Chapter

Demand
Forecasting in a
Supply Chain

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Learning
Objectives

• Understand the role of forecasting for both an enterprise

and a supply chain.

• Identify the components of a demand forecast.

• Forecast demand in a supply chain given historical demand data

using time-series methodologies.

• Analyze demand forecasts to estimate forecast error.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 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

• Forecasting involves investigating the competition, collecting

supplier data, and analyzing past patterns in order to predict the
future of an industry.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Role of Forecasting in a Supply
Chain
• Demand forecasting in supply chain management
refers to the process of planning or predicting the
demand of materials to ensure you can deliver the
right products and in the right quantities to satisfy
customer demand without creating a surplus.

• As a simple definition, it is known as the process of

making future estimations in relation to customer
demand over a specific period.

• Generally, demand forecasting will consider historical

data and other analytical information to produce the most
accurate predictions.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Characteristics of
Forecasts
• Forecasts are always inaccurate and should thus include both the
expected value of the forecast and a measure of forecast error.

• Long-term forecasts are usually less accurate than short-

term
forecasts.

• Aggregate forecasts are usually more accurate than disaggregate

forecasts

• In general, the farther up the supply chain a company is,

the greater is the distortion of information it receives

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Components and
Methods

• 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

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Components and
Methods
• Qualitative Techniques

Primarily, these are used when data are scarce—for example,

when a product is first introduced into a market.
They use human judgment and rating schemes to turn
qualitative information into quantitative estimates.

This data represents information and concepts that are not

represented by numbers. They are often gathered from
interviews and focus groups, personal diaries and lab notebooks,
maps, photographs, and other printed materials or observations.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Components and
Methods
• Time series
Use historical demand only best with stable demand.

These are statistical techniques used when several years’ data for a
product or product line are available and when relationships and trends
are both clear and relatively stable.

• Causal
Relationship between demand and some other factor

When historical data are available and enough analysis has been
performed to spell out explicitly the relationships between the factor to
be forecast and other factors (such as related businesses, economic
forces, and socioeconomic factors), the forecaster often constructs
a causal model.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Components and
Methods
• Causal Model

A causal model is the most sophisticated kind of forecasting tool. It

expresses mathematically the relevant causal relationships, and may
include pipeline considerations (i.e., inventories) and market survey
information.

Causal models incorporate the idea of multiple causality, that is, there
can be more than one cause for any particular effect.

• Simulation
Imitate consumer choices that give rise to demand

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Components of an
Observation

Observed demand (O) systematic component (S)

= + random component (R)
• Systematic component – expected value of demand
Level (current deseasonalized demand)
Trend (growth or decline in demand)
Seasonality (predictable seasonal fluctuation)

• Random component– part of forecast that from

deviates systematic component

• Forecast error – difference between forecast actua

and demand l

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Basic
Approach
Understand the objective of forecasting

• From cutting costs to keeping consumers happy,

forecasting is a vital component of supply chain
management, helping companies fill orders on time,
avoid unnecessary inventory expenses and plan for
price fluctuations.

• The purpose of forecasting is to help the organization

manage the present as to prepare for the future
by examining the most probable future demand
pattern.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Basic
Approach
Identify the major factors that influence the
demand forecast

• Economic conditions such as GDP, unemployment rate,

inflation rate, and consumer confidence are key factors
that affect the level of demand for products or services.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Basic
Approach
Forecast at the appropriate level of aggregation

• For the geographic region dimension, data aggregation

levels include county, state, region, country, and
continent.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Adaptive
Forecasting

• The estimates of level, trend, and seasonality are

adjusted after each demand observation

• Estimates incorporate all new data that are observed

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Trend-Corrected Exponential Smoothing
(Holt’s Model)

• Appropriate when the demand is assumed to have a level

and trend in the systematic component of demand but no
seasonality
 Systematic component of demand = level + trend

Holt's Smoothing method: Holt's smoothing technique,

also known as linear exponential smoothing, is a widely
known smoothing model for forecasting data that has a
trend.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Winter’s
Model
Winter's Smoothing method: Winter's smoothing
technique allows us to include seasonality while
making the prediction along with the trend.

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Time Series
Models

Forecasting Method Applicability

Moving average No trend or seasonality
Simple exponential No trend or
smoothing seasonality
Holt’s model Trend but no
seasonality
Winter’s model Trend and seasonality

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 The Role of IT in
Forecasting

• Forecasting module is core supply chain software

• Can be used to best determine forecasting methods for the

firm
and by product categories and markets

• Real time updates help firms respond quickly to

changes in marketplace

• Facilitate demand planning

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Risk
Management

• Errors in forecasting can cause significant misallocation of

resources in inventory, facilities, transportation, sourcing, pricing,
and information management

• Common factors are long lead times, seasonality, short product

life cycles, few customers and lumpy demand, and when orders
placed by intermediaries in a supply chain

• Mitigation strategies – increasing the responsiveness of

the
supply chain and utilizing opportunities for pooling of demand

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Forecasting in
Practice

• Collaborate in building forecasts

• Share only the data that truly provide value

• Be sure to distinguish between demand and sales

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra
 Summary of Learning
Objectives

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

supply chain

• Identify the components of a demand forecast

• Forecast demand in a supply chain given historical demand data

using time-series methodologies

• Analyze demand forecasts to estimate forecast error

Supply Chain Management: Strategy, Planning, and Operation, 5/e Authors: Sunil Chopra, Peter Meindl and D. V. Kalra