Chapter 2 - Forecasting and Demand Planning
Forecasting and Demand Planning
- Step 1: Forecasting: formal forecasting process, agreed-upon set of numbers
- Step 2: Demand Planning: combines statistical forecasting and judgement to construct
demand estimates for goods
Key Terms
- Demand: the need for a specific product
1) Independent demand: unrelated to other items, forecasted for
- Bicycle (finished product)
2) Dependent demand: directly related to other items (or part of), calculated
- Handlebars, wheels, pedals (component parts)
- Forecast: predicting future demand based on past events, trends, and insight
Forecasting
- Forecasting can serve different purposes over different terms:
- Short-term (< 3 mo): used mainly for tactical decsions
- Medium-term (3 mo to 2 yrs): used to develop a strategy over next 6-18 months
- Long-term (> 2 years): used to detect general trends and find major turning points
- Important considerations about a forecast:
1) Statistically, the forecast will be inaccurate, but it is still useful
2) Forecast is the basis for most downstream SC planning decisions, so it should try
to be as accurate as possible
- Good forecasting can reduce inventories, costs, stockouts, and improve service
- Companies spend a lot of time on learning good forecasting for smoother
downstream flow
- Bad forecasting can lead to garbage in = garbage out
- Goal of forecasting is to minimize forecast error (likely wrong, but hope for accuracy)
- Factors influencing demand should be considered
- The farther out in time you forecast, the greater the deviation will likely be
- Ex. weather forecast today for tomorrow vs for next week vs for next month
- Forecasting techniques can be qualitative (opinion/intution based) and quantitative (math
and historical data based) → Combination is generally recommended
Qualitative Forecasting Techniques
- Based on opinion and intuition; used when data can’t be; best for long-range; depends on
skill and experience of forecaster and available info
1) Personal Insight
- Based on insight of most experienced
- Advantages: fastest/cheapest, can potentially provide good forecast
- Disadvantages: relies on one person’s judgement, can be unreliable
Forecasting and Demand Planning
- Step 1: Forecasting: formal forecasting process, agreed-upon set of numbers
- Step 2: Demand Planning: combines statistical forecasting and judgement to construct
demand estimates for goods
Key Terms
- Demand: the need for a specific product
1) Independent demand: unrelated to other items, forecasted for
- Bicycle (finished product)
2) Dependent demand: directly related to other items (or part of), calculated
- Handlebars, wheels, pedals (component parts)
- Forecast: predicting future demand based on past events, trends, and insight
Forecasting
- Forecasting can serve different purposes over different terms:
- Short-term (< 3 mo): used mainly for tactical decsions
- Medium-term (3 mo to 2 yrs): used to develop a strategy over next 6-18 months
- Long-term (> 2 years): used to detect general trends and find major turning points
- Important considerations about a forecast:
1) Statistically, the forecast will be inaccurate, but it is still useful
2) Forecast is the basis for most downstream SC planning decisions, so it should try
to be as accurate as possible
- Good forecasting can reduce inventories, costs, stockouts, and improve service
- Companies spend a lot of time on learning good forecasting for smoother
downstream flow
- Bad forecasting can lead to garbage in = garbage out
- Goal of forecasting is to minimize forecast error (likely wrong, but hope for accuracy)
- Factors influencing demand should be considered
- The farther out in time you forecast, the greater the deviation will likely be
- Ex. weather forecast today for tomorrow vs for next week vs for next month
- Forecasting techniques can be qualitative (opinion/intution based) and quantitative (math
and historical data based) → Combination is generally recommended
Qualitative Forecasting Techniques
- Based on opinion and intuition; used when data can’t be; best for long-range; depends on
skill and experience of forecaster and available info
1) Personal Insight
- Based on insight of most experienced
- Advantages: fastest/cheapest, can potentially provide good forecast
- Disadvantages: relies on one person’s judgement, can be unreliable
