Demand Forecasting

Demand forecasting refers to the process of determining the amount of product and related
information that consumers will require, either in the short or long term. The responsibility for
preparing demand forecasting usually lies in the marketing and sales departments.

Features of forecasting
• It is difficult to forecast accurately.
• Forecasts for groups of items are often more accurate than forecasting demand for a
single item.
• Forecasts for a shorter time period are usually more accurate than forecasting for a longer
time horizon.
• What happened in the past can be used as an important guideline when making forecasts.

Nature of Forecasting:

Spatial Vs Temporal demand: (Spatial demand is the situation in which there is less pressure to
complete the task. Temporal demand is the situation in which there is more pressure to complete
the task.

Lumpy Vs Regular demand: (Lumpy demand is a phenomenon encountered in manufacturing or

retailing when the items are slow-moving or too expensive. Regular demand is the quantity of a
certain good or service that consumers are willing to buy at a given price at a certain point in time.)

Independent Vs derived demand: (Independent demand is the demand for a finished good, such
as a car, while dependent demand is the demand for a component part of a finished good, such as
the tires on a car. Dependent demand is derived from the demand for a finished good. Thus, if
the independent demand for a car is 100 vehicles, then the associated dependent demand is 400
tires).

Forecasting Methods
Types of forecasting
 • A time series is a time-ordered sequence of observations taken at regular intervals, e.g.
daily, weekly, monthly, quarterly or annually. Explanatory models also called regression
models, rely on the identification of related variables that can be used to predict the values
of the variable of interest. A mathematical relationship is developed between demand, for
example, and some other factors that cause demand behaviour. Time series techniques are
statistical methods utilized when historical sales data containing relatively clear and stable
relationships and trends are available. Using historical sales data, time series analysis is
used to identify seasonality, cyclical patterns, and trends. Once individual forecast
components are identified, time series techniques assume the future will reflect the past.
This implies that past demand patterns will continue into the future. This assumption is
often reasonably correct in the short term, so these techniques are most appropriate for
short-range forecasting.
These include the following:
i. Static forecasting
ii. Moving average forecasting

• Qualitative forecasting techniques are appropriate when little or no quantitative

information is available, but sufficient qualitative knowledge exists. It is usually a product
of judgement and accumulated knowledge.
i. The Delphi method
ii. Jury of executive option
iii. Sales force composite
iv. Consumer market survey

Special Prediction problems for Logisticians

Forecast error: Forecast accuracy refers to the difference between forecasts and corresponding
actual sales. Forecast accuracy improvement requires error measurement and analysis. There are
three steps for reducing forecast error. First, appropriate measures must be defined. Second, the
measurement level must be identified. Finally, feedback loops must be defined to improve forecast
efforts.
Startup: In the start-up phase of logistics service provider, it is difficult to forecast any observations
as there involves high risk and high expenditure.

Lumpy Demand: These types of demand are received only once in a while and are of high mass.
Thus, it is difficult for logisticians to deliver those products accurately due to the infrequent nature
of the shipment.

Regional forecasting: This involves forecasting of the demand for a local region. It is difficult to
predict such demand as people have dynamic purchase behaviour.

Collaborative Forecasting
Collaborative Planning, Forecasting, and Replenishment (CPFR) is a process initiated by the
consumer products industry to achieve such coordination. It does not replace automatic
replenishment strategies but supplements them by a cooperative process." In essence, CPFR
coordinates the requirements plan for demand creation and demand fulfillment activities.

The figure describes the nature of collaborative forecasting:

Although improved technology and other resources helped achieve significant benefits in
providing superior logistical performance in distribution channels. However, there can still be
costly unplanned and uncoordinated events that distort the smooth flow of products through the
supply chain. These distortions occur because channel participants frequently fail to coordinate
their individual forecasts of final consumer demand and marketing cycles designed to stimulate
demand. Clearly, joint planning and information sharing concerning such events would increase
the likelihood of a successful relationship.