TRL3707: Logistics Activities
Study Unit 1
Pre-scribed book chapter 6
A forecast is a prediction of the volume or number of units that may be sold,
produced or dispatched.
Forecasting improves logistics efficiency through the exchange or coordination
of information rather than inventory between the various activities and
participants in the logistics process.
Forecasting entails predicting the demand for each type of product (stock keeping unit or SKU)
during a particular period or at a specific place.
In demand forecasting, it is necessary to understand the dependent or independent nature of
demand.
Independent demand
• as the name implies, exists when the demand for an item is not related to,
• or dependent on, the demand for any other item.
• Examples of independent demand are the demand for finished goods (eg cans of beer)
and maintenance spares.
• The demand for items with an independent demand nature cannot be calculated and
can only be estimated by means of a forecast.
Dependent demand
• describes items whose demand is related to the demand for other items
• Typical examples are subassemblies, raw materials and packaging materials.
• Since the demand for these items depends on the demand for the final product, it can
be calculated; there is thus no need to forecast dependent demand
Since the demand for certain goods (mainly raw materials, semi-finished products and
packaging material) is reliant on the quantity of final goods to be produced, a forecast of these
items is unnecessary.
Logistics forecasts are necessary 1) to support collaborative planning, 2) to drive requirements
planning & 3) to improved resource management.
, 1. Collaborative planning
a. Without collaboration each partner tries to plan the level and timing of demand
for its customers, both individually and collectively
b. The result is speculative inventory positioned in anticipation of independently
forecasted demand resulting in a never-ending cycle of inventory excess and out-
of-stocks
c. Historically, manufacturers have scheduled their promotions, price changes, new
product introductions and special events, either independently or without
collaboration with their major retailers
d. When no retailer accounted for substantial proportion of a firm’s sales volume,
such collaboration was not critical
e. When a single major customer can approach 25% of a firm’s sales, such
coordinates becomes essential
f. Without collaborative plan, the supplier-customer combination typically results
in either inventory excess or shortage
g. A collaborative forecast, jointly agreed to by supply chain partners, provides a
common goal that can be the basis for developing effective operation plans
2. Requirements planning
a. Once a collaborative forecast is developed, logisticians use the forecast to drive
requirement planning
b. The plan determines inventory projections and resulting replenishment or
production requirements for the planning horizon
c. Integrates forecasts, open orders, available inventory and production plans into
a definition of periodic inventory availability and requirements
d. Planning process operates collaboratively and interactively both internally across
the firm’s operations and externally with supply chain partners to develop
common & consistent plans for each time period, location and item
3. Resource management
a. Once the plan is completed it can be used to manage critical supply chain
processes such as production, inventory and transportation
b. Accurate forecasts collaboratively developed along with consistent definition of
supply chain resources and constraints enable effective evaluation of trade-offs
associated with supply chain decisions
c. Trade-offs consider the relative costs of supply chain strategies such as
maintaining extra production / storage capacity, speculative production or
product movement or outsourcing
Forecasting components is generally a monthly or weekly figure for each stock keeping unit
(SKU) and distribution location.
Ft = (Bt x St x T x Ct x Pt) + I
Where:
,Ft = forecast quantity for period t
Bt = base level demand for period t
St = seasonality factor for period t
T = trend component index reflecting increase or decrease per time period
Ct = cyclical factor for period t
Pt = promotional factor for period t
I = irregular factor for period t
Include:
1. Base demand
a. Represents long-term average demand after remaining components have been
removed
b. It is the average over an extended time
c. It is the forecast for items having no seasonality, trend, cyclic or promotional
components
2. Seasonal
a. Is an annually recurring upward & downward movement in demand
3. Trend
a. Long-range shift in periodic sales
b. Can be positive, negative or neutral in direction
c. Positive trend means sales are increasing over time
d. Increase or decreases result from changes in overall population or consumption
patterns
e. Trend component influences base demand in the successive time periods
f. Trend index greater than 1 indicates periodic demand is increasing
Bt+1 = Bt x T
Bt+1 = base demand in period t + 1
Bt = base demand in period t
T = periodic trend index
4. Cyclic
a. Periodic shifts in demand lasting more than a year
b. Can be upward or downward
5. Promotion
a. Demand swings initiated by a firm’s marketing activities such as advertising,
deals or promotions
b. Swings can be characterized by sales increases during the promotion followed by
sales declines as customers sell or use inventory purchased to take advantage of
the promotion
c. Promotion can be regular and thus take place at the same time each year
d. Promotional component is particularly important to track especially for
consumer industries since it has a major influence on sales variation
e. It is different from other forecasting components in that its timing and
magnitude are controlled by the firm
6. Irregular
, a. Includes random or unpredictable quantities that do not fit within the other
categories
b. Because of random nature this component is impossible to predict
c. Object in this forecast is to minimize the magnitude of the random component
by tracking and predicting the other components
The approach followed in forecasting depends largely on the uncertainty of demand in
individual distribution centers.
