Demand Forecasts

• The three principles of all forecasting

techniques:
– Forecasting is always wrong
– Every forecast should include an estimate of
error
– The longer the forecast horizon the worst is
the forecast
– Aggregate forecasts are more accurate
Two comments frequently made by
managers
• We’ve got to have better forecasts
• I don’t trust these forecasts or
understand where they came from

• These comments suggest that

forecasts are held in disrepute by
many managers
 The truth about forecasts
• They are always wrong
• Sophisticated forecasting techniques
do not mean better forecasts
• Forecasting is still an art rather than
an esoteric science
• Avoid single number forecasting
– Single number substitutes for the
decision
 Selecting a forecasting
technique
• What is the purpose of the forecast?
• How is it to be used?
• What are the dynamics of the system
for which forecast will be made?
• How important is the past in
estimating the forecast?
 Forecasting Techniques
• Judgmental methods Qualitative
• Market research methods
• Time series methods
• Casual methods Quantitative
 Judgmental methods
• Sales-force composite
• Panels of experts
• Delphi method
 Market research method
• Markey testing
• Market survey
 Time Series methods
• Moving average
• Exponential smoothing
• Trend analysis
• Seasonality
– Use de-seasonalized data for forecast
– Forecast de-seasonalized demand
– Develop seasonal forecast by applying
seasonal index to base forecast
 Components of an
observation
Observed demand (O) =
Systematic component (S) + Random
component (R)

Level (current deseasonalized demand)

Trend (growth or decline in demand)

Seasonality (predictable seasonal fluctuation)

 Causal methods
• Single Regression analysis
• Multiple Regression analysis
 Error measures
• MAD
• Mean Squared Error (MSE)
• Mean Absolute Percentage Error
(MAPE)
• Bias
• Tracking Signal
 Collection and preparation
of data
• Record data in the same terms as
needed for forecast
– Demand vs. shipment
– Time interval should be the same
• Record circumstances related to data
• Record demand separately for
different customer groups
 Time Series Forecasting
Quarter Demand Dt
II, 1998 8000
III, 1998 13000 Forecast demand for the
IV, 1998 23000 next four quarters.
I, 1999 34000
II, 1999 10000
III, 1999 18000
IV, 1999 23000
I, 2000 38000
II, 2000 12000
III, 2000 13000
IV, 2000 32000
I, 2001 41000
 Time Series Forecasting

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