BM1913

DEMAND PLANNING

Forecasting
Forecasting is the process of making future assumptions by analyzing trends, including historical and
present data. It is the first step in the planning and scheduling process for most goods and service
organizations. Demand forecasts drive organizational decisions as follows (Myerson, 2015):
• Long-term decisions. These include decisions covering a 3-year horizon and above. Some
examples include development of new products and expansion of facilities.
• Medium-term decisions. These include decisions covering months to over a year, such as
production planning and budgeting.
• Short-term decisions. These include decisions covering months to a year at most such as
purchasing and deployment options.

The following are the organizational departments with different types of forecasting needs (Myerson,
2015):
• Marketing. They require forecasts to determine which new products or services to introduce or
discontinue, which markets to enter or exit, and which products to promote.
• Sales. They use forecasts to make sales plans because quotas are generally based on estimates of
future sales.
• Supply chain. They use forecasts to make production, procurement, and logistical plans.
• Finance and accounting. They use forecasts to make financial plans such as budgeting and capital
expenditures.

Demand Drivers
Demand drivers can be a component, condition, process, resource, or rationale that has a major impact
on a business’ performance. The following are the two (2) types of demand drivers:
• Internal demand drivers. These include controllable factors affecting an organization both
positively or negatively, within the scope of its operation. The following are some examples of
internal demand drivers:
o Salesforce incentive. It refers to a monetary reward given to personnel who were able to
reach a particular target or quota. The sales personnel, for example, will work to boost
demand for a particular product when they are motivated due to incentives.
o Consumer promotion. It is a form of incentive aimed toward a company's customers.
Promotions are often used to gain additional customers or keep current customers
satisfied. Thus, increasing product or service demand.
o Trade discounts. It refers to a price reduction offered by a manufacturer for instances of
bulk sales to a reseller or retailer. Savings derived from procurement are often used for
consumer promotion that drives higher product or service demand.
• External Demand Drivers. These are uncontrollable factors that affect organizational
performance both positively and negatively. External demand drivers, however, can be managed
through techniques that employ a structured methodology for improved communications and
integration with other departments within an organization and with customers. The following are
some examples of external demand drivers:
o Customer preferences. These include the expectations, likes, and dislikes of a customer
toward a particular product. Changing preferences may cause alteration in the supply
chain and demand management since companies has to adjust their operations based on
identified trend related to customer wants and needs.

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o Economy. The economic standing of a particular territory may affect demand for products
and services since customers may have a lower disposable income for some instances
where an economy experiences recession. Disposable income is the available sum of
money to be spent or saved by an individual, after deduction of taxes and other
mandatory charges.
o Regulatory agencies. These are government offices responsible for controlling or
regulating particular businesses. Changes in the regulation or policies mean changes in
the way businesses operate. For instance, an increase in levied taxes may force a business
to make particular adjustments related to the pricing of products and services. Rise in
product or service cost often drives lower demand.

Quantitative versus Qualitative Models

The following are the two (2) general types of forecasting models (Myerson, 2015):
1. Qualitative Models. These are typically used when the situation is somewhat vague and there is
little data that exists. It is useful for creating forecast estimates for new products, services, and
technology. Generally, it relies heavily upon intuition and experience. The following are examples
of qualitative forecasting models:
o Knowledge and Intuition of the Products. A forecast can be derived from the experience
of an individual who has years of involvement with a particular product or service and can
look over historical and forecast estimates to adjust based on his or her judgment. This
method can be used with other people in the organization, such as sales and marketing,
to gather their estimates.
o Market Survey. This involves the process of gathering information from actual or
potential customers. It is a way to gather perceptions, opinions, beliefs, and attitudes
toward a product, service, concept, advertisement, idea, or packaging.
o Jury of Executive Opinion. This involves discussion sessions among managers of a
particular organization revolving around experienced guesses. The resulting forecast is a
blend of informed opinions.
o Delphi Method. This involves sending the results of forecasts to a panel of experts.
Through an iterative process, multiple rounds of questionnaires are sent out, and the
anonymous responses are aggregated and shared with the group at the end of each
round. The Delphi method seeks to reach the correct response through consensus.

2. Quantitative Models. These are typically used when the situation is fairly stable and historical
data exist. As a result, it is used primarily for existing/current technology products and involves a
variety of mathematical techniques. The following are examples of quantitative forecasting
models:
o Time Series Models. It uses a set of evenly spaced numeric data that is obtained by
observing response variable at regular time periods. The forecasts are based on past
values and assume that factors influencing past, present, and future will continue. The
following are some examples of time series models:
 Naive approach. It uses the last period’s actual demand as the present period’s
forecast, without making any adjustment. For example, if January sales were 100, then
February forecasted sales would be 100. It is simple, yet cost-effective and efficient.
 Moving average. It uses the simple average of demand over a defined number of time
periods. Typically, more recent history is averaged to create the estimate. For example,
January to March sales are averaged to create an April forecast.