A top-down (centralized) approach is adequate when demand is fairly stable or when changes
in demand appear to be uniform at all centers.
A bottom-up (decentralized) approach is, however, preferable to a top-down approach when
demand in individual markets fluctuates or when changes in demand in individual markets
differ
Forecast Process
If a forecast is to be effective for its users, it must contain a number of key components.
Besides the selection of appropriate 1) techniques, a forecast process also needs a reliable
database that is regularly updated and manipulated by a 2) support system. Various 3)
administrative aspects are also a basic part of the forecast process. These include 4)
organizational aspects and 5) procedures with which you should acquaint yourself.
Forecast Techniques
Forecasting for logistical purposes requires the selection of appropriate mathematical
or statistical techniques to make a prediction for a specific period. There are three main
categories of forecast techniques:
1. qualitative,
2. time series, and
3. causal techniques.
The logistics manager must choose the technique that will provide the best results in the
particular circumstances.
For a technique to be used effectively:
• the characteristics of the situation should be related to the capability of the particular
technique.
• thus the logistics manager should first analyse the characteristics of the particular
situation before deciding which technique to use
Qualitative techniques
• rely on expertise and are costly and time-consuming
Study Unit 1
Pre-scribed book chapter 6
A forecast is a prediction of the volume or number of units that may be sold,
produced or dispatched.
Forecasting improves logistics efficiency through the exchange or coordination
of information rather than inventory between the various activities and
participants in the logistics process.
Forecasting entails predicting the demand for each type of product (stock keeping unit or SKU)
during a particular period or at a specific place.
In demand forecasting, it is necessary to understand the dependent or independent nature of
demand.
Independent demand
• as the name implies, exists when the demand for an item is not related to,
• or dependent on, the demand for any other item.
• Examples of independent demand are the demand for finished goods (eg cans of beer)
and maintenance spares.
• The demand for items with an independent demand nature cannot be calculated and
can only be estimated by means of a forecast.
Dependent demand
• describes items whose demand is related to the demand for other items
• Typical examples are subassemblies, raw materials and packaging materials.
• Since the demand for these items depends on the demand for the final product, it can
be calculated; there is thus no need to forecast dependent demand
Since the demand for certain goods (mainly raw materials, semi-finished products and
packaging material) is reliant on the quantity of final goods to be produced, a forecast of these
items is unnecessary.
Logistics forecasts are necessary 1) to support collaborative planning, 2) to drive requirements
planning & 3) to improved resource management.
