Course: International Logistics

Mcs. María Mercedes Bernal Cerquera

August 2020 – November 2020
Schedule 01 Iniciation activity.

First class
02 Demand Forecasting in a
Supply Chain
Closing activity and analysis
03 exercises.
Review
Demand Forecasting in a Supply Chain

All supply chain decisions made

before demand has materialized
are made to a forecast.
How historical demand information can be used to
forecast future demand and how these forecasts
affect the supply chain?
The role of forecasting in a supply chain
Demand forecast
form the basis of all
supply chain
planning.
The first step a
manager must take is
to forecast what
customer demand
Will be.
When all stages of a
supply chain work
together to produce a
collaborative
forescast, it tends to
be much more
accurate.
The resulting forecast
accuracy enables
supply chains to be
both more
responsive and more
efficient in serving
their customers.
 Mature products with stable demand, such as
milk, are usually easiest to forecast.

Forecasting and the accompanying managerial

decisions are extremely difficult when either the
supply of raw materials or the demand for the
finished producto is highly unpredictable.

An estimate of forecast error is essential when

designing the supply chain and planning its
response.
 Characteristics of Forecasts

In general, the farther up the

Long term forecasts are supply chain a company is the
Aggregate forecasts are
Forecasts are always usually less accurate than greater is the distortion of
usually more accurate than
inaccurate and should thus short term forecasts; that is, information it receives.
disaggregate forecasts, as
include both the expected long term forecasts have a Example: Bullwhip effect, in
they tend to have a smaller
value of the forecast and a larger standard desviation of which order variation is
standard deviation of error
measure of forecast error. error relative to the mean amplified as orders move
relative to the mean.
than short term forecasts. farther from the end
customer.
Components of a forecast and forecasting
methods

To forecast demand, companies must first identify

the factors that influence future demand and then
ascertain the relationship between these factors
and future demand.

Companies must balance objetive and subjective

factors when forecasting demand.
Forecasting methods are classified according
Qualitative
to the following four types:

1. Qualitative
methods are
mainly
Time series
subjective and

2. Time Series
forecasting
are based on
human methods use
historical Causal

3. Causal
judgment. forecasting
They are demand to
make a methods
particularly assume that

4. Simulation
forecast. They
appropriate the demand
are based on
when little forecast is
the
historical data highly
assumption
is available or correlated
when experts that the
history of past with certain
have market factors in the
research data demand is a
good indicator environment
that can affect
of future
the forecast.
demand.
 Patterns or components of a time series
The pattern or behavior of the data in a series of time has several components.
With any forecasting method there is always a random element that cannot be
explained by historical demand patterns. Therefore, any observed demand can
be divided into one systematic and random component:

Observed demand (O) = systematic component (S ) + random component (R)

The systematic component measures

The random component is the part of
the expected value of demand and
the forecast that deviates from the
consists of what we will call level, i.e.
systematic part. A company cannot
current seasonalized demand; trend,
predict the direction of the random
which is the rate of growth or decline
component. All a company can predict
in demand for the next period, and
is the size and variability of the
seasonality, which refers to
random component, which allow us to
predictable seasonal fluctuations in
measure the forecast error.
demand.

The goal of predicting is to filter the random component (noise) and estimate the
systematic component. The forecast error measures the difference between the
forecast and the actual demand. On average, a good forecasting method has an
error whose size is comparable to the random component of demand.
Basic approach to demand forecasting
The following five points are important for an organization to forecast
effectively:

Understand the
objective of forcasting

Integrate demand planning and

forecasting throughout the supply
chain.

Identify the major factors that influence

the demand forecast.

Establish performance and error

measures for the forecast.
Moving average
The moving average method is used when demand has no observable
trend or seasonality.

In this method, the level in Period t is estimated as the average demand over
the most recent N periods. This represents an N-period moving average and is
evaluated as follows:

The current forecast for all future periods is the same and is based on
the current estimate of level. The forecast is stated as
Example
 Simple exponential smoothing
The simple exponential smoothing method is appropriate when demand has no
observable trend or seasonality.

