SCM- CHAP 2- FORECASTING & DEMAND PLANNING
Forecasting & Demand Planning are the KEY building blocks from which all SC planning activities
are derived and are crucial components of customer satisfaction.
FORECAST- An ESTIMATE of future demand.
So that they can be purchased or manufactured in appropriate quantities in
advance of need.
1st Step is FORECASTING where the forecast is developed through Data Analysis & Judgment.
****Organizations must have a formal forecasting process to develop an agreed upon set of
numbers that becomes the driver for demand planning****
The 2nd step is DEMAND PLANNING which is the process of combining statistical forecasting
techniques & judgement to construct demand estimates for products or services.
*Management & other experts within the company review the forecast to ensure that it is aligned
with the company’s strategy & make adjustments if necessary, using market intelligence which may
be known to them but outside the scope of the forecasting model*
DEMAND is the need for a particular product or component. The demand could come from various
sources such as a customer order, a forecast, the manufacturing of another product, etc.
Two Types of Demand:
1. Independent Demand- what you buy at the store (finished product), A demand that is unrelated
to the demand for other items- etc a Bicycle finished product. Demand for such items is
FORECASTED.
2. Dependent Demand- is demand for an item that is directly related to other items or finished
products such as the components or materials needed to make the product- etc. Tires, brakes;
Demand for these items is CALCULATED.
TWO Important considerations about forecast:
1. Strategically speaking, the forecast will be INACCURATE and although it may be inaccurate, it is
still useful.
2. The forecast is the basis for most “Downstream” SC planning decisions, so it is critical to be as
accurate as possible.
Good forecasting can Benefit Company by facilitating more effective planning, which can lead to
reduced inventories, reduced costs, reduced stockouts, & improved customer service.
Bad forecasting can be the ROOT CAUSE FOR CREATING THE JUST OPPOSITE. There is a familiar
adage that applies to forecasting. “Garbage In= Garbage Out”. If a forecast is bad, everything
else (ex: the supply plan) based on that forecast will also be bad.
Companies spend a lot of time and effort trying to figure out how they can best forecast because
that will make everything else downstream flow more smoothly.
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Forecasting & Demand Planning are the KEY building blocks from which all SC planning activities
are derived and are crucial components of customer satisfaction.
FORECAST- An ESTIMATE of future demand.
So that they can be purchased or manufactured in appropriate quantities in
advance of need.
1st Step is FORECASTING where the forecast is developed through Data Analysis & Judgment.
****Organizations must have a formal forecasting process to develop an agreed upon set of
numbers that becomes the driver for demand planning****
The 2nd step is DEMAND PLANNING which is the process of combining statistical forecasting
techniques & judgement to construct demand estimates for products or services.
*Management & other experts within the company review the forecast to ensure that it is aligned
with the company’s strategy & make adjustments if necessary, using market intelligence which may
be known to them but outside the scope of the forecasting model*
DEMAND is the need for a particular product or component. The demand could come from various
sources such as a customer order, a forecast, the manufacturing of another product, etc.
Two Types of Demand:
1. Independent Demand- what you buy at the store (finished product), A demand that is unrelated
to the demand for other items- etc a Bicycle finished product. Demand for such items is
FORECASTED.
2. Dependent Demand- is demand for an item that is directly related to other items or finished
products such as the components or materials needed to make the product- etc. Tires, brakes;
Demand for these items is CALCULATED.
TWO Important considerations about forecast:
1. Strategically speaking, the forecast will be INACCURATE and although it may be inaccurate, it is
still useful.
2. The forecast is the basis for most “Downstream” SC planning decisions, so it is critical to be as
accurate as possible.
Good forecasting can Benefit Company by facilitating more effective planning, which can lead to
reduced inventories, reduced costs, reduced stockouts, & improved customer service.
Bad forecasting can be the ROOT CAUSE FOR CREATING THE JUST OPPOSITE. There is a familiar
adage that applies to forecasting. “Garbage In= Garbage Out”. If a forecast is bad, everything
else (ex: the supply plan) based on that forecast will also be bad.
Companies spend a lot of time and effort trying to figure out how they can best forecast because
that will make everything else downstream flow more smoothly.
1 | Page
