Supply Chain & Logistics Analytics – Session 2

Forecasting and Accuracy Measurement Part I

Chapter 1, 2, 3 from the Recommended Textbook
 Course Methodology
Guided Sessions of the Concepts
Case Examples
Real life experience sharing from corporate world
Text book concepts summarized
IA will be Application Based
TEE will be mix of Theory and Application
Recommended Reading – Text Book, Course Slides
Focus on decision making and not on Tools
 IA
 IA is Descriptive Questions
 Case let situation / asked to choose a situation
 Theory plus Application expected
 Concept application to case situation
 30 to 40% weightage for Theory in the DQ
 No calculation is expected
 Keep answers to the topic and application situation
 Stick to the concept being asked to be applied
 Stay within supply chain management domain in giving
answers with focus on analytics
 1 – 10 = 10 marks * 1 Question
What will we cover?

 Understanding Forecasting
 Analytics in Forecasting
 Forecasting Techniques
 Modern day forecasting Challenges
• One of the biggest challenges for business executives today is demand volatility in
relation to demand forecasting.
• Whereas data availability continues to increase, customer purchase patterns are
becoming increasingly complex
• That makes prediction harder
• There are too many factors influencing demand, ranging from weather fluctuations
to posts by social media influencers, causing customers to frequently changing
their minds.
• things that will reshape customer intentions will mostly happen quite
unexpectedly. Traditional Forecasts are only as accurate as the data, models,
resources and people that have to interpret them.
• how can we respond to these challenges?
 AI and ML a solution ??
Are AI and machine learning the future for demand forecasting?
Demand forecasting is at the heart of every retailer’s supply chain, and for good
reason: the demand forecast is central to sales, profitability and the customer
shopping experience, and it has a ripple effect throughout the supply chain.
Yet despite a wealth of established demand forecasting solutions and
methodologies, retailers struggle to produce accurate, timely demand forecasts.

According to Retail Systems Research

• 65% of retailers consistently stock out on fast-moving products
• 63% have too much inventory in slow-moving categories and products.
• The result is a major drag on retailers’ performance; according to IHL Group,
out-of-stocks account for $634 billion in lost sales worldwide each year, while
overstocks result in $472 billion in lost revenues due to markdowns.
• U.S. retail growth is up 4.2%, but 77% of retailers can’t keep up
• 53% of retail CXOs list demand management as the top area where AI can make
improvements over the next five years.
AI and ML a solution ??
• As e-commerce sales rise and shoppers choose from new fulfillment options,
retailers must consider the impact of unified commerce on demand
forecasting. Gartner analyst Tom Enright notes,
• Unified commerce retailers must take a more detailed approach to forecasting
demand. They should supplement their existing focus on forecasting consumer
demand at a product/location and time combination with a new approach to
predict how consumers will use the shopping options available to them in
making their purchases.”
• With channel convergence and the emergence of new formats, understanding
what your customer needs and forecasting for each ‘location’ is key.
• If the forecast isn’t accurate, there are adverse effects throughout the supply
chain, since the demand forecast is central to every supply chain function –
multi-echelon inventory, allocation and replenishment logistics.
• Meeting these challenges, while overcoming the additional problems we’ve
identified, requires new technologies and solutions for demand forecasting.
• 71% of retailers rank retail forecasting as “very important” to their success,
and 51% plan major new implementations or replacements that incorporate AI
and machine learning.
ML in Forecasting
ML in Forecasting
Traditional Vs ML Forecasting
Danone Case
Danone Brands in India
Danone Case
Danone implemented a machine learning system to make better
demand forecasts. The company required more accurate and secure
demand forecasts, due to the short shelf-life of its fresh products and
volatile demand.

Danone uses many promotions and media events. More than 30% of
the total volume is sold through promotional offers such as discounts
and leaflets, so the demand forecasts were somewhat ad hoc

The implemented machine learning system did not only improve

forecasts, but also improved planning between different departments
such as sales, supply chain, finance and marketing. This system
improved efficiency and inventory balance, allowing Danone to
achieve its target service levels for channel or store-level inventories
Danone Case
What value can AI add to a company? Let’s look at the numbers.

