FORECASTING AND DEMAND PLANNING

Forecasting
• The process of analyzing current and historical data to determine future trend.
• An attempt to cope with the uncertainty of the future.
• Use assumptions based on experience, knowledge & judgment.
USE OF FORECASTING
– Financial planning (sales forecast >> cash flow, budgeting…)
– Capacity planning
– Value chain planning
• Inventory planning
• Production planning (sales forecast)
• Resource planning
• Scheduling
How Forecasting Can Improve Efficiency?
Accurate forecasts are needed throughout the value chain and are used by all functional areas of
an organization such as accounting, finance, marketing, operations and distribution. Poor
forecasting can result in poor inventory and staffing decisions, resulting in part shortages,
inadequate customer service and many customer complaints

Gaining a customer Value Creation Keeping the Customer

Pre-production services
Goods and services demand
Market share, revenue and profit
Brand and category demand
Education/training needs
New designs, changeovers and
technology trends
Financing needs
Production Process
Production forecasts
Productivity, quality and
performance rates and trends
Equipment failure rates
Economic trends
Supplier performance and trends
Post-production services
Call center volume and timing
Installation, maintenance and
field repair demand
Transportation demand
Warranty/claim trends
Field and call center service
training

• Improved capacity management: Achieve high capacity utilization.

• Improved customer service: Improve availability.
• Improve profitability: Less wastage (life expired), no under utilization, no over stocking….
PLANNING HORIZON: the length of time on which a forecast is based
1. Short-range forecast
• Up to 1 year, generally less than 3 months
• Purchasing, job scheduling, workforce levels, job assignments, production levels
2. Medium-range forecast
• 3 months to 3 years
• Sales and production planning, budgeting
3. Long-range forecast
• 3+ years
• New product planning, facility location, research and development

Different TIME SERIES may exhibit one or more of the following characteristics:
- Trend: the underlying pattern of growth or decline in a time series
- Seasonal patterns: are characterized by repeatable periods of ups and downs over short periods
of time
- Cyclical patterns: are regular patterns in a data series that take place over long periods of time
- Random variation (noise): is the unexplained deviation of a time series from a predictable
pattern (trend, seasonal, cyclical)
- Irregular variation: is a one-time variation that is explainable

FORECASTING APPROACHES
1. Quantitative approach (Statistical)
- Used when situation is ‘stable’ and historical data exist
• Existing products
• Current technology
- Involves mathematical techniques. e.g., forecasting sales of color televisions

2. Qualitative approach (Judgemental)

- Used when situation is vague and little data exist
• New products
• New technology
- Involves intuition, experience. e.g., forecasting sales on Internet
Delphi method: base on experts’ view.
Panel consensus: Through open discussion with free exchange of ideas.
Market research
Historical analogy: Use existing product as a model, best for new products.
When no historical data are available, only judgemental forecasting is possible. The demand for
goods and services is affected by a variety of factors such as global markets and cultures, interest
rates, disposable income, etc. Competitors’ actions and government regulations also have an
impact. Thus some element of judgemental forecasting is always necessary
The major reasons given for using judgemental methods rather than statistical (quantitative) are:
 Greater accuracy
 Ability to incorporate unusual or one-time events
 The difficulty of obtaining historical data
 A feeling of “ownership” and a common-sense dimension