Supply Chain Plan & Control

Session 20

The Role of Forecasting

Basis for strategic and planning decisions in SC (push/pull) !! Examples:
!!
!! !! !! !!

DELL forecasting for component purchase, INTEL forecasts also Coca Cola (regular forecast, incorporating promotions to update FC) Milk, mineral water, paper towels (easy forecasting) Fashion goods, technical products (difficult forecasting) Production: scheduling, inventory, aggregate planning Marketing: sales force allocation, promotions, new product introduction Finance: plant/equipment investment, budgetary planning Personnel: workforce planning, hiring, layoffs

!!

All of these decisions are interrelated:

!! !! !! !!

Characteristics of Forecasting
!!

Inaccurate:
!! !!

Value of forecast Measure of forecast error Long term are less accurate (larger standard deviation of error) Short term are more accurate (7-Eleven quick replenishment) GDP for the US is easier to estimate than a companys yearly profit A products revenue is more difficult to forecast

!!

Forecast horizon:
!! !!

!!

Aggregate forecasts are usually more accurate

!! !!

!!

Farther the company is from the consumer, more difficult to forecast

Components
!! Past

demand !! Lead time of product replenishment !! Planned advertising or marketing efforts !! State of the economy !! Planned price discounts !! Actions that competitors have taken

Forecasting Methods
!!

Qualitative
!! !!

primarily subjective, rely on human judgment Used where little historic data, new industries, new market insights Based on historic demand only assuming it is a good indicator of the future Used where demand is stable year on year Based on correlation of demand with factors of the environment. E.g. Demand strongly correlates with product pricing. Imitate consumer choices that give rise to demand Can combine time series and causal methods

!!

Time Series
!! !!

!!

Causal
!! !!

!!

Simulation
!! !!

Components of Observed Demand

Observed demand (O) = Systematic component (S) + Random component (R)

Level (current deseasonalized demand) Trend (growth or decline in demand) Seasonality (predictable seasonal fluctuation)

! Systematic component: Expected value of demand ! Random component: Part of forecast that deviates from the systematic component ! Forecast error: difference between forecast and actual demand

Role of Aggregate Planning

!! Process

to define ideal levels of capacity, production, subcontracting, inventory, stock-outs and even pricing !! Satisfy demand while maximizing profits !! Aggregate decisions rather than SKU level decisions
!!

Total production level without SKU wise split

!! Best
!!

utilization of resources? operational parameters over the time

Paper Mill example

!! Specify
!!

horizon:

Production rate, machine capacity level, inventory on hand, backlog, workforce, overtime, subcontracting

Outputs of and Aggregate Plan

!! Production !! Inventory
!! !!

number of workers and supplier purchase levels how much warehouse space and working capital is needed what customer service levels will be human resource planning

quantity

held

!! Backlog/stock-out !! Workforce !! Machine !! A

!! !! !!

quantity

hired/ laid off

poor aggregate plan can result in lost sales, lost profits, excess inventory, or excess capacity

if new production equipment needs to be purchased

capacity increase/decrease

Sales & Operations Planning

!! MRP !! Change
!!

in demand that can be forecasted !! Goal of S&OP improve profitability by either:

Managing Supply:
!! Capacity !! Inventory !! Subcontracting !! Backlogs

!!

Managing Demand:
!! Short-term

price discounts !! Trade promotions

!! Scheduling**