Supply Chain Management: Strategy,

Planning, and Operation

Chapter 7
Demand Forecasting
in a Supply Chain

Copyright © 2019 Pearson Education, Ltd.

 Learning Objectives

7.1 Understand the role of forecasting for both an enterprise and a

supply chain.
7.2 Identify the components of a demand forecast and some basic
approaches to forecasting.
7.3 Forecast demand using time-series methodologies given
historical demand data in a supply chain.
7.4 Analyze demand forecasts to estimate forecast error.

Copyright © 2019 Pearson Education, Ltd.

 Role of Forecasting in a Supply Chain

• The basis for all planning decisions in a supply chain

• Used for both push and pull processes
– Production scheduling, inventory, aggregate planning
– Sales force allocation, promotions, new production introduction
– Plant/equipment investment, budgetary planning
– Workforce planning, hiring, layoffs
• All of these decisions are interrelated

Copyright © 2019 Pearson Education, Ltd.

 Characteristics of Forecasts
1. Forecasts are always inaccurate and should thus
include both the expected value of the forecast and a
measure of forecast error
2. Long-term forecasts are usually less accurate than
short-term forecasts
3. Aggregate forecasts are usually more accurate than
disaggregate forecasts

Copyright © 2019 Pearson Education, Ltd.

 Components and Methods (1 of 2)
• Companies must identify the factors that influence future
demand and then ascertain the relationship between
these factors and future demand
– Past demand
– Lead time of product replenishment
– Planned advertising or marketing efforts
– Planned price discounts
– State of the economy
– Actions that competitors have taken

Copyright © 2019 Pearson Education, Ltd.

Components and Methods (2 of 2)
1. Qualitative
– Primarily subjective
– Rely on judgment

2. Time Series
– Use historical demand only
– Best with stable demand

3. Causal
– Relationship between demand and some other factor

4. Simulation
– Imitate consumer choices that give rise to demand

Copyright © 2019 Pearson Education, Ltd.

 Forecasting Time Horizons
1. Short-range forecast
► Up to 1 year, generally less than 3 months
► Purchasing, job scheduling, workforce levels, job
assignments, production levels
2. Medium-range forecast
► 3 months to 3 years
► Sales and production planning, budgeting
3. Long-range forecast
► 3+ years
► New product planning, facility location, capital expenditures,
research and development
Copyright © 2019 Pearson Education, Ltd.
 Seven Steps in Forecasting
1. Determine the use of the forecast
2. Select the items to be forecasted
3. Determine the time horizon of the forecast
4. Select the forecasting model(s)
5. Gather the data needed to make the forecast
6. Make the forecast
7. Validate and implement the results

Copyright © 2019 Pearson Education, Ltd.

 The Realities!
► Forecasts are seldom perfect, unpredictable outside
factors may impact the forecast
► Most techniques assume an underlying stability in
the system
► Product family and aggregated forecasts are more
accurate than individual product forecasts

Copyright © 2019 Pearson Education, Ltd.

 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

Copyright © 2019 Pearson Education, Ltd.

 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

Copyright © 2019 Pearson Education, Ltd.

 Overview of Qualitative Methods
1. Jury of executive opinion
► Pool opinions of high-level experts, sometimes augmented by
statistical models
2. Delphi method
► Panel of experts, queried iteratively

3. Sales force composite

► Estimates from individual salespersons are reviewed for
reasonableness, then aggregated

4. Market Survey
► Ask the customer

Copyright © 2019 Pearson Education, Ltd.

 Jury of Executive Opinion
► Involves small group of high-level experts and
managers
► Group estimates demand by working together
► Combines managerial experience with statistical
models
► Relatively quick
► ‘Group-think’ disadvantage

Copyright © 2019 Pearson Education, Ltd.

 Delphi Method
• Iterative group
process, continues
until consensus is
reached
• Three types of
participants
–Decision makers
–Staff
–Respondents

Copyright © 2019 Pearson Education, Ltd.

 Sales Force Composite

► Each salesperson projects his or her sales

► Combined at district and national levels
► Sales reps know customers’ wants
► May be overly optimistic

Copyright © 2019 Pearson Education, Ltd.

 Market Survey
► Ask customers about purchasing plans
► Useful for demand and product design and planning
► What consumers say and what they actually do may
be different
► May be overly optimistic

Copyright © 2019 Pearson Education, Ltd.

Overview of Quantitative Approaches
1. Naive approach
2. Moving averages
Time-series
3. Exponential models
smoothing
4. Trend projection
5. Linear regression Associative
model

Copyright © 2019 Pearson Education, Ltd.

 Time-Series Forecasting
Set of evenly spaced numerical data
►

► Obtained by observing response variable at

regular time periods
Forecast based only on past values, no other
►
variables important
► Assumes that factors influencing past and
present will continue influence in future

Copyright © 2019 Pearson Education, Ltd.