The initial estimate of level, L0, is taken to be the average of all historical data
because demand has been assumed to have no observable trend or seasonality.
Given demand data for Periods 1 through n, we have the following:

The current forecast for all future periods is equal to the current estimate of level
and is given as

After observing the demand, Dt+1, for Period t + 1, we revise the estimate of the level
as follows:
Example
 Trend corrected exponential smoothing
(Holt´s Models)
The trend-corrected exponential smoothing (Holt’s model) method is appropriate
when demand is assumed to have a level and a trend in the systematic component
but no seasonality.

We obtain an initial estimate of level and trend by running a linear regression between
demand Dt and time Period t of the form

Dt = at + b
In this case, running a linear regression between demand and time periods is
appropriate because we have assumed that demand has a trend but no seasonality.
 Trend corrected exponential smoothing
(Holt´s Models)

The underlying relationship between demand and time is thus linear. The constant b
measures the estimate of demand at Period t = 0 and is our estimate of the initial level
L0. The slope a measures the rate of change in demand per period and is our initial
estimate of the trend T0. In Period t, given estimates of level Lt and trend Tt, the
forecast for future periods is expressed as

After observing demand for Period t, we revise the estimates for level and trend as
follows:
 Trend and seasonnality corrected
exponential smoothing (Winter´s Model)
This method is appropriate when the systematic component of demand has a level, a
trend, and a seasonal factor.

Assume periodicity of demand to be p. To begin, we need initial estimates of level

(L0), trend (T0), and seasonal factors (S1, . . . , Sp).

In Period t, given estimates of level, Lt, trend, Tt, and seasonal factors, St, . . ., St+p-1,
the forecast for future periods is given by

On observing demand for Period t + 1, we revise the estimates for level, trend, and
seasonal factors as follows:
 Measures of forecast error

A good forecasting method should capture the systematic component of

demand but not random; it manifests itself in the form of a forecast error.

Forecast errors contain valuable information and should be carefully analyzed for
two reasons:

1. Managers use error analysis to determine whether the current forecasting

method accurately predicts the systematic component of demand.

2. All contingency plans should take into account the forecast error.
 Forecast error for Period

forecast error for Period t is given by Et, where the following

holds:
Et = Ft - Dt
That is, the error in Period t is the difference between the
forecast for Period t and the actual demand in Period t. It is
important that a manager estimate the error of a forecast
made at least as far in advance as the lead time required for
the manager to take whatever action the forecast is to be
used for.
 Mean Squared Error (MSE)

The MSE can be related to the variance of the forecast error.

In effect, we estimate that the random component of
demand has a mean of 0 and a variance of MSE.

The MSE penalizes large errors much more significantly than

small errors because all errors are squared.
 Mean absolute deviation (MAD)

Define the mean absolute deviation (MAD) to be the average of

the absolute deviation over all periods, as expressed by

The MAD can be used to estimate the standard deviation of the

random component assuming that the random component is
normally distributed.
Mean absolute percentage error (MAPE)

The mean absolute percentage error (MAPE) is

the average absolute error as a percentage of
demand and is given by

The MAPE is a good measure of forecast error

when the underlying forecast has significant
seasonality and demand varies considerably
from one period to the next.
 Tracking Signal TS

The tracking signal (TS) is the ratio of the bias

and the MAD and is given as
Example using four-period moving average
Example using simple exponential smoothing
Example using tren-corrected exponential smoothing
Example using trend and seasonality-corrected exponential smoothing
Summary

1. Understand the role of forecasting for both the company and the supply chain.

2. Identify the components of the demand forecast.

3. Forecast demand in a supply chain given the historical demand

information using time series methodologies.

4. Analyze demand forecasts to estimate forecast error.

Activity
1. Summarize the case study

2. Explain in the context of the case

why it is necessary to consider a
forecast for future periods

3. What forecast method would

you use for the case and why?
GRACIAS

Thanks