Demand Forecasting

What is Forecasting..?

Process of predicting a future event based on historical data

Educated Guessing.
Underlying basis of all business decisions
 Production
 Inventory
 Personnel
What Resources are Needed.?
 Facilities How existing Resources are to be scheduled.?
 Finance What additional resources can be acquired.?
 Forecasting
Forecasting is a process of estimating a future event by casting
forward past data.

The past data are systematically combined in a predetermined way to

obtain the estimate of the future.

Prediction is a process of estimating a future event based on

subjective considerations other than past data
 Demand Forecasting
 It is the Prerequisite Activity for Every Production Process
Estimating or Predicting the Future is called as Forecasting
Need for Forecasting:
1) Uncertainty in Market and Fluctuating Demands
2) Seasonal Fluctuation of Demand
3) To avoid Shortages and Overproduction
4) Helps in Planning and thus minimize errors
Errors = Actual – Forecast [ Et = At – Ft ]
Note that over-forecasts = negative errors and under-forecasts = positive errors
 Steps of Demand Forecasting

1) Specifying the objectives of Demand Forecasting

2) Determining the Time Perspective
3) Making the choice of Methods of Demand Forecasting
4) Collection of Data
5) Estimation & Interpretation of Demand
 Objectives of Forecasting (as Planning Tool)

Forecasting can be done on short & long term basis.

Benefits of Short term objectives:-
1) Formulation of Production plans
2) Helps to ensure regular supply of material
3) Maximum capacity utilization
4) Ensuring regular labour availability
5) Ensuring Adequate finance
 Objectives of Forecasting (as Planning Tool)

Forecasting can be done on short & long term basis.

B) Benefits of Long term objectives:-
1) Decision on new plant & production capacities
2) Estimation of labour requirement
3) Arrangement for long term finance
 Forecasting (as Planning Tool)

 Seasonality of Demand: Ex. Ice Cream, Cold Drinks (helps businesses

to maintain levels, to manage fluctuations in demand.) Festive seasons-
demand is always high
 Daily & Weekly Demand Fluctuations: Ex: Time of Day or week
 viz: morning, noon, or evening, or Weekday or Weekend etc.
 Banks & Tea stalls, more rush in morning hours, Supermarkets experiences demand on
weekends.
 Types of Forecasting Methods

Qualitative Methods Quantitative Methods

Rely on subjective Rely on data and analytical

opinions from one or techniques.
more experts.
 Techniques for Forecasting
Qualitative Technique

Executive Market Survey Sales Force

Delphi Method
Opinion Approach that Approach
uses interviews Approach in
Approach in Approach in
and surveys to which consensus
which a group of which each
judge the agreement is
managers meet & salesperson
preferences of reached among a
Shares Opinions estimates sales in
customers & to group of experts
to Forecast his or her region
assess demand
 Qualitative Techniques for Forecasting
Type Characteristics Strengths Weaknesses

Executive A group of managers meet Good for strategic or new- One person's opinion can
opinion & come up with a forecast product forecasting dominate the forecast

Uses surveys & interviews Actual Data

Market It can be difficult to develop
to identify customer Good determinant of customer
research a good questionnaire
preferences preferences

