Introduction to forecasting

In the modern supply chain, forecasting is necessary for companies that

manufacture items for inventory and that are not made to order. Manufacturers
will use material forecasting to ensure that they produce the level of material
that satisfies their customers without producing an overcapacity situation where
too much inventory is produced and remains on the shelf. Equally, the forecast
must not fall short and the manufacturer finds them without inventory to fulfill
customer’s orders. The cost of failing to maintain an accurate forecast can be
financially catastrophic.

Forecasts are developed for a company’s finished goods, components and

service parts. The forecast is used by the production team to develop production
or purchase order triggers, quantities and safety stock levels. The forecast is not
static and should be reviewed by management on a regular basis. This is to
ensure that information on future trends, the internal or external environment is
incorporated into the forecast to give a more accurate calculation.

Statistical Forecasting

In supply chain management software, the forecast is a calculation that is fed

data from real time transactions and is based on a set of variables that are
configured for a number of statistical forecast situations. Planning professionals
are required to use the software to provide the best forecast situation possible
and often this is left unchecked without any review for long periods. To best use
the forecasting techniques in the supply chain software, planners should review
their decisions with respect to the internal and external environment. They
should adjust the calculation to provide a more accurate forecast based on the
current information they have.

Statistical forecasts are best estimates of what will occur in the future based on
the demand that has occurred in the past. Historical demand data can be used to
produce a forecast using simple linear regression. This gives equal weighting to
the demand of the historical periods and projects the demand into the future.
However, forecasts today give greater emphasis on the more recent demand data
than the older data. This is called smoothing and is produced by giving more
weight to the recent data. Exponential smoothing refers to ever-greater
weighting given to the more recent historical periods. Therefore a period two
months ago has a greater weighting than a period six months ago. The
weighting is called the Alpha Factor and the higher the weighting, or Alpha
factor the fewer historical periods are used to create the forecast. For example, a
high Alpha factor gives high weighting to recent periods and demand from
periods for a year or two years ago are weighted so lightly that they have no
bearing on the overall forecast. A low Alpha factor means historical data is
more relevant to the forecast.

Historical periods generally contain demand data from a fixed month, i.e. June
or July. However, this introduces error into the calculation as some months have
more days than other months and the number of workdays can vary. Some
companies use daily demand to alleviate this error, although if the forecaster
understands the error, monthly historical periods can be used along with a
tracking indicator to identify when the forecast deviates significantly from the
actual demand. The level at which the tracking signal flags the deviation is
determined by the forecaster or software and vary between industries,
companies and products. A small deviation may require intervention when the
product being forecasted is high-value, whereas a low-value item may not
require the forecast be scrutinized to such a high level.

Some of the methods are given below:

1.Multiple Regression Analysis:

 Used when two or more independent factors (also called as predictors)

are involved.
 Widely used for intermediate term forecasting.
 Used to access which factors to include and which to exclude.
 Can be used to develop alternate models with different factors.
 Here variables of interest identifies which variables are important
indicators and can be measured at the least cost and which are redundant
 Sample is taken and the researcher calculates the scatter diagram (also
considers the confidence intervals i.e. time intervals)

2. Non-linear regression: It is a form of regression analysis. Observational data

are modelled by a function which is a non-linear combination of the model
parameters. It depends on one or more independent variables.

Steps involved:

i. Choose a model
ii. Choose or review initial values
iii. Decide whether to constrain any parameters
iv. Decide on a weighting scheme
v. Handling replicate values
3. Trend analysis: It collects information and spots a pattern or a trend (pattern
of behaviour in time series). It estimates uncertain events in the past. It is also
used in Project management i.e. it tracks variances in costs and schedules
performance. It is basically a project management quality control tool.

4. Decomposition analysis: It is used to identify several patterns that appear

simultaneously in a time series. Deseasonalizing a series is done here and it
considers various factors driving productivity growth.

5. Moving Average Analysis: It is also called as rolling average or running

average or rolling mean. It is used to calculate a series of averages of different
subsets of the full data set. It calculates only for a finite duration.

6. Weighted moving average: It is a moving average that is weighted so that

more recent values are more heavily weighted than values further in the past.

7. Adaptive filtering: It is used to calculate only for some parameters which are
not known in advance. The underlying principle here is that it uses cost function
which means costs of production as a function of total quantity production.It
also calculates and analyses the short run and long run curve

8.Exponential smoothing: It is applied to time series data either to produce

smoothed data for presentation or to make forecasts. It is a random process.

9. Forecasting Error: it basically calculates the difference between the model

prediction and the true value.
Non-Statistical Forecasting

Non-statistical forecasting is found in supply chain management software where

demand is forecasted based on quantities determined by the production
planners. This occurs when the planner enters in a subjective quantity that they
believe the demand will be without any reference to historical demand. The
other non-statistical forecasting that occurs is when demand for an item is based
on the results of materials requirements planning (MRP) runs. This takes the
demand for the finished good and explodes the bill of materials so that a
demand is calculated for the component parts. The component demand can then
be amended by the planner based on their assessment and knowledge of the
current environment. The resulting forecast is based on current demand and will
not incorporate any demand from previous periods. Many companies will use a
combination of non-statistical and statistical forecasting across their product
line.

Statistical forecasting is based on complex calculations and the future demand

can be determined based on the demand from historical periods. The forecast
gives the planner a guide to future demand, but no forecast is totally accurate
and the planners experience and knowledge of the current and future
environment is important in determining the future demand for a company’s
products.

