Demand Forecasting

For Supply Chain

Presented By : Arun Sharma

Jan 14th 2011 , UPES Dehradun

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 Contents
 The role of forecasting in a supply chain
 Characteristics of forecasts
 Components of forecasts and forecasting methods
 Basic approach to demand forecasting
 Time series forecasting methods
 Measures of forecast error
 Forecasting in practice
 Role of Forecasting
in a Supply Chain
 The basis for all strategic and planning decisions in a
supply chain
 Used for both push and pull processes
 Examples:
– Production: scheduling, inventory, aggregate planning
– Marketing: sales force allocation, promotions, new production
introduction
– Finance: plant/equipment investment, budgetary planning
– Personnel: workforce planning, hiring, layoffs
 All of these decisions are interrelated
 Characteristics of Forecasts
 Forecasts are always wrong. Should include
expected value and measure of error.
 Long-term forecasts are less accurate than short-
term forecasts (forecast horizon is important)
 Aggregate forecasts are more accurate than
disaggregate forecasts
 Forecasting Methods
 Qualitative: primarily subjective; rely on judgment and
opinion
 Time Series: use historical demand only
– Static
– Adaptive
 Causal: use the relationship between demand and some
other factor to develop forecast
 Simulation
– Imitate consumer choices that give rise to demand
– Can combine time series and causal methods
 Components of an Observation
Observed demand (O) =
Systematic component (S) + Random component (R)
Level (current deseasonalized demand)

Trend (growth or decline in demand)

Seasonality (predictable seasonal fluctuation)

• Systematic component: Expected value of demand
• Random component: The part of the forecast that deviates
from the systematic component
• Forecast error: difference between forecast and actual demand
 Forecasting Basics
 Time Series – Past and Future
 Alpha ,Beta and Gama –Level ,trend and
seasonality -Forecasting parameters
 Ex-post forecast
 Forecast errors
 Forecast accuracy
 Methods used for forecsting
 Historical data correction
 Basic Approach to
Demand Forecasting
 Understand the objectives of forecasting
 Integrate demand planning and forecasting
 Identify major factors that influence the demand
forecast
 Understand and identify customer segments
 Determine the appropriate forecasting technique
 Establish performance and error measures for the
forecast
 Time Series
Forecasting Methods
 Goal is to predict systematic component of demand
– Multiplicative: (level)(trend)(seasonal factor)
– Additive: level + trend + seasonal factor
– Mixed: (level + trend)(seasonal factor)
 Static methods
 Adaptive forecasting
 Static Methods
 Estimating level and trend
 Estimating seasonal factors
 Estimating Level and Trend
 Before estimating level and trend, demand data
must be deseasonalized
 Deseasonalized demand = demand that would
have been observed in the absence of seasonal
fluctuations
 Periodicity (p)
– the number of periods after which the seasonal cycle
repeats itself
 Estimating Level and Trend
 Before estimating level and trend, demand data
must be deseasonalized
 Deseasonalized demand = demand that would
have been observed in the absence of seasonal
fluctuations
 Periodicity (p)
– the number of periods after which the seasonal cycle
repeats itself
 Adaptive Forecasting
 The estimates of level, trend, and seasonality are
adjusted after each demand observation
 General steps in adaptive forecasting
 Moving average
 Simple exponential smoothing
 Trend-corrected exponential smoothing (Holt’s
model)
 Trend- and seasonality-corrected exponential
smoothing (Winter’s model)
 Measures of Forecast Error
 Forecast error = Et = Ft - Dt
 Mean squared error (MSE)
MSEn = (Sum(t=1 to n)[Et2])/n
 Absolute deviation = At = |Et|
 Mean absolute deviation (MAD)
MADn = (Sum(t=1 to n)[At])/n
 = 1.25MAD
 Summary of Learning Objectives
 What are the roles of forecasting for an enterprise and
a supply chain?
 What are the components of a demand forecast?
 How is demand forecast given historical data using
time series methodologies?
 How is a demand forecast analyzed to estimate
forecast error?
Thank You