Excellent for forecasting long-

Seeks to develop a
Delphi term product demand,
consensus among a group Time consuming to develop
method technological changes, and
of experts
scientific advances
 Forecasting on Time Horizon
Quantitative
 SHORT-RANGE FORECAST methods
USUALLY < 3 MONTHS Detailed
use of
JOB SCHEDULING, WORKER ASSIGNMENTS
Production
 MEDIUM-RANGE FORECAST system
3 MONTHS TO 3 YEARS
SALES/PRODUCTION PLANNING
 LONG-RANGE FORECAST
Design
3 YEARS & MORE
of Production
NEW PRODUCT PLANNING system Qualitative
Methods
 Forecasting on Time Horizon
 Short Range Forecasting:
o Typically are more accurate as predictions are made from the known
facts and figures
o It ranges from weeks to 3 months period, which includes;
1) Purchase requirement
2) Cash Requirement
3) Scheduling Work of employees
4) Job Assignments to Managers
5) Production Levels to be achieved
 Forecasting on Time Horizon
 Medium Range Forecasting:
o Typically are Fairly accurate as forecasts are made from the recent facts
and figures and future trends can be calculated
o It ranges from 3 months to 3 years, which includes;
1) Sales Planning
2) Production Planning & Budgeting
3) New Product Launch
4) Addition of New Technology
 Forecasting on Time Horizon
 Long Range Forecasting:
o Typically are less accurate as forecasts are made from the recent facts and
figures and future trends can be calculated
o It ranges from 3 years to more than that, which includes;
1) Investments in New Plant
Useful for R&D
2) Change in Facility Location & Expansion
Projects, Big
3) New Product Launch Construction
4) Addition of New Technology Projects

5) Acquisition or Divestment Requires Constant

Revisions and Updates
 Sources of Data for Forecasting
 Accuracy of Forecasting increases based on quality and quantity of
data.
 The source of Data for Forecasting can be either;
1) Internal Source: The data which is obtained from inside of the
business. Viz. Previous Sales Data, Reports, Actual Forecast
2) External Source: The Data which is obtained from out of the
business, which can be used for the purpose of forecasting
 External Sources of Data for Forecasting
1) Sales Force Estimates: Based on the opinions of the sales people, who are in
the market and in contact with customers. The source is valuable, as the
accuracy of the forecast is high
2) Point of Sales Data Systems: Here actually the consumer buying behavior is
observed by the retailers, who in contact with manufacturer, can estimate future
trends and expected demand by customers
3) Forecast from Supply Chain Partners: Retailers and Distributors in SCM,
can provide the accurate data based on their experiences with other channel
partners including customers
 External Sources of Data for Forecasting
4) Trade/Industry Journals: These journals can be published monthly
or quarterly, becomes a source of data, which analyses trends in
domestic as well as international markets, sector wise data is also useful
for forecasting purpose
5) B2B Portals or Market Place: Various Data sources of national and
international businesses can be obtained from websites of private as
well as government officials.
 External Sources of Data for Forecasting
6) Economic Surveys & Indicators: The surveys on economic trends like
consumption pattern, GDP, GNP, Per capita income and spending capacity etc.
can become the source for forecasting. Economic Research Agencies like CMIE-
Centre for Monitoring Indian Economy or Central Statistical Agency are the
examples
7) Subjective Knowledge: Senior Management or the Subject Experts, can
become the source of information for forecasting. A systematic study of
present and past scenario can help Top management to take Strategic Decisions
 Capacity
Capacity: It can be defined as “the upper limit of output”.
Capacity as output can be measured as Business Capacity (output) as
sum total of its products or services.

