Forecasting

[ref. Chopra & Meindl pages 68 to 75]

Forecasting is a scientific method of determining

demand in future
Starting point for all strategic planning

Importance of strategy in spite of uncertainty in

future
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 Logistical areas of production scheduling,

inventory control, and aggregate planning need

demand forecast

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Some characteristics of forecasts

Forecasts are almost always wrong

Forecasts are more accurate for groups or

families of items

motor cars and models

Aggregate forecasts are more accurate annual rainfall and daily rainfall
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Forecasts are more accurate for short periods

(tomorrow, next year)

Forecast should include an estimate of error

Forecasts are no substitutes for facts

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Components of forecast Past demand Planned advertising or marketing efforts Planned price discounts State of economy Competitors actions forecasters knowledge and judgment
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Major categories of forecasts (forecasting methods) Qualitative & quantitative forecasts Qualitative forecasting

Forecast is based on personal judgment Subjective (opinion based) can be obtained in less time
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 When facts are unavailable for other methods Made for specific items based on aggregate
forecast for markets)

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Some qualitative methods of forecasting

Market surveys potential customers opinions

Delphi method
Panel consensus

Life cycle analogy

Informed judgment sales force

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Quantitative forecasting Fact based, scientific models Causal-Correlating demand to specific causal factors in environment. Estimate these causal factors and forecast demand. Ambient temperature and coffee consumption! Monsoon and rice

production!

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Econometric models-statistical analysis of

various sectors of economy

Input-output models

Examine flow of products and services for

markets and market segments

Generally used for project needs

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Simulation using computer simulation to simulate sectors of economy Time series 1. Regression analysis Statistical method Developing analytical relationship between two variables
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 Using statistical tools on past data to identify

trend, under stable environmental situations and demand 2. Moving average method Simple moving average estimator decides the period over which average is taken. 3 months or so
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MONTHS JANUARY FEBRUARY MARCH APRIL

ACTUAL 4200 4300 4350 -

FORECAST 4283

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Weighted moving average

MONTHS JANUARY FEBRUARY WEIGHTS 2 3 SALES 4200 4300 WEIGHTED SALES 8400 12,900

MARCH
TOTAL

5
10

4350

21,750
43050

Weighted forecast for April = 4305

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Major factors that influence demand forecast:

Demand and promotions

-one product stealing demand of another product

(tooth powder and tooth paste, motor car and

motorbikes)

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Lead times
-forecast methods need to be more accurate

(sophisticated) if lead times are longer, as

forecasts tend to become weak for a long span of

time. If supply sources are available with short

lead times, forecast methods need not be very

accurate (sophisticated)
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Influence of product variants on each other

is to be judged and if required joint forecast may

be made
Full shirts and half shirts, shirts and T-shirts,

different models of same product

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Appropriate technique for forecast

Take the dimensions of forecast into account to

determine forecasting method. These dimensions

are
geographical area

product groups
customer groups
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Take criteria into account

accuracy

time horizon
data availability experience of the forecaster

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Establish performance and error measures to

use forecast accurately:

Lead time as a performance measure. Forecast

accuracy is required to be highest at the end of this

lead-time.
Difference between forecast and actual should be measured for estimating error.
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Forecast Approaches Top-Down Approach (decomposition approach)

A national level forecast for SKU of company performance pattern of locations in the past forecast for various locations demand is assumed to be uniform across the
national market
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Bottom-Up Approach (decentralized approach)

Forecast for individual locations

Cumulative forecast for company at national

level

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