, 1. Collaborative planning
a. Without collaboration each partner tries to plan the level and timing of demand
for its customers, both individually and collectively
b. The result is speculative inventory positioned in anticipation of independently
forecasted demand resulting in a never-ending cycle of inventory excess and out-
of-stocks
c. Historically, manufacturers have scheduled their promotions, price changes, new
product introductions and special events, either independently or without
collaboration with their major retailers
d. When no retailer accounted for substantial proportion of a firm’s sales volume,
such collaboration was not critical
e. When a single major customer can approach 25% of a firm’s sales, such
coordinates becomes essential
f. Without collaborative plan, the supplier-customer combination typically results
in either inventory excess or shortage
g. A collaborative forecast, jointly agreed to by supply chain partners, provides a
common goal that can be the basis for developing effective operation plans
2. Requirements planning
a. Once a collaborative forecast is developed, logisticians use the forecast to drive
requirement planning
b. The plan determines inventory projections and resulting replenishment or
production requirements for the planning horizon
c. Integrates forecasts, open orders, available inventory and production plans into
a definition of periodic inventory availability and requirements
d. Planning process operates collaboratively and interactively both internally across
the firm’s operations and externally with supply chain partners to develop
common & consistent plans for each time period, location and item
3. Resource management
a. Once the plan is completed it can be used to manage critical supply chain
processes such as production, inventory and transportation
b. Accurate forecasts collaboratively developed along with consistent definition of
supply chain resources and constraints enable effective evaluation of trade-offs
associated with supply chain decisions
c. Trade-offs consider the relative costs of supply chain strategies such as
maintaining extra production / storage capacity, speculative production or
product movement or outsourcing
Forecasting components is generally a monthly or weekly figure for each stock keeping unit
(SKU) and distribution location.
Ft = (Bt x St x T x Ct x Pt) + I
Where:
,Ft = forecast quantity for period t
Bt = base level demand for period t
St = seasonality factor for period t
T = trend component index reflecting increase or decrease per time period
Ct = cyclical factor for period t
Pt = promotional factor for period t
I = irregular factor for period t
Include:
1. Base demand
a. Represents long-term average demand after remaining components have been
removed
b. It is the average over an extended time
c. It is the forecast for items having no seasonality, trend, cyclic or promotional
components
2. Seasonal
a. Is an annually recurring upward & downward movement in demand
3. Trend
a. Long-range shift in periodic sales
b. Can be positive, negative or neutral in direction
c. Positive trend means sales are increasing over time
d. Increase or decreases result from changes in overall population or consumption
patterns
e. Trend component influences base demand in the successive time periods
f. Trend index greater than 1 indicates periodic demand is increasing
Bt+1 = Bt x T
Bt+1 = base demand in period t + 1
Bt = base demand in period t
T = periodic trend index
4. Cyclic
a. Periodic shifts in demand lasting more than a year
b. Can be upward or downward
5. Promotion
a. Demand swings initiated by a firm’s marketing activities such as advertising,
deals or promotions
b. Swings can be characterized by sales increases during the promotion followed by
sales declines as customers sell or use inventory purchased to take advantage of
the promotion
c. Promotion can be regular and thus take place at the same time each year
d. Promotional component is particularly important to track especially for
consumer industries since it has a major influence on sales variation
e. It is different from other forecasting components in that its timing and
magnitude are controlled by the firm
6. Irregular
, a. Includes random or unpredictable quantities that do not fit within the other
categories
b. Because of random nature this component is impossible to predict
c. Object in this forecast is to minimize the magnitude of the random component
by tracking and predicting the other components
The approach followed in forecasting depends largely on the uncertainty of demand in
individual distribution centers.
A top-down (centralized) approach is adequate when demand is fairly stable or when changes
in demand appear to be uniform at all centers.
A bottom-up (decentralized) approach is, however, preferable to a top-down approach when
demand in individual markets fluctuates or when changes in demand in individual markets
differ
Forecast Process
If a forecast is to be effective for its users, it must contain a number of key components.
Besides the selection of appropriate 1) techniques, a forecast process also needs a reliable
database that is regularly updated and manipulated by a 2) support system. Various 3)
administrative aspects are also a basic part of the forecast process. These include 4)
organizational aspects and 5) procedures with which you should acquaint yourself.
Forecast Techniques
Forecasting for logistical purposes requires the selection of appropriate mathematical
or statistical techniques to make a prediction for a specific period. There are three main
categories of forecast techniques:
1. qualitative,
2. time series, and
3. causal techniques.
The logistics manager must choose the technique that will provide the best results in the
particular circumstances.
For a technique to be used effectively:
• the characteristics of the situation should be related to the capability of the particular
technique.
• thus the logistics manager should first analyse the characteristics of the particular
situation before deciding which technique to use
Qualitative techniques
• rely on expertise and are costly and time-consuming