Time-Series Components

Trend Cyclical

Seasonal Random

Copyright © 2019 Pearson Education, Ltd.

 Components of Demand
Trend
component
Demand for product or service

Seasonal peaks

Actual demand
line

Average demand
over 4 years

Random variation
| | | |
1 2 3 4
Time (years)
Figure 4.1

Copyright © 2019 Pearson Education, Ltd.

 Trend Component
► Persistent, overall upward or downward pattern
► Changes due to population, technology, age,
culture, etc.
► Typically several years duration

Copyright © 2019 Pearson Education, Ltd.

 Seasonal Component
► Regular pattern of up and down fluctuations
► Due to weather, customs, etc.
► Occurs within a single year
PERIOD LENGTH “SEASON” LENGTH NUMBER OF “SEASONS” IN PATTERN

Week Day 7
Month Week 4 – 4.5
Month Day 28 – 31
Year Quarter 4
Year Month 12
Year Week 52

Copyright © 2019 Pearson Education, Ltd.

 Cyclical Component
► Repeating up and down movements
► Affected by business cycle, political, and
economic factors
► Multiple years duration
► Often causal or
associative
relationships 0 5 10 15 20

Copyright © 2019 Pearson Education, Ltd.

 Random Component
► Erratic, unsystematic, ‘residual’ fluctuations
► Due to random variation or unforeseen
events
► Short duration
and nonrepeating

M T W T F

Copyright © 2019 Pearson Education, Ltd.

 Naive Approach
► Assumes demand in next
period is the same as
demand in most recent period
► e.g., If January sales were 68, then February sales will
be 68
► Sometimes cost effective and efficient
► Can be good starting point

Copyright © 2019 Pearson Education, Ltd.

 Moving Averages
► MA is a series of arithmetic means
► Used if little or no trend
► Used often for smoothing
► Provides overall impression of data over time

Moving average =
 demand in previous n periods
n

Copyright © 2019 Pearson Education, Ltd.

 Moving Average Example
MONTH ACTUAL SHED SALES 3-MONTH MOVING AVERAGE
January 10
10
February 12
12
March 13
13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3
August 30 (19 + 23 + 26)/3 = 22 2/3
September 28 (23 + 26 + 30)/3 = 26 1/3
October 18 (26 + 30 + 28)/3 = 28
November 16 (30 + 28 + 18)/3 = 25 1/3
December 14 (28 + 18 + 16)/3 = 20 2/3

Copyright © 2019 Pearson Education, Ltd.

 Weighted Moving Average
Used when some trend might be present
►

► Older data usually less important

Weights based on experience and intuition
►

Weighted
moving  ((Weight for period n )(Demand in period n ))
average =
 Weights

Copyright © 2019 Pearson Education, Ltd.

 Weighted Moving Average
MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE
January 10
10
February 12
12
March 13
13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1/6
May 19
WEIGHTS APPLIED PERIOD
June 23
3 Last month
July 26
2 Two months ago
August 30
1 Three months ago
September 28
6 Sum of the weights
October 18
Forecast for this month =
November 16
3 x Sales last mo. + 2 x Sales 2 mos. ago + 1 x Sales 3 mos. ago
December 14
Sum of the weights

Copyright © 2019 Pearson Education, Ltd.

 Weighted Moving Average
MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE
January 10
10
February 12
12
March 13
13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 14 1/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 20 1/2
August 30 [(3 x 26) + (2 x 23) + (19)]/6 = 23 5/6
September 28 [(3 x 30) + (2 x 26) + (23)]/6 = 27 1/2
October 18 [(3 x 28) + (2 x 30) + (26)]/6 = 28 1/3
November 16 [(3 x 18) + (2 x 28) + (30)]/6 = 23 1/3
December 14 [(3 x 16) + (2 x 18) + (28)]/6 = 18 2/3

Copyright © 2019 Pearson Education, Ltd.

 Exponential Smoothing
New forecast = Last period’s forecast
+ a (Last period’s actual demand
– Last period’s forecast)
Ft = Ft – 1 + a(At – 1 – Ft – 1)
where Ft = new forecast
Ft – 1 = previous period’s forecast
a = smoothing (or weighting) constant (0 ≤ a ≤ 1)
At – 1 = previous period’s actual demand

Copyright © 2019 Pearson Education, Ltd.

 Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant a = 0.20

Ft = Ft – 1 + a(At – 1 – Ft – 1)

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. 4 - 32

 Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant  = .20
Ft = Ft – 1 + a(At – 1 – Ft – 1)

New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars

Copyright © 2020 Pearson Education Ltd. All Rights Reserved. 4 - 33