Chapter 5

COLLABORATIVE
PLANNING,
FORECASTING, AND
Supply Chain
Management: REPLENISHMENT

Prepared by Mark A. Jacobs, PhD

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duplicated, or posted to a publicly accessible website, in whole or in part.
 LEARNING OBJECTIVES

You should be able to:

• Explain the role of demand forecasting in a supply
chain
• Identify the components of a forecast
• Compare & contrast qualitative & quantitative
forecasting techniques
• Assess the accuracy of forecasts
• Explain collaborative planning, forecasting, &
replenishment

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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 CHAPTER OUTLINE

• Introduction
• Demand Forecasting
• Forecasting Techniques
• Qualitative Methods
• Quantitative Methods
• Components of Time Series Data
• Time Series Forecasting Methods
• Forecast Accuracy
• Useful Forecasting Websites
• Collaborative Planning, Forecasting, & Replenishment
(CPFR)
• Software Solutions
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 Introduction
• Supply chain members find it important
to manage demand, especially in pull
manufacturing environments.
• Suppliers must find ways to better
match supply & demand to achieve
optimal levels of cost, quality, &
customer service to enable them to
compete with other supply chains.
• Improved forecasts benefit all trading
partners in the supply chain & mitigates
supply-demand mismatch problems.

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 Demand Forecasting

 A forecast is an estimate of future demand &

provides the basis for planning decisions
 The goal is to minimize forecast error
 The factors that influence demand must be
considered when forecasting.
 Managing demand requires timely & accurate
forecasts
 Good forecasting provides reduced inventories,
costs, & stockouts, & improved production plans &
customer service
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 Forecasting Techniques

 Qualitative forecasting is based on opinion &

intuition.

 Quantitative forecasting uses mathematical

models & historical data to make forecasts.

 Time series models are the most frequently used

among all the forecasting models.

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 Forecasting Techniques (Continued)

Qualitative Forecasting Methods

Generally used when data are limited, unavailable, or
not currently relevant. Forecast depends on skill &
experience of forecaster(s) & available information

Four qualitative models used are –

1. Jury of executive opinion
2. Delphi method
3. Sales force composite
4. Consumer survey

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 Forecasting Techniques (Continued)

Quantitative Methods
 Time series forecasting – based on the assumption
that the future is an extension of the past. Historical
data is used to predict future demand

 Cause & Effect forecasting – assumes that one or

more factors (independent variables) predict future
demand

It is generally recommended to use a combination of

quantitative & qualitative techniques

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 Forecasting Techniques (Continued)

Components of Time Series

Data should be plotted to detect for the following components –

 Trend variations: increasing or decreasing

 Cyclical variations: wavelike movements that are
longer than a year (e.g., business cycle)
 Seasonal variations: show peaks & valleys that
repeat over a consistent interval such as hours,
days, weeks, months, seasons, or years
 Random variations: due to unexpected or
unpredictable events

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 Forecasting Techniques (Continued)

Time Series Forecasting Models

Naïve Forecast – the estimate of the next period is

equal to the demand in the past period.

Ft+1 = At

Where Ft+1 = forecast for period t+1

At = actual demand for period t

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 Forecasting Techniques (Continued)

Time Series Forecasting Models

Simple Moving Average Forecast – uses historical

data to generate a forecast. Works well when demand
is stable over time.

Where Ft+1 = forecast for period t+1

At = actual demand for period t
n = number of periods to calculate
moving average
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 Forecasting Techniques (Continued)

Simple Moving Average

(Fig. 5.1)
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 Forecasting Techniques (Continued)

Time Series Forecasting Models

Weighted Moving Average Forecast – is based

on an n-period weighted moving average

Where Ft+1 = forecast for period t+1

Ai = actual demand for period i
n = number of periods to calculate
moving average
wi = weight assigned to period i (Σwi = 1)
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 Forecasting Techniques (Continued)

Weighted Moving Average

(Fig. 5.2)
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 Forecasting Techniques (Continued)

Time Series Forecasting Models

Exponential Smoothing Forecast – a type of weighted

moving average where only two data points are needed

Ft+1 = Ft+(At - Ft) or Ft+1 = At + (1 – ) Ft

Where Ft+1 = forecast for Period t + 1

Ft = forecast for Period t
At = actual demand for Period t
 = smoothing constant (0 ≤  ≤1)
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 Forecasting Techniques (Continued)

Exponential Smoothing

(Fig. 5.3)
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 Forecasting Techniques (Continued)

Time Series Forecasting Models

Linear Trend Forecast – trend can be estimated using

simple linear regression to fit a line to a time series

Ŷ = b0 + b1x

Where Ŷ = forecast or dependent variable

x = time variable
b0 = intercept of the line
b1 = slope of the line
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 Forecasting Techniques (Continued)

Regression

(Fig. 5.4)
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 Forecasting Techniques (Continued)

Cause & Effect Models

One or several external variables are identified that are
related to demand
Simple regression – Only one explanatory variable is
used & is similar to the previous trend model. The
difference is that the x variable is no longer time but an
explanatory variable.

