Supply Chain Management

By
Tauseef Iqbal Khan
Introduction
• Forecasting is only one of the three key activities in CPFR
[Collaborative Planning, Forecasting and Replenishment]
• Planning is the process of working together to organize and to resolve
key barriers to rapid and efficient delivery of goods in the supply chain
• Replenishment is the activity of accomplishing timely, accurate and
complete fulfillment between partners in the supply chain and
between distribution centers and selling locations
• The middle activity, Forecasting, has to have as its end result a reliable
order forecast that the supplier actually uses to drive acquisition and
manufacturing to support on time and complete shipping
Chapter 5 DEMAND FORECASTING

Learning Objectives
• Explain the role of demand forecasting in a supply chain
• Identify the components of a forecast
• Compare and contrast qualitative and quantitative forecasting
techniques
• Assess the accuracy of forecasts
• Explain collaborative planning, forecasting and replenishment
Challenges
• Organizations are moving to a more effective demand-driven supply
chain to enable them to respond quickly to shifting demand
• Consumers have become more demanding and discriminating
• There are several ways to closely match supply and demand
• One way is for a supplier to hold plenty of stock available for delivery
at any time
• While this approach maximizes sales revenues, it is also expensive
because of the cost of carrying inventory and the possibility of write-
downs at the end of the selling season
Demand Forecasting
• Forecasting is an important element of demand management
• It provides an estimate of future demand and the basis for planning and sound
business decisions
• The goal of a good forecasting technique is to minimize the deviation between actual
demand and the forecast
• Buyers and sellers should share all relevant information to generate a single
consensus forecast so that the correct decisions on supply and demand can be made
• Improved forecasts benefit not only the focal company but also the trading partners
in the supply chain
• The benefits of better forecasts are lower inventories, reduced stockout, smoother
production plans, reduced costs and improved customer service
Forecasting Techniques - Qualitative
Methods
• Qualitative forecasting methods are based on intuition or judgmental evaluation and
are generally used when data are limited, unavailable, or not currently relevant
• This approach can be very low cost, its effectiveness depends to a large extent on the
skill and experience of the forecaster
Jury of Executive Opinion
• A group of senior management executives who are knowledgeable about the
market, their competitors and the business environment collectively develop the
forecast
• The challenge is if one member’s views dominate the discussion
• This technique is applicable for long-range planning and new product introductions
Forecasting Techniques - Qualitative
Methods
Delphi Method
• A group of internal and external experts are surveyed during several
rounds in terms of future events and long-term forecasts of demand
• The answers from the experts are accumulated after each round of
the survey and summarized
• The summary of responses is then sent out to all the experts in the
next round, wherein individual experts can modify their responses
based on the group’s response summary
Forecasting Techniques - Qualitative
Methods
Sales Force Composite
• The sales force represents a good source of market information
• This type of forecast is generated based on the sales force’s knowledge of the market
and estimates of customer needs
• Due to the proximity of the sales personnel to the consumers, the forecast tends to be
reliable, but individual biases could negatively impact the effectiveness of this approach
Consumer Survey
• A questionnaire is developed that seeks input from customers on important issues such
as future buying habits, new product ideas and opinions about existing products
• The survey is administered through telephone, mail, Internet, or personal interviews
Forecasting Techniques - Quantitative
Methods
• Quantitative forecasting models use mathematical techniques that are
based on historical data and can include causal variables to forecast demand
• Time series forecasting is based on the assumption that the future is an
extension of the past; thus, historical data can be used to predict future
demand
• Cause-and-effect forecasting assumes that one or more factors
(independent variables) are related to demand and, therefore, can be used
to predict future demand
• Since these forecasts rely solely on past demand data, all quantitative
methods become less accurate as the forecast’s time horizon increases
Quantitative Methods- Components of
Time Series
• Trend Variations - Trends represent either increasing or decreasing
