Demand Forecasting

•Demand forecast forms the basis of all

Supply chain
•All push processes in the supply chain
are performed in anticipation of customer
demand,
•whereas all pull processes are
performed in response to customer
demand.

•For push processes, a manager must

plan the level of activity , be it
production, transportation, or any other
planned activity, for pull processes, A
manager must plan the level of
available capacity & inventory but not
the actual amount to be executed
 • “An estimate of sales in dollars or
physical units for a specified
future period under a proposed
marketing plan.”
American Marketing
Association
Meaning of • Demand forecasting is the scientific
Demand and analytical estimation of demand
for a product (service) for a particular
Forecasting period of time.
• It is the process of determining how
much of
what products is needed when and
where.
 • Forecast are always
wrong
•Thus include
both the
expected value
of the forecast
and a measure
of forecast
error.
• Longer forecast are
usually less accurate
than the short term
forecasts.
• Aggregate forecasts are
usually more accurate
• Forecasts are integral
part of decision
making.
 “PREDICTIONS ARE USUALLY DIFFICULT
,ESPECIALLY ABOUT THE FUTURE”

customer demand is influenced by a

Components variety of factors & can be predicted
Of A Forecast • Companies must balance objective & subjective
and factors when forecasting demand.
Forecasting • A company must take numerous factors that are
Methods related to the demand forecast. Some of the
these factors are:
• Past Demand
• Lead time of product
• Planned advertising or marketing efforts
• State of the economy
• Planned price discounts
• Actions that competitors have taken, at least
with some probability
 By Level of Forecasting
Categorization of
• Firm (Micro) level: forecasting of
demand for its product by an individual
firm.
• decisions related to production and
Forecasting

marketing.
Demand

Industry level: for a product in

an industry as a whole.
• insight in growth pattern of the industry
• in identifying the life cycle stage of the
product
• relative contribution of the industry in
national income.
 • Economy (Macro) level: forecasting of
aggregate demand (or output) in the economy
as a whole. Helps in various policy formulations
at government level.

•By nature of goods

•Capital Goods: (goods that are used to manufacture
other goods)Derived demand
♦demand for capital goods depends upon demand
of consumer goods which they can produce.
•Consumer Goods: Direct demand
♦durable consumer goods: new demand or
replacement demand
♦ Nondurable consumer goods: FMCG
Time Horizon in
Forecasting
 Short-term( 1
day to 3
months), Little time to

Short-term
managers are react to errors
In absence of
interested in in demand
Time series historical data
forecasts for forecast, so
analysis is managers use
disaggregated the forecasts
often used. judgment

Forecasting
demand( for need to be as
methods.
specific accurate as
product, for possible.
specific
geography, etc)
Medium-term
Forecasting

• Time horizon for medium-

term( 3 months to 24 months).
• Relates to aggregate
planning(sales &
operations
planning).
• Medium term forecast is
used to build up seasonal
inventory.
• Both time-series and
causal methods are used.
Long-term
Forecasting

• Time horizon exceeding two

years.
• Long-term forecasts are
used for process
selection, capacity
planning & location
decisions.
• Judgment models & causal
models are used.
Forecast Methods Forecast methods
are classified as
follows:
• Qualitative
Forecasting
• Quantitative
Forecasting
Qualitative Forecasting Methods

Qualitative forecasting methods

are primarily subjective and the
rely on human expertise and
judgment.

Most appropriate when little

historical data are available like
in the case of demand forecasts
for new products

Popular qualitative forecasting

methods are: Delphi, Market
research, Life cycle analogy &
judgment methods
•Delphi Approach: The Delphi method
employs a panel of experts in arriving at the
forecast & proceeds through a series of
rounds. It is an iterative method wherein each
expert is asked to make individual predictions
based on available data.
•Market Research: Market research involves
the estimation of the market size based on
testing new products or ideas with a few
selected potential customers.
•Life Cycle Analogy: Products go
through a life cycle of introduction,
growth, maturity & decline. Based on
the experiences of similar products in
the past, one can make a decision.
•Informed Judgment: This forecast is made by
an individual or a group based on experience
& understanding of the situation.
Quantitative Methods
• Within quantitative models two types are
commonly used in forecasting applications:
⮚ Time-series
⮚ Causal

• Time series method of forecasting uses historical

data to make forecasts. It is assumed that the
future is going to be very similar to the past.
• Causal forecasting model shows the cause for
demand and its relation to other variables. Usually
regression is used for modeling the cause-and-
effect behavior
Time-series

• Seasonality: A seasonal pattern(e.g., quarter of

the year, month of the year, week of the month,
day of the week) exists when demand is
influenced by seasonal factors.
• Trend: During the growth and decline stages of the
product life cycle, a consistent trend pattern in
terms of demand growth or demand decline can
be observed.
• Level : It is difficult to capture short term patterns
that are not repetitive in nature. In short run,
sometimes there is a swing, which could be in
either direction, upward or downward, and it
usually has momentum that lasts for a few
periods
Causal Method

Causal forecasting model show the cause for demand

and its relation to other variables. Usually, regression
is used for modeling the cause-and-effect behavior.

Examples: Soft drink can be related to the average

summer temperature.

Rainfall can give us an estimate of crop

Basic Approach To Demand
Forecasting
• The following basic, six-step approach
helps an organization perform
effective forecasting:

⮚ Understand the objective of forecasting

⮚ Integrate demand planning & forecasting
throughout the supply chain
⮚ Understand & identify customer segments
⮚ Identify the major factors that influence the
demand forecast
⮚ Determine the appropriate forecasting technique
⮚ Establish performance and error measures for
the forecast.
Demand Management
Demand management may be thought of as focused efforts to
estimate and manage customer’s demand with the intention of
using this information to shape operating decisions.

The essence of demand management is to further improve the

ability of firms throughout the supply chain-particularly
manufacturing through customer-to collaboration on activities
related to the flow of products, services, information and
capital.

The following list suggests a number of

ways in which effective demand
management will help to unify channel members with the
common goal of satisfying customers and solving customer
problems:
 Gathering and analyzing knowledge about customers,
their problems and their unmet needs.
 Identifying partners to perform the functions needed in
the demand chain.
 Moving the functions that need to be done to the channel
member that can perform them most effectively and
efficiently.
 Sharing with other supply chain members knowledge
about consumers and customers, available technology,
and logistics challenges and opportunities.
 Developing products and services that solve customer’s
problems.
 Developing and executing the best logistics transportation
and distribution methods to deliver products and services
to consumers in the desired format