physically meet
=> avoid the
time-consuming
scenario where
and very expensive
one or a few experts
could dominate a
discussion
Individual biases
The forecast tends to
could negatively
be reliable because
impact the
 market and estimates of sales people are effectiveness of
customer needs close to customers this approach
- Apply for all kind of
projects
- Design a forecasting questionnaire
- Choose the target population
4. Customer - Carry out the survey through telephone, mail, Internet, or personal
Surveys interviews
- Collect and analyze data
- Make forecasts from the results