Definition: “Capacity is the upper limit or maximum amount on the

load that an operating unit can handle.”
In Every Lift, it is clearly mentioned the capacity of weight either in
kg’s or in terms of no. of persons
 Importance of Capacity Decisions
If a manufacturing plant has higher capacity then,
 It allows the ability to meet future high demands
 It affects operating costs to the company
 It is the major determinant of initial costs
 It affects competitiveness
 It affects ease of management
 Types of Capacity
 Fixed Capacity: The capital assets (building and equipment) of a company
at any particular time, is known as fixed capacity.
 Adjustable Capacity: Depending upon size of work force, number of hours,
number of shifts, subcontracting, capacity can be adjustable.
 Design Capacity: It is the maximum amount of work that an organization is
capable of completing in a given period.
Ex: A Cement Factory is designed to manufacture 150 tons/day
 Licensed Capacity: Legally Allowed Capacity (ex.-Liquor mfg.)
 Types of Capacity
 System Capacity: The maximum output of a specific product, using workers
and machine system i.e. production system. It is less than or equal to Design
Capacity
 Installed Capacity: The capacity of output of a machine provided at the time of
installation. (Car Mileage)
 Normal Capacity/Rated Capacity: The capacity of output based on actual
output, established by the actual trials.
 Effective/Actual or Utilized Capacity: It is the actual output of any production
system at any given point of time. It depends upon availability of resources like
absenteeism which reduces capacity.
 Capacity Planning
 Capacity planning is the process of determining the production
capacity needed by an organization to meet changing demands for its
products in the market.
 A discrepancy between the capacity of an organization and the
demands of its customers results in inefficiency, either in under-utilized
resources or unfulfilled customers Demands.
 The goal of capacity planning is to minimize this discrepancy.
 Improving Capacity of Output
Capacity can be improved by..,
o Better utilization of existing capacity, which can be accomplished
through improvements in Overall Equipment Effectiveness (OEE).
o Capacity can be increased through introducing new techniques,
equipment and materials, increasing the number of workers or
machines, increasing the number of shifts, or acquiring additional
production facilities.
Ex: Garment Stitching Machines Capacity increases during Festivals.
 Master Production Schedule-MPS
 The MPS is software based system, that gives information related to
production planning and purchasing which helps top management
with the information needed to plan and control the manufacturing
operation.

Planned production quantities for each end-items, in each time

period of the planning horizon.
 Master Production Schedule-MPS
- A Master Production Schedule (MPS) is the plan that a company has
developed for-
Production, Inventory, Staffing, etc.
- It sets the quantity of each item to be completed in each week of a
short-range planning horizon.
- A MPS is the master of all schedules. 
- It is a plan for future production of end items.
- It is usually linked to manufacturing where the plan indicates when and
how much of each product will be demanded.
 What Master Production Schedule Does..?
- Breaks down, or disaggregates, the production plan into product families
- Promotes valid order promises
- Provides a communication medium between Marketing, Sales and
Operations
- Proactively control ability to deliver goods to customers
- Resource availability control
- Proactively controls inventory levels
 Master Production Schedule-MPS
Disaggregate the Sales and Operations Plan
1) The Sales and Operations Plan is broken into smaller product families.
An example would be an auto maker breaking their automobile production down
into small cars, sedans, trucks, etc..
2) Promotes valid order promises: By validating the capacity for the MPS
through rough cut capacity planning, alternative plans can be made when there
are more orders than capacity.
- Management has several options & implement something before customer
orders are late or missed.
RCCP: Irrespective of Available inventory and available capacity, matching market demand
 Master Production Schedule-MPS

The MPS of Automobile Manufacturer, producing Model A, B, C & D

Cars on monthly basis
 Master Production Schedule-MPS
 Marketing Operations
- Marketing communicates demand through customer orders &
forecasts: Marketing researches and monitors data to provide input on
actual customer demand and forecasted customer demand to the
Operations department
- Operations communicates capacity through inventory levels and
constraints: Operations researches & monitors data to provide input on
capacity, inventory levels & production constraints.
 Master Production Schedule-MPS
- Resource Availability Control
Production shortfalls will be known ahead of time & alternative plans
can be made: Based on the sales forecast & capacity review, a firm will
know when they will not be able to meet forecasted demand & will be able to
make alternative plans to increase capacity in some other manner or
subcontracting.
Proactively control ability to deliver goods to customers: Management
will be able to proactively work on CRM by deciding how to handle
production shortfalls in advance.
 Example of MPS
An example of a master production schedule for "product A“
Production Plan for week-2, February, 2021

Demand Management 6 Feb. 21 7 Feb. 21 8 Feb. 21 9 Feb. 21 10 Feb. 21

Monthly Demand For

Product A 4000 4000 4000 4000 4000

Working Days in the Month 23 23 23 23 23

MPS Daily Demand for

Product A 174 174 174 174 174
 Inputs-Outputs of MPS
Capacity
Constraint

Forecast What to Produce?