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 Weighted moving average. It involves assigning different weights to data at different

positions. Typically used when some trend might be present because it treats older
data as usually less important. The weights are based on experience and intuition. For
example, the following weights are assigned to January to March sales in order to
generate the forecast for April:

April forecast = .6(March sales) + .3(February sales) + .1(January sales)

In this example, more weight has been given to March demand than to January and
February to generate the April forecast.

o Associative Models. It assumes that the variable to be forecasted has a cause-and-effect

relationship with one (1) or more variables. Projections are then based on these
associations. The following are some examples of associative models:
 Simple linear regression. It quantifies the relationship between one (1) independent
variable and one (1) dependent variable. Linear regression is used for predictive
analysis and modeling. For example, linear regression can be used to quantify the
relative impacts of age, gender, and diet (independent variables) on height (dependent
variable). Another example, a clothing company desires to analyze the relationship
between their advertising expenses (independent variable) and sales (dependent
variable). Linear regression estimates that Sales = 168 + 23 Advertising. That is, if
advertising expenditure is increased by one (1) peso, then sales will be expected to
increase by 23 pesos, and if there was no advertising, sales are expected at 168 pesos.
 Multiple linear regression. It is used to analyze the relationship between two (2)
independent variables and one (1) dependent variable. For example, a clothing
company desires to analyze the relationship between sales year and advertising
expenses (independent variables) and sales (dependent variable). Linear regression
estimates that Sales = 323 + 14 Advertising + 47 Year. The interpretation of this
equation is that every extra peso of advertising expenditure will lead to an extra 14
pesos of sales and that sales will grow due to non-advertising factors by 47 pesos per
year. If there were no changes in advertising and non-advertising factors, sales are
expected at 323 pesos.

Product Life Cycles and Forecasting

A product’s life cycle details the milestone of a particular product/service from when it is launched to its
ultimate downfall or termination. The following are the stages of the product life cycle (Myerson, 2015):
1. Introduction. This stage involves the launch of a new product or service. During this phase,
forecasters tend to rely more on qualitative estimates that are generated both internally and
externally. This information can come from sources such as market research, sales, and customer
estimates.
2. Growth. This stage involves a strong growth in sales and profits. As a product gains momentum
through expanded marketing and distribution, the time series methods may be used in demand
forecasting, as minimal demand history becomes available. As a general rule of thumb in
forecasting, a forecaster needs at least 12 months of history. So, during this growth phase, both
quantitative and qualitative methods are used to create a blended forecast.

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3. Maturity. This is the most challenging stage for businesses since they have to maintain their
business position in order to remain relevant in the market. During this phase, forecast accuracy
tends to improve due to the availability of historical data. Forecasters may use either of the
quantitative and qualitative models in generating demand forecasts.
4. Decline. This stage involves the downfall of the product or service brought by multiple factors
such as intensified competition or market saturation. Eventually, the product may be
discontinued. However, forecasts must still be generated to run out existing inventory. Therefore,
similar to the introductory phase, the forecaster relies more on qualitative than on quantitative
methods.

Forecasting Process Steps

The following are the general steps in demand forecasting (Heizer & Render, 2012):
1. Determine the use of the forecast. Companies must identify their forecasting need depending on
a particular industry or company. In the case of manufacturing, it may be to drive production and
deployment, in the case of retail it can be to determine purchasing requirements and for pure
service companies might be used primarily for labor staffing.
2. Select the items to be forecasted. Companies must determine the particular materials, levels and
units of measurement, and demand history needed to arrive at accurate demand prediction.
3. Determine the time horizon of the forecast. Companies must identify the appropriate time
horizon (short, medium, or long term), which will be used in the forecast.
4. Select the forecasting models and methods. This involves recognizing where a product is in its
lifecycle and the appropriate qualitative or quantitative tool to be used in the forecast.
5. Gather the data needed to make the forecast. This involves collecting information from survey
or observation, comparison of demand versus sales, and elimination of data errors.
6. Generate forecasts. This involves auditing the results of forecasts based on promotional plans
and sales estimates.
7. Validate and implement the results. This involves reviewing forecasts at various levels of detail
and units of measure to ensure the highest level of accuracy possible. During this time, recent
forecast accuracy will be evaluated, as well, to help target improvement.

References
Heizer, J. and Render, B. (2012). Operations management (10th ed.). New Jersey: Pearson.
Myerson, P. (2015). Supply chain and logistics management made easy: Methods and applications for
planning, operations, integration, control and improvement, and network design. United States:
Pearson Education, Inc.

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