movements over many years, and are due to factors such as population
growth, population shifts, cultural changes and income shifts
• Cyclical Variations - These variations are wavelike movements that are
longer than a year and influenced by macroeconomic and political
factors. One example is the business cycle (recession or expansion)
• Seasonal Variation shows peak and valley that repeat over a consistent
interval such as weekly, monthly
• Random variations are due to unexpected or unpredictable events
such as natural disasters
Time Series Forecasting Models
• Naïve Forecast Using the naïve forecast, the estimate for the next
period is equal to the actual demand for the immediate past period
• Ft +1 =At
• where Ft+1 = forecast for period t+1;
• At = actual demand for period
Time Series Forecasting Models
• The Simple Moving Average forecast uses historical data to generate a
forecast and works well when the demand is fairly stable over time
• Weighted Moving Average Forecast The simple moving average forecast
places equal weights (1/n) on each of the n-period observations. Under
some circumstances, a forecaster may decide that equal weighing is
undesirable
• Exponential Smoothing Forecast The exponential smoothing forecast is a
sophisticated weighted moving average forecasting technique in which
the forecast for next period’s demand is the current period’s forecast
adjusted by a fraction of the difference between the current period’s
actual demand and forecast
Linear Trend Forecast
• A linear trend forecast can be estimated using simple linear regression to fit
a line to a series of data occurring over time
• This model is also referred to as the simple trend model
• The trend line is determined using the least squares method, which
minimizes the sum of the squared deviations to determine the
characteristics of the linear equation.
• The trend line equation is expressed as
• Ŷ = b0 + b1x Where Ŷ = forecast or dependent variable; x = time variable
• b0 = intercept of the vertical axis
• b1 = slope of the trend line
Cause-and-Effect Models
• The cause-and-effect models have a cause (independent variable or
variables) and an effect (dependent variable)
• One of the more common models used is regression
• Simple Linear Regression Forecast - When there is only one
explanatory variable, we have a simple regression forecast equivalent
to the linear trend forecast described earlier. The difference is that
the x variable is no longer time but instead an explanatory variable of
demand
Forecast Accuracy
• The ultimate goal of any forecasting endeavor is to have an accurate
and unbiased forecast
• The costs associated with prediction error can be substantial and
include the costs of lost sales, safety stock, unsatisfied customers and
loss of goodwill
• Forecast error is the difference between the actual quantity and the
forecast. Forecast error can be expressed as:
• et = At − Ft
• where et = forecast error for period t; At = actual demand for period t;
Ft = forecast for period t.
Forecast Accuracy
Running Sum Of Forecast Errors
• We compute RSFE by summing up the forecast errors over time
• The RSFE is an indicator of bias in the forecasts. Forecast bias
measures the tendency of a forecast to be consistently higher or
lower than the actual demand
• A positive RSFE indicates that the forecasts are generally lower than
actual demand which can lead to stockout
• A negative RSFE shows that the forecasts are generally higher than
actual demand, which can result in excess inventory carrying costs
Forecast Accuracy
• Mean Absolute Deviation Error is defined as sum of error over a
period of time (Sum of Forecast error / n)
• The tracking signal is used to determine if the forecast bias is within
the acceptable control limits. It is expressed as:
• Tracking signal =RSFE / Mean Absolute Deviation
• If the tracking signal falls outside preset control limits, there is a bias
problem with the forecasting method, and an evaluation of the way
forecasts are generated is warranted
• A biased forecast will lead to excessive inventories or stockout
Collaborative Planning, Forecasting and
Replenishment (CPFR)
• A set of business processes that entities in a supply chain can use for
collaboration on a number of retailer/manufacturer functions towards
overall efficiency in the supply chain
• A concept that aims to enhance supply chain integration by supporting and
assisting joint practices
• CPFR seeks cooperative management of inventory through joint visibility
and replenishment of products throughout the supply chain
• The objective of CPFR is to optimize the supply chain by improving demand
forecast accuracy, delivering the right product at the right time to the right
location, reducing inventories across the supply chain, avoiding stockouts
and improving customer service