Ŷ = b0 + b1x

Where Ŷ = forecast or dependent variable

x = explanatory or independent variable
b0 = intercept of the line
b1 = slope of the line
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 Forecasting Techniques (Continued)

Cause & Effect Models

Multiple regression – several explanatory

variables are used to make the forecast

Ŷ = b0 + b1x1 + b2x2 + . . . Bkxk

Where
Ŷ = forecast or dependent variable
xk = kth explanatory or independent
variable
b0 = intercept of the line
bk = regression coefficient of the
independent variable xk
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 Forecast Accuracy

The formula for forecast error, defined as the difference

between actual quantity & the forecast –

Forecast error, et = At - Ft

Where et = forecast error for Period t

At = actual demand for Period t
Ft = forecast for Period t

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 Forecast Accuracy (Continued)

Several measures of forecasting accuracy follow –

 Mean absolute deviation (MAD)- a 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,
large forecast errors are heavily penalized

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22
 Forecast Accuracy (Continued)

Mean absolute deviation (MAD)-

MAD of 0 indicates the forecast exactly predicted
demand.

Where et = forecast error for period t

At = actual demand for period t
n = number of periods of evaluation

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 Forecast Accuracy (Continued)

Mean absolute percentage error (MAPE) –

provides a perspective of the true magnitude of the
forecast error.

Where et = forecast error for period t

At = actual demand for period t
n = number of periods of evaluation

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 Forecast Accuracy (Continued)

Mean squared error (MSE) –

analogous to variance, large forecast errors are
heavily penalized

Where et = forecast error for period t

n = number of periods of evaluation

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 Forecast Accuracy (Continued)

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.
n
Running Sum of Forecast Errors, RSFE = e
t 1
t

Where et = forecast error for period t

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26
RSFE

Forecast Accuracy
MAD

(Continued)

Tracking signal –
determines if forecast is within acceptable control
limits. If the tracking signal falls outside the pre-set
control limits, there is a bias problem with the
forecasting method and an evaluation of the way
forecasts are generated is warranted.

RSFE
Tracking Signal =
MAD

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 Useful Forecasting Websites

 Institute for Forecasting Education

www.forecastingeducation.com
 International Institute of Forecasters
www.forecasters.org
 Forecasting Principles
www.forecastingprinciples.com
 Stata (Data analysis & statistical software)
www.stata.com/links/stat_software.html

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 Collaborative Planning, Forecasting,
& Replenishment (CPFR)

A business practice that combines the

intelligence of multiple trading partners in the
planning & fulfillment of customer demands.
Links sales & marketing best practices, such as
category management, to supply chain planning
processes to increase availability while reducing
inventory, transportation & logistics costs.

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 Collaborative Planning, Forecasting,
& Replenishment Continued ( )

Real value of CPFR comes from sharing of forecasts

among firms rather than sophisticated algorithms from
only one firm.
Does away with the shifting of inventories among trading
partners that suboptimizes the supply chain.
CPFR provides the supply chain with a plethora of
benefits but requires a fundamental change in the way
that buyers & sellers work together.

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 Collaborative Planning, Forecasting,
& Replenishment Continued ( )

VICS’s CPFR Model

(Fig. 5.5)
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 Collaborative Planning, Forecasting,
& Replenishment Continued ( )

CPFR Model
Step 1: Collaboration Arrangement
Step 2: Joint Business Plan
Step 3: Sales Forecasting
Step 4: Order Planning/Forecasting
Step 5: Order Generation
Step 6: Order Fulfillment
Step 7: Exception Management
Step 8: Performance Assessment

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 Software Solutions

Forecasting Software
 Business Forecast Systems www.forecastpro.com
 John Galt www.johngalt.com
 Just Enough www.justenough.com
 SAS www.sas.com
 JDA Software Group www.jda.com
 i2 Technologies www.i2.com
 Oracle www.oracle.com

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