A crucial activity for planners is to when to decide to place an order. There are a
number of reorder methodologies that can be adopted. Although most computer
systems are based on the materials requirement planning (MRP) method, there
are other methods that planners can use.

1.Material requirements planning (MRP) is a production planning and

inventory control system used to manage manufacturing processes. Most MRP
systems are software-based, while it is possible to conduct MRP by hand as
well.

An MRP system is intended to simultaneously meet three objectives:

 Ensure materials are available for production and products are available
for delivery to customers.
 Maintain the lowest possible level of inventory.
 Plan manufacturing activities, delivery schedules and purchasing
activities.
2.Manufacturing resource planning (MRP II) is defined by APICS as a
method for the effective planning of all resources of a manufacturing company.
Ideally, it addresses operational planning in units, financial planning in dollars,
and has a simulation capability to answer "what-if" questions and extension of
closed-loop MRP.

This is not exclusively a software function, but a marriage of people skills,

dedication to data base accuracy, and computer resources. It is a total company
management concept for using human resources more productively

3.Enterprise resource planning (ERP) integrates internal and external

management information across an entire organization, embracing
finance/accounting, manufacturing, sales and service, etc. ERP systems
automate this activity with an integrated software application. Its purpose is to
facilitate the flow of information between all business functions inside the
boundaries of the organization and manage the connections to outside
stakeholders.

ERP systems can run on a variety of hardware and network configurations,

typically employing a database to store data

ERP systems typically include the following characteristics:

 An integrated system that operates in (next to) real time, without relying
on periodic updates.
 A common database, that supports all applications.
 A consistent look and feel throughout each module.
 Installation of the system without elaborate application/data integration
by the Information Technology (IT) department.[3]

Supply chain management : Order to cash, inventory, order entry, purchasing,

product configurator, supply chain planning, supplier scheduling, inspection of
goods, claim processing, and commissions

4.Just-in-time (JIT) is an inventory strategy that strives to improve a business's

return on investment by reducing in-process inventory and associated carrying
costs. Just In Time production method is also called the Toyota Production
System. To meet JIT objectives, the process relies on signals or Kanban (看板
Kanban) between different points in the process, which tell production when to
make the next part. Kanban are usually 'tickets' but can be simple visual signals,
such as the presence or absence of a part on a shelf. Implemented correctly, JIT
focuses on continuous improvement and can improve a manufacturing
organization's return on investment, quality, and efficiency. To achieve
continuous improvement key areas of focus could be flow, employee
involvement and quality.

Quick notice that stock depletion requires personnel to order new stock is
critical to the inventory reduction at the center of JIT. This saves warehouse
space and costs. However, the complete mechanism for making this work is
often misunderstood.

For instance, its effective application cannot be independent of other key

components of a lean manufacturing system or it can "...end up with the
opposite of the desired result."In recent years manufacturers have continued to
try to hone forecasting methods (such as applying a trailing 13 week average as
a better predictor for JIT planning, however some research demonstrates that
basing JIT on the presumption of stability is inherently flawed.

Based on a diagram modelled after the one used by Hewlett-Packard’s Boise

plant to accomplish its JIT program

1) F Design Flow Process

- F Redesign/relayout for flow
- L Reduce lot sizes
- O Link operations
- W Balance workstation capacity
- M Preventive maintenance
- S Reduce setup Times

2) Q Total Quality Control

- C worker compliance
- I Automatic inspection
- M quality measures
- M fail-safe methods
- W Worker participation

3) S Stabilize Schedule
- S Level schedule
- W Establish freeze windows
- UC Underutilize Capacity
 4) K Kanban Pull System
- D Demand pull
- B Backflush
- L Reduce lot sizes

5) V Work with Vendors

- L Reduce lead time
- D Frequent deliveries
- U Project usage requirements
- Q Quality expectations

6) I Further Reduce Inventory in Other Areas

- S Stores
- T Transit
- C Implement carrousel to reduce motion waste
- C Implement conveyor belts to reduce motion waste

7) P Improve Product Design

- P Standard production configuration
- P Standardize and reduce the number of parts
- P Process design with product design
- Q Quality expectations

Kanban ( 看 板 ?), also spelled kamban and literally meaning "signboard" or

"billboard", is a concept related to lean and just-in-time (JIT) production.
According to Taiichi Ohno, the man credited with developing Just-in-time,
kanban is one means through which JIT is achieved.

Kanban is not an inventory control system. Rather, it is a scheduling system that

tells you what to produce, when to produce it, and how much to produce.

The need to maintain a high rate of improvements led Toyota to devise the
kanban system. Kanban became an effective tool to support the running of the
production system as a whole. In addition, it proved to be an excellent way for
promoting improvements because reducing the number of kanban in circulation
highlighted problem areas.
Customer relationship management (CRM) is a widely-implemented strategy
for managing a company’s interactions with customers, clients and sales
prospects. It involves using technology to organize, automate, and synchronize
business processes—principally sales activities, but also those for marketing,
customer service, and technical support. The overall goals are to find, attract,
and win new clients, nurture and retain those the company already has, entice
former clients back into the fold, and reduce the costs of marketing and client
service. Customer relationship management describes a company-wide business
strategy including customer-interface departments as well as other departments.

The use of a CRM system will confer several advantages to a company:

 Quality and efficiency

 Decreased costs
 Decision support
 Enterprise agility