When to
Production Plan
MPS Produce?

How much to
Customer Order produce?

Product Lead
Time Constraint
 Material Requirement Planning (MRP-I)
 Materials requirements planning (MRP) is the logic for determining
the number of parts, components, and/or materials required to produce
a demanded product.
MRP is a software system.
MRP provides time scheduling information specifying when each of the
materials, parts, and components should be ordered or produced.
Dependent demand drives MRP.
 Inventory Classification
 Dependent demand – Demand for items that are sub-assemblies, parts
or raw materials to be used in the production of finished goods (end
items).
Independent demand – Finished products

100 x 1 = 100 tabletops

100 tables
100 x 4 = 400 table legs
 Functions of Material Requirement Planning
• Reduce Purchasing Cost
• Reduces Inventory Levels
• Improve Production Schedules
• Reduces Component Shortages
• Reduce Manufacturing Cost
• Improve Shipping Performance
• Less Scrap and Rework
• Improve Customer Service
• Simplified & Accurate Scheduling
• Improve Productivity
• Improve Supply Schedules
• Improve Communication
• Improve Calculation of Material
• Reduce Freight Cost
Requirements
• Reduction in Excess Inventory
• Improve Competitive Position
 Three Basic Steps of MRP
1. Identifying Requirements
2. Running MRP – Creating the Suggestions
3. Firming the Suggestions
 Three Basic Steps of MRP
 Step 1: Identifying Requirements
Quantity on Hand
Quantity on Purchase Order
Quantity in/on Planned for Manufacturing
Quantity Forecasted
(In short gross & net requirement planning)
 Three Basic Steps of MRP
 Step 2: Running MRP – Creating the Suggestions
Critical Items- (Vital & Essential “A”)
Expedite Items- (Possibility of Shortage. “S”)
Delay Items- (possibility of delay)

(Simply Classification of Materials)

 Three Basic Steps of MRP
 Step 3: Firming the Suggestions
Manufacturing Orders
Purchasing Orders
Various Reports
Material Requirement Planning (MRP-I)
 Overview of the MRP System
Inputs (Inputs & Outputs)
Product Master
Inventory
Structure File Production
Master File
(BoM) Schedule

Material
Requirements
Outputs Planning

Manufacturing Purchase Various

Orders Orders Reports
 MRP Process
The Firm in Example produces all items in Product A.
Using Lead times and MPS, we construct the Gross MRP as follows:
 MRP Process
Given the following on-hand inventory, We construct a Net Requirements
Plan:
Item Quantity on Hand
Net Requirements plan includes following: A 10
1) Gross Requirements, B 15
2) On hand inventory, C 20
D 10
3) Net requirements,
E 10
4) Planned Order Receipt & F 5
5) Planned Order Release for each item. G 0
 MRP Process
Net Requirement for Item-’A’
 Net Requirement for item-’B’

We need 80 units of B at week 7 because we need 40 units of A at this week, and one
unit of A requires 2 units of B. Therefore 2 times 40 = 80.
 MRP-I Process
Net Requirements = (Gross Req.) - [(On hand) + (Scheduled Receipts)]
Therefore, we should also consider that the Inventory on hand for a item &
also Scheduled Receipts for it (if we buy some of the item from other
suppliers).
Remember that, Scheduled receipts are the ones which we do not produce
but buy from Outside.
 MRP-I Process

