Chapter 7: Summary (Mandar Patil 2201121)

 Demand forecasts form the basis of all supply chain planning

 Forecasts tend to be more accurate when all stages of a supply chain work together.

 Forecast accuracy allows supply chains to be both more responsive and efficient.

 Products with stable demand (milk, salt) are easiest to forecast.

 Long term forecasts are usually less accurate than short term forecast (Seven Eleven -
short term forecast)

 Aggregate forecasts are more accurate than disaggregate forecast as they have a smaller
standard deviation of error.

 Factors related to demand forecast:- Past demand, Lead time of product replenishment,
Planned advertising or marketing efforts, Planned price discounts, State of the economy,
Actions that competitors have taken.
 Forecasting methods:

1. Qualitative: Rely mostly on human judgment. Most appropriate when little historical data are
available or when experts have market intelligence that may affect the forecast.
2. Time series: Use historical demand to make a forecast based on the assumption that past
demand history is a good indicator of future demand. Most appropriate when the basic demand
pattern does not vary significantly from one year to the next.
3. Causal: they assume that the demand forecast is highly related with certain factors in the
environment (the state of the economy, interest rates, etc.)
4. Simulation: Simulation forecasting methods imitate the consumer choices that give rise to
demand to arrive at a forecast. Using this, a firm can combine time-series and causal methods
 Observed demand = Systematic component + Random component

 The systematic component measures the expected value of demand and consists of level,
the current depersonalized/constant demand; trend, the rate of growth or decline in
demand for the next period; and seasonality, the predictable seasonal fluctuations in
demand.

 The random component is the part of the forecast that deviates from the systematic part.
  Basic Approach to Demand Forecasting:

1. Understand the objective of forecasting: - Every forecast supports decisions that are based
on it, first step is to identify these decisions clear (how much of a particular product to make, how
much to inventory, and how much to order).
2. Integrate demand planning and forecasting throughout the supply chain: - Company
should link its forecast to all planning activities throughout the supply chain(capacity planning,
production planning, promotion planning, and purchasing)
3. Identify the major factors that influence the demand forecast:- On the demand side, a
company must ascertain whether demand is growing or declining or has a seasonal pattern. On
the supply side, a company must consider the available supply sources to decide on the accuracy
of the forecast desired.
4. Forecast at the appropriate level of aggregation.
5. Establish performance and error measures for the forecast.

 Forms of systematic component:

Multiplicative: Systematic component = level * trend * seasonal factor

Additive: Systematic component = level + trend + seasonal factor
Mixed: Systematic component = level + trend * seasonal factor

 Adaptive Forecasting: In adaptive forecasting, the estimates of level, trend, and

seasonality are updated after each demand observation.
 Moving Average The moving average method is used when demand has no observable
trend or seasonality. Systematic component of demand = level
 Trend-Corrected Exponential Smoothing (Holt’s Model):- This method is appropriate
when demand is assumed to have a level and a trend in the systematic component, but no
seasonality. Systematic component of demand = level + trend
 Trend- and Seasonality-Corrected Exponential Smoothing (winter’s Model):- This
method is appropriate when the systematic component of demand has a level, a trend, and
a seasonal factor. Systematic component of demand = (level + trend) * seasonal factor