Wisner - Supply Chain - 6e - Ch05 - PowerPoint - Ce

Chapter 5
DEMAND FORECASTING
Wisner | Tan | Leong, Principles of Supply Chain Management: A Balanced Approach, 6 th Edition. © 2023 Cengage. All Rights
Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1
Chapter 5
Learning Objectives
You should be able to
• Explain the role of demand forecasting in a supply chain.
• Identify the components of a forecast.
• Compare and contrast qualitative and quantitative forecasting techniques.
• Assess the accuracy of forecasts.
• Explain collaborative planning, forecasting, and replenishment.
Chapter Outline
• Introduction
• The Importance of Demand Forecasting
• Demand Forecasting Techniques
• Forecast Performance
• Demand Sensing
• Demand Planning During the COVID-19 Pandemic and Beyond
• Useful Forecasting Websites
• Forecasting Software
• Artificial Intelligence and Machine Learning in Demand Forecasting
• Cloud-Based Forecasting
• Summary
Introduction

Organizations moving to a more effective demand-driven supply chain.

Suppliers must find ways to better match supply and demand.

Improved forecasts benefit all trading partners in the supply chain and
mitigates supply-demand mismatch problems.

Ways to closely match supply and demand:

Supplier holds plenty of stock available for delivery at any time.

Use of flexible pricing to change demand.

Utilize short-term methods to increase supply, such as overtime,
subcontracting, or temporary workers.
The Importance of Demand Forecasting, Part 1

A forecast is an estimate of future demand and provides the basis for planning
decisions.

The goal is to minimize deviation between actual demand and forecast.

The factors that influence demand must be considered when forecasting.

Buyers and sellers should share all relevant information to generate a single
consensus forecast.

Good forecasting benefits are lower inventories, reduced stock outs, smoother
production plans, reduced costs, and improved customer service.
The Importance of Demand Forecasting, Part 2
Collaborative, planning, forecasting, and replenishment
(CPFR)
Seeks cooperative management of inventory through joint visibility and
replenishment of inventory throughout the supply chain by information
sharing between suppliers and retailers.
Technological, organizational, and cultural challenges are reasons why
widespread adoption of CPFR has stalled.
Without a holistic view of account pricing, promotion, and new product
introductions, the promise of collaborative initiatives was not realized.
Demand Forecasting Techniques, Part 1
Qualitative forecasting methods

Based on opinions and intuition

Generally used when data is limited, unavailable, or not currently
relevant.

Types:

Jury of Executive Opinion

Delphi Method

Sales Force Composite

Customer Surveys
Jury of executive opinion

Group of senior management executives collectively develop the forecast

Good for long-range planning and new product introductions
Delphi method

Internal and external experts are surveyed during several rounds

Summary of responses is sent out to all the experts; they can modify their
responses in next round

Good for high-risk technology forecasting; large, expensive projects; or
major new product introductions
Sales force composite


Based on sales force’s knowledge of the market and estimates of
customer needs

Tendency for sales force to under-forecast
Consumer survey

Questionnaire uses inputs from customers on future purchasing needs,
new product ideas, and opinions about existing or new products
Quantitative forecasting methods

Use mathematical models and relevant historical data to generate
forecasts

All quantitative methods become less accurate as the forecast’s time
horizon increases

For long-time horizon forecasts, use a combination of quantitative and
qualitative techniques
Quantitative forecasting methods:

Time series forecasting:

Assumes the future is an extension of the past

Types: naïve, simple moving average, weighted moving average,
exponential smoothing, and linear trend

Cause-and-effect models:

Assumes one or more factors (independent variables) predict future
demand

Types: simple linear regression, multiple regression
Components of Time Series Forecasting Models
Data should be plotted to detect for the following components:

Trend variations: increasing or decreasing over many years

Cyclical variations: wavelike movements that are longer than a year
(e.g., business cycle)

Seasonal variations: show peaks & valleys that repeat over consistent
interval (i.e., hours, days, weeks, months, seasons, or years)

Random variations: due to unexpected or unpredictable events such as
natural disasters
Time Series Forecasting

Naïve Forecast: the estimate of the next period is equal to the demand in
the past period.
Simple Moving Average Forecast: uses historical data to generate a
forecast. Works well when demand is stable over time.
Simple Moving Average
Weighted Moving Average Forecast: based on an n-period weighted
moving average
Weighted Moving Average
Exponential Smoothing Forecast: type of weighted moving average, with
only two data points needed
Exponential Smoothing
Linear Trend Forecast: trend can be estimated using simple linear
regression to fit a line to a time series
Cause-and-Effect Models
Simple regression:

Only one explanatory variable is used.

