Demand forecasting in supply

chain:
 What is Forecasting?
Process of predicting a
future event
Underlying basis of
all business decisions
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Production
Inventory
Personnel
Facilities
 Forecasting Time Horizons
Short-range forecast
Up to 1 year, generally less than 3 months
Purchasing, job scheduling, workforce levels, job
assignments, production levels
Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting
Long-range forecast
3+ years
New product planning, facility location, research
and development
 Distinguishing Differences
Medium/long range forecasts deal with more
comprehensive issues and support management
decisions regarding planning and products,
plants and processes
Short-term forecasting usually employs different
methodologies than longer-term forecasting
Short-term forecasts tend to be more accurate
than longer-term forecasts
 Types of Forecasts
• Economic Forecasts- projections of economic growth,
inflation rates, money supply based on economic data
trends along with policy interventions
• Demographic Forecasts- projections of population in
aggregate and disaggregate form forecasts
• Technological Forecasts- predicting technological
change e.g. in cloud computing or electronics sectors
et al..
• Other Forecasts- weather, earthquakes, tsunami et al
• Business Forecasts- involving demand and sales
forecasts –
 Strategic Importance of
Forecasting
Human Resources – Hiring, training, laying off
workers
Capacity – Capacity shortages can result in
undependable delivery, loss of customers,
loss of market share
Supply Chain Management – Good supplier
relations and price advantages
 Forecasting Factors
• Time required in future
• Availability of historical data
• Relevance of historical data into future
• Demand and sales variability patterns
• Required forecasting accuracy and likely errors
• Planning horizon/lead time for operational moves
 Seven Steps in Forecasting
Determine the use of the forecast
Select the items to be forecasted
Determine the time horizon of the forecast
Select the forecasting model(s)
Gather the data
Make the forecast
Validate and implement results
 Forecasting Approaches
Qualitative Methods
Used when situation is vague and little
data exist
New products
New technology
Involves intuition, experience
e.g., forecasting sales on Internet
 Forecasting Approaches
Quantitative Methods
Used when situation is ‘stable’ and
historical data exist
Existing products
Current technology
Involves mathematical techniques
e.g., forecasting sales of color televisions
 What is Demand Management?
• Demand Management is one that takes a
complete view of a business
• It means discovering markets, planning
products and services for those markets and
then fulfilling these customer demands
• It is an integrative set of business processes,
across, not just the enterprise, but across all
its trading partner network ( both customers
and suppliers)
What does Demand Management involve?

• Discovering and understanding your market

• Establishing your customers needs and expectations and what
draws them to your business
• Challenge of managing what, when, and how a
product/service is designed, made, distributed, displayed ,
promoted and serviced
• Doing the pricing and inventory optimization at various levels
of market and channels segmentation
• Satisfying customers on product, price, delivery and
post-sales services
 What is Demand Forecasting?

• Demand Forecasting is predicting the future demand

for products/services of an organization.
• To forecast is to estimate or calculate in advance
• Since forecasts are estimates and involve
consideration of so many price and non-price factors,
no estimate is necessarily 100% accurate.
 Why Demand Forecasting?
• To help decide on facility capacity planning and capital
budgeting
• To help evaluate market opportunities worthy of future
investments
• To help assess its market share amongst other competitors
• To serve as input to aggregate production planning and
materials requirement planning
• To plan for other organizational inputs ( like manpower, funds
and financing) and setting policies and procedures
 Key Functions of Forecasting
• Its use as an estimation tool
• Way to address the complex and uncertain
business environment issues
• A tool to predicting events related to
operations planning and control
• A vital prerequisite for the overall business
planning process
 Forecasting Role in a Supply Chain
• Forms 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 and part of
aggregate production planning(APP)

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 Role of demand forecasting
• Effective transportation system or supply chain
design is predicated on the availability of accurate
inputs to the modeling process.
• One of the most important inputs are the
demands placed on the system.
• Forecasting techniques are used to predict, in the
face of uncertainty, what the demands on the
system will be in the future so that appropriate
designs and operating plans can be devised.
 Overview of Planning Levels
Organizations make capacity decisions on three
levels:
• Short-range plans (Detailed plans)
– Machine loading
– Job assignments
• Intermediate plans (General levels)
– Employment
– Output, and inventories
• Long-range plans
– Long term capacity
– Location / layout
 Planning Sequence

Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes operations
Business Plan
and capacity strategies

Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules

for specific products
 Aggregate Planning Inputs
• Resources • Costs
– Workforce/production – Inventory carrying
rate – Back orders
– Facilities and equipment
– Hiring/firing
• Demand forecast
– Overtime
• Policies
– Inventory changes
– Subcontracting
– Overtime – subcontracting
– Inventory levels
– Back orders
 Aggregate Planning Outputs
• Total cost of a plan
• Projected levels of:
– Inventory
– Output
– Employment
– Subcontracting
– Backordering
 Aggregate Planning Strategies
• Proactive
– Involve demand options: Attempt to alter
demand to match capacity
• Reactive
– Involve capacity options: attempt to alter
capacity to match demand
• Mixed
– Some of each
 Demand Options
• Pricing

