OK, recall that we said that supply chain management is

all about making supply match demand.

So understanding and being able to forecast that demand
is a critical and usually a first step
in designing a supply chain.
But before we get into the math of forecasting,
let's step back and talk about demand planning
to understand what we're really trying to do.
It's important to always remember
when we're in the middle of forecasting
and all the different models what our objective is,
and that forecasting isn't the end game.
We don't forecast just for forecast sake.
We always forecast for a reason, whether it's
the planned capacity, to manage our inventory,
or to set up our transportation plan,
or anything in between that.
But there's always a reason for doing a forecast.
And forecasting is actually part of a larger process.
And then you can think about the demand process.
And there are three main big questions
that we try to answer in this demand process.
The first one is, what should we do to shape and create
demand for our product?
And this is sometimes known as demand planning.
And you can think of what falls in this category as the five
p's.
You want to think about the product that you're making
and the packaging.
What does the size and the final form look like?
Because this will shape demand.
It'll change whether people really want it or are not
as interested in it.
Think about promotions.
And so the interesting thing about promotions,
if you're talking to the consumer
packaged good industry, the companies that make things
that you buy in the grocery store or department store,
40% of all products in supermarkets sold by CPG
are sold under a promotion.
Promotions drive huge swings in the business.
So that will definitely change demand.
You want to think about the pricing.
What's your list price versus what discounts do you offer?
Because that changes the way the demand will be shaped.
And then finally, place.
And what we mean here is what kind of channels are you using?
Is it all internet?
Is it small mom and pop stores?
Is it large grocery stores?
Anything in between.
So how you set up your product, your packaging,
the way you run promotions, your pricing plan,
and where you place, where you sell your products,
that will help shape demand.
So now we can think about the next question.
And that's given this plan, what do we expect the demand to be?
And so this is where forecasting comes in.
So we've got this plan in place.
We know what the promotions are going to be
and all these different things.
And now we're going to forecast.
And as we'll see in a second, there
are different levels of forecasting.
You can think of strategic, tactical, and operational.
And they all vary with the time horizon
you're trying to plan over.
And we'll talk more about that in a second.
But the second thing is you want to consider
both internal and external factors.
And the key word here is factors.
So you want to understand that demand plan-- that's
the internal factors that you're shaping,
how you're setting up your promotions and everything--
but also your external factors, the competitive landscape.
What you don't want to include in here is your capabilities.
You don't want to set a forecast based
on what you want to happen or what
you think you would like to see.
It's really all about what your unbiased, the baseline
or unconstrained forecast is.
So you try not to have other things influence
the forecast that don't fit in.
You look at those factors that are
beyond your control-- the competitive landscape.
But you really don't want to bias your forecast.
And we'll talk much more about that in later lectures.
And then the third question is, OK,
given that we have this demand, how do we prepare and act
for this when it starts materializing?
And this is known as demand management.
And this is kind of at the end of the process.
But it's an ongoing process.
And this is where we try to balance the demand
and supply across the organization.
So you can think about this demand planning up here.
A lot of this is happening at the marketing or sales side.
Product development, they're trying to figure out policies.
Forecasting is done in different places within a company.
A lot of times it's done in the marketing side,
sometimes on the supply chain side.
But demand management is the process
that involves all of the company,
because you're balancing the demand and the supply.
So the key tool or process used here
is the S&OP processor, Sales and Operations Planning,
which we'll talk about a little bit later.
But essentially what this is, it's
a meeting or series of meetings or a mechanism
that ties the operations or the supply side
with the demand side.
So the supply side is focused on minimizing cost and inventory.
This is the guys in the supply chain trying
to make things as efficient as possible.
And they balance this with the demand side.
These are the marketing and sales side.
And their objective is to maximize revenues and margins.
And so what this S&OP does, it creates a bridge
across the firm to try to balance
between what we want to sell and what we're able to make.
So these are the three key questions
within the demand process.
And the last thing I want to say before we
get into some of the details is the different types
of forecasts.
And again, they all differ based on the time horizon.
So you can think of a strategic plan or strategic forecast
as being multiple years.
This is one year, multiple years.
In the pharmaceuticals industry, you
might be planning five, 10 plus years out,
because you have to base it on the life of the drug
that you're creating.
For large infrastructure investments,
such as for the government for a department of transportation,
they've got to look 20 to 30 years out,
because the life of the product itself, the investment,
the highway, the bridge, whatever has a long lifespan.
So they have to look much further.
So you see these strategic level forecasts, mainly
for investment strategies.
And the big questions-- capacity planning, building a new plant,
large business changes.
Then you get down to the tactical level.
You can think of quarterly tactical plans as well as
months or weeks plans.
And they're really all about those things
that we can change within a quarter
or within a month or a week.
So here on the month or week, we can
think about short term capacity planning,
master planning, inventory planning.
This is where we'll spend a lot of time.
But quarterly, that's pretty much
how you can adjust your labor, your manpower, some
of your sales planning.
A lot of these things run on quarterly cycles.
Whether that's a good thing or a bad thing is another question.
But a lot of times, you have these things tied to a quarter.
And then finally, you have these operation or shortform term
plans.
And I'm forecasting over days or hours.
A lot of times you'll see this for transportation
on the current operations, production planning, inventory
deployment, those kinds of things.
So essentially, you forecast to the level
that which your process can change.
So if an investment up here, like
we're talking about for a factory or a large plant,
if it's going to last for 50 years
and takes five to 10 years to build,
then you're going to need a longer term
vision than if you're trying to plan how many trucks I need
next Tuesday.
So the type of the forecast depends
along the length of the horizon you're trying to plan for.
So what are we going to talk about for the rest
of this lecture?
Four things.
First, we're going to go into some truisms about forecasting.
We always have to address these when we first
talk about demand forecasting.
We're going to talk about different approaches
and classify them as subjective versus objective.
And then we're going to go into quality of forecast,
how do you tell if it's good or bad,
and then getting into metrics.
So let's get started.