1) Exploding and Offsetting

2) Gross and Net Requirements
3) Releasing Orders
4) Low level Coding and Netting
 MRP-I Process
 1) Exploding and Offsetting:
Lead time – it is the time needed to perform the process . It includes order
preparation, queuing, processing moving receiving and inspecting time as
well as any expected delays.
Exploding the requirements – it is the process of multiplying the
requirements by usage quantity of each item and recording the appropriate
requirements throughout the product tree. (BoM)
Offsetting – it is a process of placing the exploded requirements in their
proper periods based on lead time. (Ordering)
 MRP-I Process
 2) Gross and Net Requirements
Gross Requirement - Total expected demand of the product.
Net Requirements - Actual amount needed in each time period.
Net Requirements = Gross Requirement – available inventory
Planned on hand - Expected inventory on hand at the beginning of each time
period.
Planned-order receipts - Quantity expected to received at the beginning of
the period
Planned-order releases - Planned amount to order in each time period
 MRP-I Process
 3) Releasing Orders:
Releasing an order – means authorization is given to buy the necessary
material or to manufacturing of required component.
Scheduled Receipts – are orders placed on manufacturing or on a vendor
and represent a commitment to make or buy.
Now, considering Scheduled Receipts,
Net Requirement = Gross Requirement – Scheduled Receipts – available
inventory
 MRP-I Process
 4) Low Level Coding and Netting:
Netting – is a process in which any stock on hand is subtracted from the
gross requirement determined through explosion, giving the quantity of each
item needed to manufacture the required finished products.
Low Level Code – is the lowest level on which a part resides in all bills of
material.
(Low level codes are determined by starting at lowest level of bill of material
and working up, recording the level against the part. If part exists on higher
level, its existence on the lower level is already recorded.)
 Capacity Requirement Planning (CRP)
 CRP is the process of determination of;
Personnel Capacities & Equipment Capacities to meet production
objectives as per MPS
MRP & CRP are integrated within computerized system
MRP mainly focuses on Materials, while CRP focuses on Time
 Capacity Requirement Planning (CRP)
CRP mainly Concerned with;
1) Long Range resources planning of capital facilities, equipment and
human resources
2) Medium Range requirement planning of Labour & Equipment to meet
MPS needs
3) Short Range control of the flow (input & output) and sequencing of
Operations
 Distribution Requirement Planning (DRP)
 DRP provides the basis for integrating Supply Chain inventory
information & physical distribution activities with the Manufacturing
planning & control system.
- Managing the flow of Materials between firms, warehouse &
distribution centers
- DRP helps to manage these materials flow just like MRP does in
manufacturing

Inbound Logistics Operations Outbound Logistics Sales & Mktg. After Sales Services
 Distribution Requirement Planning (DRP)
DRP & Marketplace:
- DRP starts in Marketplace to collect sales forecast
- Some firms gather information on inventory levels & product usage
from customers
- This information serves as knowledge to create opportunity
- This is specially true when they have vendor managed inventories
 Distribution Requirement Planning (DRP)
 DRP is the systematic process of delivering materials (Raw
materials as well finished goods) at the location, where it is
demanded.
- The main objective of DRP is to lower the shortages and reduce
the cost of ordering, transportation and holding goods
- DRP take into accounts the supply stock along with buffer or
safety stock to meet customer demand
 Distribution Requirement Planning (DRP)
 The role of MRP and DRP is same, the only difference is that, MRP
works at manufacturing while DRP works at SCM
- DRP works on Pull as well Push System
Pull System: ensures goods moving up to fulfill the demand of
customers
Push System: It sends goods down with planned order system, so as to
maintain a constant supply of goods which are on regular demand.
 Distribution Requirement Planning (DRP)
 DRP system works on demand signals
- The organization collects the orders from market
Totaled orders then sent as demand signals to various production units,
enabling them to develop their production plan and thus ensure supply
of goods to the desired markets with 5R’s
If DRP system doesn’t deploy efficiently, may result in Bullwhip
effect.
Need of Distribution Requirement Planning (DRP)
 It provides a framework for determining the need to replenish inventory
- It links market requirement with manufacturing and demand
management system
- It helps to manage the inventory according to MPS and demand in the
market
- It helps to maintain the safety stock of inventory, thus avoids
shortages
- It helps to achieve overall productivity
Thank You…