• Promotion

• Back orders

• New demand
 Pricing
• Pricing differential are commonly used to shift demand
from peak periods to off-peak periods, for example:
– Some hotels offer lower rates for weekend stays
– Some airlines offer lower fares for night travel
– Movie theaters offer reduced rates for matinees
– Some restaurant offer early special menus to shift some
of the heavier dinner demand to an earlier time that
traditionally has less traffic.
• To the extent that pricing is effective, demand will be
shifted so that it correspond more closely to capacity.
• An important factor to consider is the degree of price
elasticity of demand; the more the elasticity, the more
effective pricing will be in influencing demand patterns.
 Promotion
• Advertising and any other forms of promotion,
such as displays and direct marketing, can
sometimes be very effective in shifting demand
so that it conforms more closely to capacity.
• Timing of promotion and knowledge of
response rates and response patterns will be
needed to achieve the desired result.
• There is a risk that promotion can worsen the
condition it was intended to improve, by
bringing in demand at the wrong time.
 Back order
• An organization can shift demand to other
periods by allowing back orders. That is , orders
are taken in one period and deliveries promised
for a later period.
• The success of this approach depends on how
willing the customers are to wait for delivery.
• The cost associated with back orders can be
difficult to pin down since it would include lost
sales, annoyed or disappointed customers, and
perhaps additional paperwork.
 New demand
• Manufacturing firms that experience
seasonal demand are sometimes able
to develop a demand for a
complementary product that makes
use of the same production process.
For example, the firms that produce
water ski in the summer, produce
snow ski in the winter.
 Aggregate Planning Strategies
for meeting uneven demand
• Maintain a level workforce
• Maintain a steady output rate
• Match demand period by period
• Use a combination of decision variables
 Techniques for Aggregate Planning
Techniques for aggregate planning are classified
into two categories:
• Informal trial-and-error techniques (frequently
used)
• Mathematical techniques
A general procedure for Aggregate Planning
1. Determine demand for each period
2. Determine capacities (regular time, over time, and
subcontracting) for each period
3. Identify policies that are pertinent
4. Determine units costs for regular time, overtime,
subcontracting, holding inventories, back orders, layoffs, and
other relevant costs
5. Develop alternative plans and compute the costs for each
6. Select the best plan that satisfies objectives. Otherwise
return to step 5.
 Mathematical Techniques

Linear programming: Methods for obtaining optimal

solutions to problems involving allocation of scarce
resources in terms of cost minimization.
Linear decision rule: Optimizing technique that seeks to
minimize combined costs, using a set of
cost-approximating functions to obtain a single
quadratic equation.
Simulation models: Developing a computerized models
that can be tested under a variety of conditions in an
attempt to identify reasonably acceptable (although not
always optimal) solutions to problem.
 Aggregate Planning Objectives

• Minimize Costs/Maximize Profits

• Maximize Customer Service
• Minimize Inventory Investment
• Minimize Changes in Production Rates
• Minimize Changes in Workforce Levels
• Maximize Utilization of Plant and
 Role of Aggregate Planning
in a Supply Chain
• Given the demand forecast for each period in the
planning horizon, we can determine the
production level, inventory level, and the capacity
level for each period that maximizes the firm’s
(supply chain’s) profit over the planning horizon
• All supply chain stages should work together on an
aggregate plan that will optimize supply chain
performance
 Managing Demand and Supply
• In any operating organization, it is important to
manage both demand and supply singly or together
by:
• Managing Demand thro various options
• Managing Supply thro various options
• All chosen options have their own implications on
customer service levels and different costs incurred
 Managing Demand
• Thro capacity reservation by shifting excess demand to a
future period without losing it – by doing advance booking or
appointments for future times
• Thro differential pricing to reduce peak demands( higher
prices e.g. movie tickets) or build demand in off-season by
lowering prices/special discounts)
• Thro advertising and sales promotions to even out demand
patterns at different times( lower telecom rates for night use)
• Thro complementary products to even out seasonal demand
products – e.g. woolen and cotton garments; winter creams
and suntan lotions; lawn mowers and snow ploughs
 Managing Supply
• Thro inventory based alternatives by building excess
inventory during periods of lean demand and consuming
them during peak demand times; or by shifting production to
a future period beyond demand period; or deliberately
inducing stock-outs leaving customers to wait longer; final
choice depends on required customer service levels
• Thro capacity adjustment alternatives by hiring/laying of
workers; working extra hours and shifts; use of part time
workers
• Thro capacity augmentation means by outsourcing and/or
subcontracting, rescheduling maintenance programs and by
debottlenecking projects
 Managing Demand and Supply
• Managing demand and/or supply involves choice amongst
many options with varying implications
• Some basic strategies to help make a choice are:
• Level strategy – not to disturb existing production system at
all; maintain a steady rate of regular time output while
meeting demand variations largely thro inventories
• Chase strategy – by matching capacity to demand and don’t
carry inventories; planned output for a period is set at
expected demand for that period( with lead-times built in
e.g. Jan production for Feb needs); capacity related
alternatives ( discussed earlier) used flexibly
• Mixed strategy – use a combination of level and chase
approaches
 Level strategy
❖ Stable machine capacity and workforce
maintained with constant output rate
❖ Production not synchronized with demand.
❖ Inventories are build up in anticipation of future
demand.
❖ Employee benefits from stable working condition.
❖ Drawback- Large inventories may accumulate and
customer orders may be delayed
❖ Used when inventory carrying and backlog costs
are relatively low
 Chase strategy
❖ Capacity as the lever.
❖ Production rate is synchronized with demand rate
by varying machine capacity or hiring and layoff
employees.
❖ Synchronization can be problematic due to the
difficulty of varying machine and labour capacity
on short notice
❖ Results in low level of inventory in supply chain.
❖ Used when cost of carrying inventory is very high.
 Time flexibility from work force or
capacity strategy
❖ Utilization as the lever
❖ Work force (capacity) kept stable.
❖ Production synchronized with demand by
varying number of hours worked.
❖ Avoids some problems of chase strategy ie
changing size of workforce.
❖ Used when inventory carrying cost are
relatively high.