Principles of Supply Chain Management (5e)

Chapter 5
DEMAND FORECASTING

Prepared by Cynthia Wisner, MBA

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 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

© 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.
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 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
© 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
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 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.

© 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.
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 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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 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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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 1

Qualitative Forecasting Methods
• Used when data are limited, unavailable, or not
currently relevant
• Forecast depends on skill & experience of forecaster &
available information
Four qualitative models used are –
1. Jury of executive opinion
2. Delphi method
3. Sales force composite
4. Consumer survey

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 2

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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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 3

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

© 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.
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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 4

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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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 5

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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otherwise on a password-protected website or school-approved learning management system for classroom use.
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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 6

Time Series Forecasting Models
Naïve Forecast – the estimate of the next period is
equal to the demand in the past period.

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 7

Time Series Forecasting Models
Simple Moving Average Forecast – uses historical
data to generate a forecast. Works well when demand
is stable over time.

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 8

Simple Moving Average
Period Actual Forecast
1 1,600 Empty Cell
2 2,200 Empty Cell
3 2,000 Empty Cell
4 1,600 Empty Cell
5 2,500 1,850
6 3,500 2,075
7 3,300 2,400
8 3,200 2,725
9 3,900 3,125
10 4,700 3,475
11 4,300 3,775
12 4,400 4,025
Empty Cell Empty Cell 4,325

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 9

Time Series Forecasting Models
Weighted Moving Average Forecast – based on
an n-period weighted moving average

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 1 0

Weighted Moving Average

Description Weight
Fourth most recent period 0.1
Third most recent period 0.2
Second most recent period 0.3
Most recent period 0.4
Total 1.0

Period Actual Forecast

1 1,600 (empty cell)
2 2,200 (empty cell)
3 2,000 (empty cell)
4 1,600 (empty cell)
5 2,500 1,840
6 3,500 2,100
7 3,300 2,670
8 3,200 3,030
9 3,900 3,220
10 4,700 3,530
11 4,300 4,020
12 4,400 4,230
(empty (empty
cell) cell) 4,380

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 1 1

Time Series Forecasting Models

Exponential Smoothing Forecast – type of weighted
moving average - only two data points are needed

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 1 2

Exponential Smoothing

Period Actual Forecast

1 1,600 (empty cell)
2 2,200 1,600
3 2,000 1,780
4 1,600 1,846
5 2,500 1,772
6 3,500 1,991
7 3,300 2,443
8 3,200 2,700
9 3,900 2,850
10 4,700 3,165
11 4,300 3,626
12 4,400 3,828
(empty (empty
cell) cell) 4,000

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 1 3

Time Series Forecasting Models

Linear Trend Forecast – trend can be estimated using
simple linear regression to fit a line to a time series

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 1 4

Linear Regression

Period Actual Forecast

1 1,600 1,523
2 2,200 1,810
3 2,000 2,097
4 1,600 2,383
5 2,500 2,670
6 3,500 2,957
7 3,300 3,243
8 3,200 3,530
9 3,900 3,817
10 4,700 4,103
11 4,300 4,390
12 4,400 4,677
(empty
13 cell) 4,964

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 1 5

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

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 Principles of Supply Chain Management (5e)

Forecasting Techniques, Part 1 6

Cause & Effect Models

Multiple regression – several explanatory
variables are used to predict the dependent
variable

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 Principles of Supply Chain Management (5e)

Forecast Accuracy

Forecast error - the difference between actual

quantity & the forecast

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 Principles of Supply Chain Management (5e)

Forecast Accuracy, Part 1

Mean absolute deviation (MAD)- MAD of 0 indicates the
forecast exactly predicted demand

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 Principles of Supply Chain Management (5e)

Forecast Accuracy, Part 2

Mean absolute percentage error (MAPE) – provides a
perspective of the true magnitude of the forecast error

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 Principles of Supply Chain Management (5e)

Forecast Accuracy, Part 3

Mean squared error (MSE) – analogous to variance,
large forecast errors are heavily penalized

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 Principles of Supply Chain Management (5e)

Forecast Accuracy, Part 4

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.

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 Principles of Supply Chain Management (5e)

Forecast Accuracy, Part 5

• 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

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 Principles of Supply Chain Management (5e)

Forecast Accuracy, Part 6

• 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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 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.

© 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.
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 Principles of Supply Chain Management (5e)

Collaborative Planning, Forecasting,

& Replenishment, Part 1

• 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.

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 Principles of Supply Chain Management (5e)

Collaborative Planning, Forecasting,

& Replenishment, Part 2
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

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 Principles of Supply Chain Management (5e)

Collaborative Planning, Forecasting, &

Replenishment, Part 3

CPFR Benefits (continued)

• Uses joint planning & promotions management

• Integrates planning, forecasting and logistics
activities
• Provides efficient category management &
understanding of consumer purchasing patterns

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 Principles of Supply Chain Management (5e)

Collaborative Planning, Forecasting,

& Replenishment, Part 4

CPFR Benefits (continued)

• Provides analysis of key performance metrics to:

➢reduce supply chain inefficiencies
➢improve customer service
➢increase revenues and profitability

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 Principles of Supply Chain Management (5e)

Collaborative Planning, Forecasting,

& Replenishment, Part 5
Top three challenges for CPFR implementation
1. Difficulty of making internal changes
2. Cost
3. Trust

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 Principles of Supply Chain Management (5e)

Useful Forecasting Websites

▪ Institute for Business Forecasting & Planning
https://ibf.org/
▪ International Institute of Forecasters
www.forecasters.org
▪ Forecasting Principles
www.forecastingprinciples.com
▪ Several forecasting blogs:
Business Forecasting (www.businessforcastingblog.com)
No Hesitations: A Blog by Francis Diebold
(http://fxdiebold.blogspot.com.au)

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 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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 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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 Principles of Supply Chain Management (5e)

End of Chapter 5

© 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.
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