SCM. Quincy Snodgrass Enterprises and Hammerstein University Cases
INeal
5thedChapter05.pptxDEMAND FORCASTING
Chapter 5
Prepared by Cynthia Wisner, MBA
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
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
Calculate and Assess the accuracy of forecasts
Explain collaborative planning, forecasting, & replenishment
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Chapter Outline
Introduction
The Importance of Demand Forecasting
Forecasting Techniques
Forecast Accuracy
Collaborative Planning, Forecasting, & Replenishment (CPFR)
Useful Forecasting Websites
Forecasting Software
Cloud-Based Forecasting
Summary
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Introduction
Organizations moving to a more effective demand-driven supply chain
Suppliers must find ways to better match supply & demand
Improved forecasts benefit all trading partners in the supply chain & mitigates supply-demand mismatch problems.
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
The Importance of Demand Forecasting
A forecast is an estimate of future demand & provides the basis for planning decisions
The goal is to minimize deviation between actual demand and forecast
The factors that influence demand must be considered when forecasting
Buyers and sellers should share all relevant information to generate a single consensus forecast
Good forecasting provides reduced inventories, costs, & stockouts, & improved production plans & customer service
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques
Qualitative forecasting - based on opinion & intuition
Quantitative forecasting - uses mathematical models & historical data to make forecasts
Time series models - most frequently used among all the forecasting models
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Qualitative Forecasting Methods
Used when data are limited, unavailable, or not currently relevant
Forecast depends on skill & experience of forecaste & available information
Four qualitative models used are –
Jury of executive opinion
Delphi method
Sales force composite
Consumer survey
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Jury of executive opinion
Group of senior management executives collectively develop the forecast
Good for long-range planning and new product introductions
Delphi method
Internal and external experts are surveyed during several rounds
summary of responses is sent out to all the experts & they can modify their responses in next round
Good for high-risk technology forecasting; large, expensive projects; or major new product introductions
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Sales force composite
Based on sales force’s knowledge of the market & estimates of customer needs
Tendency for sales force to under-forecast
Consumer survey
Questionnaire uses inputs from customers on future purchasing needs, new product ideas, & opinions about existing or new products
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Quantitative Methods
Time series forecasting – assumes the future is an extension of the past
Historical data is used to predict future demand
Cause & Effect forecasting – assumes one or more factors (independent variables) predict future demand
All quantitative methods become less accurate as forecast’s time horizon increases
For long-time horizon forecasts, use a combination of quantitative & qualitative techniques
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Components of Time Series
Data should be plotted to detect for the following components –
Trend variations: increasing or decreasing over many years
Cyclical variations: wavelike movements that are longer than a year (e.g., business cycle)
Seasonal variations: show peaks & valleys that repeat over consistent interval (ie. hours, days, weeks, months, seasons, or years)
Random variations: due to unexpected or unpredictable events such as natural disasters
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Simple Moving Average
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Time Series Forecasting Models
Weighted Moving Average Forecast – 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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Weighted Moving Average
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Time Series Forecasting Models
Exponential Smoothing Forecast – type of weighted moving average - 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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Exponential Smoothing
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Linear Regression
(Fig. 5.4)
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Cause & Effect Models
One or several external variables are identified & related to demand
Simple regression – Only one explanatory variable is used & is similar to the previous linear trend model.
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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecasting Techniques (Continued)
Cause & Effect Models
Multiple regression – several explanatory variables are used to predict the dependent variable
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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecast Accuracy
Forecast error - 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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
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.
Running Sum of Forecast Errors, RSFE =
Where et = forecast error for period t
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecast Accuracy (Continued)
Tracking signal determines if forecast is within acceptable control limits
If tracking signal falls outside pre-set control limits
there is bias problem with the forecasting method
evaluation of forecast generation is warranted
Tracking Signal =
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Forecast Accuracy (Continued)
Biased forecast will lead to excessive inventories or stockouts
Key to accurate forecasts is collaboration with different partners inside outside the firm working together to eliminate forecasting error
Collaboration can lead to significant improvements in forecasting accuracy
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Collaborative Planning, Forecasting, & Replenishment (CPFR)
What is CPFR?
It is a business practice that combines the intelligence of multiple trading partners in the planning & fulfillment of customer demands.
It 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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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Real value of CPFR comes from sharing of forecasts among firms
Eliminates shifting of inventories among trading partners that suboptimizes the supply chain
Provides the supply chain with a plethora of benefits but requires a fundamental change in the way that buyers & sellers work together.
Collaborative Planning, Forecasting, & Replenishment (Continued)
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
CPFR Benefits
Strengthens partner relationships
Provides analysis of sales & order forecasts
Uses point-of-sale data, seasonal activity, promotions, to improve forecast accuracy
Manages demand chain & eliminates problems before they appear
Allows collaboration on future requirements & plans
Collaborative Planning, Forecasting, & Replenishment (Continued)
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
CPFR Benefits (continued)
Uses joint planning & promotions management
Integrates planning, forecasting and logistics activities
Provides efficient category management & understanding of consumer purchasing patterns
Collaborative Planning, Forecasting, & Replenishment (Continued)
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
CPFR Benefits (continued)
Provides analysis of key performance metrics to:
reduce supply chain inefficiencies
improve customer service
increase revenues and profitability
Collaborative Planning, Forecasting, & Replenishment (Continued)
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Top three challenges for CPFR implementation
Difficulty of making internal changes
Cost
Trust
Collaborative Planning, Forecasting, & Replenishment (Continued)
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Useful Forecasting Websites
Institute for Business Forecasting & Planning
International Institute of Forecasters
Forecasting Principles
Several forecasting blogs:
Business Forecasting (www.businessforcastingblog.com)
No Hesitations: A Blog by Francis Diebold (http://fxdiebold.blogspot.com.au)
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Software Solutions
Forecasting Software simplifies the calculation processes and saves a great deal of time
Business Forecast Systems - www.forecastpro.com
John Galt - www.johngalt.com
Just Enough - www.justenough.com
Avercast, LLC - www.avercast.com
SAS - www.sas.com/en_us/home.html
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
Cloud-Based Forecasting
Cloud-based forecasting - supplier-hosted or software-as-a-service (SaaS) advanced forecasting applications
Provided on a subscription basis
Benefits include:
Increase data storage & data analysis capabilities
New capabilities without extensive training
Reduction in IT costs
Improvement in forecast accuracy
Reduction in stockout & inventory carrying costs
Improvement in employee productivity
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© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.
Principles of Supply Chain Management (5e)
End of Chapter 5
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Principles of Supply Chain Management (5e)
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