Is similar to the linear trend model.

x variable is no longer time, but instead is an explanatory variable
Simple Regression
Cause-and-Effect Models
Multiple regression: several explanatory variables are used to predict the
dependent variable
Forecast Performance, Part 1
Forecast error: the difference between the actual quantity and the forecast
Several measures of forecast performance can also be calculated:

Mean absolute deviation (MAD), Mean absolute percentage error (MAPE),
Mean square error (MSE), and Running sum of forecast errors (RSFE)
Mean absolute deviation (MAD): MAD of 0 indicates the forecast exactly
predicted demand
Mean absolute percentage error (MAPE): provides a perspective of the true

magnitude of the forecast error
Mean squared error (MSE): analogous to variance since large forecast errors
are heavily penalized
Running Sum of Forecast Errors (RSFE): indicates bias in the forecasts or
the tendency of a forecast to be consistently higher or lower than actual
demand.
Tracking signal determines if forecast is within acceptable control limits
If tracking signal falls outside pre-set control limits, then

There is bias problem with the forecasting method

Evaluation of forecast generation is warranted

Biased forecast will lead to excessive inventories or stockouts.

Key to accurate forecasts is collaboration with different partners inside and
outside of the firm working together to eliminate forecasting error.

Collaboration can lead to significant improvements in forecasting accuracy.
Demand Sensing
Demand sensing is a way of identifying short-term trends quickly so
companies can better forecast what, when, and where consumers want goods.
A good one would include:

Real-time inputs from several external sources to generate forecasts of
the prevailing market situation.

Using pattern recognition technologies from AI and ML from sources of
big data to generate useful information.

An automated model with self-adjusting algorithms that can learn from
data without human intervention and generate forecasts for execution
daily.
Demand Planning During the COVID-19
Pandemic and Beyond
Recommended plan of action:

Change forecasting models.

Identify future demand drivers.

Understand supply chain dynamics.

Increase communication with customers.

Restructure Sales and Operations Planning processes.

Plan product portfolio.

Clean data for the future.
Useful Forecasting Websites

Institute for Business Forecasting & Planning: https://ibf.org/

International Institute of Forecasters: www.forecasters.org

Business Forecasting: www.businessforcastingblog.com
Forecasting Software
Software can be used to simplify the process and save the time required to
generate a forecast when using a quantitative method.

Business Forecast Systems, Inc: www.forecastpro.com

John Galt: https://johngalt,com/forecastx-new/

Mi9 Retail: https://mi9retail.com/retail-demand-management-software/

SAS:
https://www.sas.com/cs_cz/software/supply-chain/demand-driven-forecasting
.html
Artificial Intelligence and Machine Learning in
Demand Forecasting
Artificial Intelligence (AI): basically, is self-learning machines.
Machine Learning (ML): a type of AI that uses algorithms to better predict
data.
MIT study conclusions:

Better data governance is needed.

Data privacy emerges as an opportunity.

Fostering an analytics culture improves innovation.
Cloud-Based Forecasting
Cloud-based forecasting: supplier-hosted or software-as-a-service (SaaS)
advanced forecasting applications that is provided on a subscription basis
Benefits include:

Increase data storage and data analysis capabilities

New capabilities without extensive training

Reduction in IT costs

Improvement in forecast accuracy

Reduction in stockout and inventory carrying costs

Improvement in employee productivity
End of Chapter 5

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Chapter 5

Sales force composite

Time Series Forecasting

Several measures of forecast performance can also be calculated:

Mean absolute percentage error (MAPE): provides a perspective of the true

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