FORECASTING
What is Demand Management?
Demand Management is gauging the demand for a product or service in the future and
planning the manufacturing so there wouldn’t be supply and demand gaps.
Demand Management Process
Demand management is the supply chain management process that balances the
customers' requirements with the capabilities of the supply chain
Demand Management Techniques
The three, (3), Master Production Scheduling (MPS) environments of :
● make-to-stock (MTS)
● assemble-to-order (ATO)
● make-to-order (MTO)
Components of Demand Management
● Forecasting
● Supply Planning
● Demand Analysis
● Sales and Operations Planning
What is Forecasting?
● Forecasting is the process of making predictions of the future based on past and
present data and most commonly by analysis of trends.
● Forecasting is the process of estimating the relevant events of future, based on the
analysis of their past and present behavior.
Two (2) Set of Factors Assessing Forecast
1. External forces (outside)
2. Internal forces
Approaches to Forecasting
● Top-down Approach
● Bottom-up Approach
Benefits of Forecasting
● Future-oriented
● Identification of Critical Areas Reduces Risk
● Coordination
● Effective Management Development of Executives
Measures to Increase the Effectiveness of Forecasting
● Forecasting methods should be simple
● Compare forecasts with the situation of “no change”
● Long range forecasts should not depend upon a single forecasting method
● Forecasts should not be made for very long periods Managerial skill should be
improved to make reliable
● forecasts for planning decisions
● Forecasts should be based on facts and figures and not personal biases of the
forecaster
Process of Forecasting
● Determine the objective for which forecast is required
● Select the appropriate forecast method
● Compare the actual results
● Review and revise the forecasts
Steps in Forecasting
● Developing the basis
● Estimation of Future Operations
● Regulation of Forecasts
Review of Forecasting Process
Techniques in Forecasting
● Quantitative Forecasting (Objective)
● Qualitative Forecasting (Subjective)
Methods in Qualitative Forecasting
● Executive Committee Consensus
● Panel Approach
● Delphi Method
● Scenario Planning
● Sales Force Composite
● Customer Surveys
Methods in Quantitative Forecasting
1. Time Series Analysis - Simple time series plot a variable over time then, by
removing underlying variations with assignable causes, use extrapolation techniques
to predict future behavior.
○ Forecasting UnassignedVariation
■ Moving-Average Forecasting
- The moving-average approach to forecasting takes the
previous n periods’ actual demand figures, calculates the
average demand over the n periods, and uses this average as
a forecast for the next period’s demand.
■ Exponentially smoothed forecasting
- The exponential- smoothing approach forecasts demand in the
next period by taking into account the actual demand in the
current period and the forecast which was previously made for
the current period.
2. Causal Models - Causal models often employ complex techniques to understand the
strength of relationships between the network of variables and the impact they have
on each other.
3. Other Forecasting Methods
○ Straight Line Method
- The straight-line method is one of the simplest and easy-to-follow
forecasting methods. A financial analyst uses historical figures and
trends to predict future revenue growth.
○ Simple Linear Regression
- Regression analysis is a widely used tool for analyzing the relationship
between variables for prediction purposes.
Forecast Accuracy
● Forecast bias – persistent tendency for forecast to be greater or less than the actual
values of a time series.
● Forecast error – difference between the actual value and the value that was
predicted for a given period.
● Bias
- Indicates on an average basis, whether the forecast is too high (negative bias
indicates over forecast) or too low (positive bias indicates under forecast).
The Running Sum of Forecast Errors (RSFE) provides a measure of forecast
bias.
● Mean Absolute Deviation (MAD)
- indicates on an average basis, how many units the forecast is off from the
actual data.
● Mean Absolute Percentage Error (MAPE)
- indicates on an average basis, how many percent the forecast is off from the
actual data.
● Mean Squared Error
- a forecast error measure that penalizes large errors proportionately more than
small errors.
