Forecasting!......why?

• Push system requires planning about:

– Level of production
•Pull system requires planning about:
–Level of available capacity
–Level of inventory
• Both require future demand of customers.
•Either Pull or push, both processes are
driven by customer demand

Example of Dell Computer:

Mastering Pull and Push
•Dell orders components anticipating
customers order (Push)

•It determines capacity of assembly

plants on customer demand basis.
(Pull)

•For both purposes it requires demand

forecasting.

Forecasting: Definition
and its role
Definition: In its simplest form “It is estimation of expected demand over a specified future
period.”

– If each SC stage makes own demand

forecast variation is unavoidable.
– Collaborative forecasts tend to be more
accurate.
•Role:

–This accuracy enables SC to be more responsible and efficient in serving their customers.
Forecasting makes decisions
about:
1. Production: scheduling, inventory control,
aggregate planning, purchasing.
3. Marketing:
sales-force
allocation,
promotions, new product introduction.
5. Finance:
plant/equipment
investment,
budgetary planning.
7. Personal: workforce planning, hiring,
layoffs.

Characteristics of forecasts
1. Should include both expected and measure of
forecast error (demand uncertainty).
•
Consider, two car dealers
•One expects sales between 100 and 1900
•Other expects sales between 900 and 1100.
•Even though for both average sales is 1000,
sourcing strategy will be different.
•First dealer will have to arrange more resources
 due to higher forecasting error

Characteristics of forecasts

1. Long term forecasts are usually less

accurate than short term forecasts.
2. For same percentage error, aggregate forecasts
(e.g. GDP of a country) are usually more
accurate than disaggregate forecasts (e.g. yearly
revenue of company or product wise details).

Factors related to demand

forecast
•Past demand
•Lead time of products
•Planned advertising or
marketing efforts
•State of the economy
•Planned price discounts
•Actions competitors have
taken.

Classification of forecasting
methods
•Qualitative:
– Methods are subjective and rely on
human judgment.
–Appropriate when there is little historical data
available or experts have market intelligence.
– Used to forecast demand several years into the
future in a new industry.

Classification of forecasting
methods…
•Time series:
–Uses historical demand to make
forecasts.
–Based on assumption that past demand history
is a good indicator of future demand.
– Appropriate when the basic demand pattern
does not vary significantly from one period to
next.
– Simple to use and can serve as a good
starting point.

Classification of forecasting
methods…
•Causal
– Assumes that demand forecast is highly
correlated with certain factors in the
environment (e.g. state of economy, interest
rates etc.).
–This method find the correlation between
demand and environment and use estimates of
environment factors to forecast future demand.
 Classification of forecasting
methods…
Simulation
– These methods imitate consumer choices that
give rise to demand to arrive at a forecast.
–Using it a firm can combine time series and
causal method to answer:
1. What will be impact of price promotion?
2. What will be the impact of a competitor opening a
store nearby?
3. Airlines simulate customers buying behavior to
forecast demand for higher fare seats.

Appropriate method
•Several studies have indicated that using
multiple forecasting method is more effective
than any individual method.
•Deal with time series method when future
forecast is expected to follow historical method.
•Historical demand, growth pattern, any
seasonal pattern influence the forecast.