• Errors in supply chain networks can be reduced with 30 to 50% with

AI-powered demand forecasting.
• Warehousing costs decrease with around 10 to 40%.
• The loss in sales due to inventory out-of-stock situations can be
reduced up to 65% with the improved accuracy.
• In general the estimated impact of AI is between 1.2 and 2 trillion
dollars in the manufacturing and supply chain planning.
• For Danone Group, AI in demand planning ultimately led to a 30%
reduction in lost sales, a 30% reduction in product obsolescence, a
20% reduction in wrong forecasts and a 50% reduction in the
workload of demand planners
 Benefits of AI in Forecasting
• Improvements in accuracy over time: Better forecasts will be
made over time as machine learning algorithms learn from
existing data.
• Higher customer satisfaction: When products are ‘out of stock’,
this will decrease customer satisfaction, whereas customer
satisfaction will increase when products are always available. This
improves customer loyalty and brand perception.
• Improved workforce planning: Demand forecasting can support
the HR department in making efficient considerations between
full-time or part-time staff mix, thus optimising HR costs and
effectiveness.
 Benefits of AI in Forecasting
• Improved markdown/discount optimisation: Cash-in-stock is a
common situation for retail companies, where products remain
unsold for a longer period than expected. This often causes
higher expected inventory costs and the risk of products
becoming obsolete and losing value. In this scenario, products
are sold at lower selling prices. With demand forecasting, this
scenario can be minimised.

• Overall efficiency: With demand forecasting, teams can focus on

strategic issues instead of trying to reduce or increase inventories
and staffing levels
DATA MANAGERS WILL BROADEN THEIR FOCUS FROM STRUCTURED DATA TO UNSTRUCTURED
DATA ANALYTICS

‘RIGHT DATA’ ANALYTICS WILL SURPASS BIG DATA ANALYTICS AS A KEY TREND

DATA FABRICS WILL BE A STRATEGIC ENTERPRISE IT TREND IN 2022

MULTI-CLOUD WILL EVOLVE WITH DIFFERENT DATA STRATEGIES

SYNTHETIC DATA + UNSTRUCTURED DATA WILL BE NEEDED TO MANAGE DATA GROWTH

L’OREAL Case
L’OREAL Case
L’Oréal, a French multinational and one of the world’s largest
beauty products manufacturers, used information from various
sources to anticipate on trends, optimize sales and predict
customer demand.

The sources they used included social media, weather and

financial market indicators and data gathered at point-of-sales,
such as collection, reception and inventory. Combining these
datasets, and identifying which variable combinations affected
consumer demand.

This allowed L’Oréal to target end-customers more effectively

and respond to the challenge of demand volatility
 Sales During Covid

• Current reality is not knowing what sales will be, purchase new equipment despite
uncertainty about demand for products, and make investments without knowing what
profits will be.
• Managers are always trying to make better estimates of what will happen in the future
in the face of uncertainty.
• Making good estimates is the main purpose of FORECASTING
 Demand Forecasting

https://www.youtube.com/watch?v=HQ7C
I7JlXJQ
Forecasting Challenges
 Data Normalization
Year Sales Quantity Year Sales Quantity
2000 28 2000 28
2001 33 2001 33
2002 37 2002 37
2003 39 2003 39
2004 40 2004 40
2005 38 2005 38
2006 41 2006 41
2007 42 2007 42
2008 47 2008 47
2009 41 2009 41
2010 92 2010 42
2011 51 2011 51
2012 50 2012 50
2013 48 2013 48
2014 54 2014 54
2015 56 2015 56
2016 61 2016 61
2017 64 2017 64
2018 66 2018 66
2019 71 2019 71
 Data Normalization
Year Sales Quantity Year Sales Quantity
2000 28 2000 28
2001 33 2001 33
2002 37 2002 37
2003 39 2003 39
2004 40 2004 40
2005 38 2005 38
2006 2006 38
2007 2007 40
2008 2008 42
2009 2009 44
2010 2010 46
2011 2011 48
2012 2012 50
2013 2013 52
2014 54 2014 54
2015 56 2015 56
2016 2016 59
2017 2017 62
2018 66 2018 66
2019 71 2019 71
 Man Machine Collaboration
Month 2017 2018 2019 2020
Jan 0 0 0 0
Feb 0 0 0 0
Mar 0 0 0 0
Apr 0 0 0 0
May 0 0 0 0
Jun 0 0 0 0
Jul 0 0 0 0
Aug 0 0 0 ?
Sep 0 0 0 ?
Oct 0 0 0 ?
Nov 0 0 0 ?
Dec 1 1 1 ?

Panel Discussion 1
Only customer who were buying is likely to
change technology?
Sales annually for this unit is $1Million
What will be your forecast?
 Man Machine Collaboration
Month 2017 2018 2019 2020
Jan 0 0 0 0
Feb 0 0 0 0
Mar 0 0 0 0
Apr 0 0 0 0
May 0 0 0 0
Jun 0 0 0 0
Jul 0 0 0 0
Aug 0 0 0 ?
Sep 0 0 0 ?
Oct 0 0 0 ?
Nov 0 0 0 ?
Dec 1 1 1 ?

Panel Discussion 2
Customer has changed technology
There are other customers in the market
What will be your forecast?
 AI Plus Human Intelligence
• However, no matter how smart the forecasting solution may be,
Human logic is still needed to evaluate the relevance of the
outcomes produced by AI solutions.

• To draw conclusions with common sense and domain expertise.

• Companies should invest in industry specialists to determine what

factors should be taken into account in predictive
algorithms/models.

• Only by combining the strengths of both human and artificial

intelligence can a company foresee and plan for a better future
 Alternatives to Forecasting
• 7-eleven in Japan has been doing collaborations with suppliers of bread, so the
10,000 stores around Japan are connected through network with PPIC
(Production, Planning and Inventory Control) suppliers.
• Bread can be made in accordance with market demand so that forecasting
become more accurate.
• Managers need to encourage collaboration (derived from the Latin word "co"
and "labor", which means to work together or to work together) among the
companies that really need each other because they have one purpose,
namely to meet the needs and consumer satisfaction .
• Collaboration with the support of the sharing of information, systems planning
and development of new products together, as well as understanding the
strengths and weaknesses of each company, will be able to cope with the
bullwhip effect is the increased variability and uncertainty of the downstream
(retailers) to upstream (supplier of raw materials) .
• All of the flow of raw materials, from downstream to upstream so it can be
controlled (oversee) so be predicted well, except for natural disasters.
Backup Slides
 Forecasting
• Forecasting is the art and science of predicting future events.

• Forecasting may involve taking historical data (such as past sales)

and projecting them into the future with a mathematical model.

• It may be a subjective or an intuitive prediction (e.g., “this is a great

new product and will sell 20% more than the old one”).

• It may be based on demand-driven data, such as customer plans to

purchase, and projecting them into the future.

• Or the forecast may involve a combination of these, that is, a

mathematical model adjusted by a manager’s good judgment..
 Qualitative Methods
Jury of executive opinion
A forecasting technique that uses the opinion of a small group of high-level
managers to form a group estimate of demand.

Delphi method
A forecasting technique using a group process that allows experts to make
forecasts.

Sales force composite

A forecasting technique based on salespersons’ estimates of expected sales

Market survey
A forecasting method that solicits input from customers or potential
customers regarding future purchasing plans
Quantitative Methods
 Quantitative Methods
Naive approach
A forecasting technique that assumes that demand in the next period is equal
to demand in the most recent period.

Moving averages
A forecasting method that uses an average of the n most recent periods of
data to forecast the next period.

Exponential smoothing
A weighted-moving-average forecasting technique in which data points are
weighted by an exponential function
 Quantitative Methods

Trend projection
A time-series forecasting method that fits a trend line to a series of historical
data points and then projects the line into the future for forecasts

Linear-regression analysis
A straight-line mathematical model to describe the functional relationships
between independent and dependent variables