DEMAND

FORCASTING IN A
SUPPLY CHAIN
Virly Indah Sucianti
55122120011
WHAT IS THE ROLE
OF FORECASTING IN
A SUPPLY CHAIN?
Demand forecasts form the basis of all supply chain planning. All push
processes in the supply chain are performed in anticipation of
customer demand, whereas all pull processes are performed in
response to customer demand. For push processes, a manager must
plan the level of activity, be it production, transportation, or any other
planned activity. For pull processes, a manager must plan the level of
available capacity and inventory but not the actual amount to be
executed. In both instances, the first step a manager must take is to
forecast what customer demand will be.
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CHARACTERISTICS
OF FORECASTS
1. Forecasts are always inaccurate and should thus include both the
expected value of the forecast and a measure of forecast error.
2. Long-term forecasts are usually less accurate than short-term forecasts;
that is, longterm forecasts have a larger standard deviation of error
relative to the mean than short-term forecasts.
3. Aggregate forecasts are usually more accurate than disaggregate forecasts,
as they tend to have a smaller standard deviation of error relative to the
mean.
4. In general, the farther up the supply chain a company is (or the farther it
is from the consumer), the greater is the distortion of information it
receives.
TYPES OF
4

FORECASTING
METHODS
1. Qualitative
2. Time Series
3. Causal
4. Simulation
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1. QUALITATIVE
Qualitative forecasting methods are primarily
subjective and rely on human judgment. They
are most appropriate when little historical data
are available or when experts have market
intelligence that may affect the forecast. Such
methods may also be necessary to forecast
demand several years into the future in a new
industry.
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2. TIME SERIES
Time-series forecasting methods use historical
demand to make a forecast. They are based on the
assumption that past demand history is a good
indicator of future demand. These methods are
most appropriate when the basic demand pattern
does not vary significantly from one year to the
next. These are the simplest methods to implement
and can serve as a good starting point for a demand
forecast.
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3. CAUSAL
Causal forecasting methods assume that the
demand forecast is highly correlated with
certain factors in the environment (the state of
the economy, interest rates, etc.). Causal
forecasting methods find this correlation
between demand and environmental factors
and use estimates of what environmental
factors will be to forecast future demand.
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4. SIMULATION
Simulation forecasting methods imitate the
consumer choices that give rise to demand
to arrive at a forecast.
 9

BASIC APPROACH TO
DEMAND
FORECASTING
The following five points are important for an organization
to forecast effectively:
1. Understand the objective of forecasting
2. Integrate demand planning and forecasting throughout
the supply chain.
3. Identify the major factors that influence the demand
forecast.
4. Forecast at the appropriate level of aggregation.
5. Establish performance and error measures for the forecast.
 TIME-SERIES
FORECASTING
METHODS
1. Static Methods
2. Adaptive Forecasting
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1. STATIC METHODS
A static method assumes that the estimates of level, trend, and
seasonality within the systematic component do not vary as new
demand is observed. In this case, we estimate each of these parameters
based on historical data and then use the same values for all future
forecasts. In this section, we discuss a static forecasting method for use
when demand has a trend as well as a seasonal component.

In a static forecasting method, the forecast in Period t for demand in

Period t + l is a product of the level in Period t + l and the seasonal factor
for Period t + l. The level in Period t + l is the sum of the level in Period 0
(L) and (t + l) times the trend T. The forecast in Period t for demand in
Period t + l is thus given as,

Ft+ l = [L + (t + l)T]St+ l
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2. ADAPTIVE
FORECASTING
In adaptive forecasting, the estimates of level, trend, and seasonality
are updated after each demand observation. The main advantage of
adaptive forecasting is that estimates incorporate all new data that
are observed. We now discuss a basic framework and several methods
that can be used for this type of forecast. The framework is provided
in the most general setting, when the systematic component of
demand data contains a level, a trend, and a seasonal factor. The
framework we present is for the case in which the systematic
component has the mixed form. It can, however, easily be modified
for the other two cases. The framework can also be specialized for
the case in which the systematic component contains no seasonality
or trend.
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2. ADAPTIVE
FORECASTING
MOVING AVERAGE

The moving average method is used when demand has no observable trend
or seasonality.

SIMPLE EXPONENTIAL SMOOTHING

The simple exponential smoothing method is appropriate when demand has

no observable trend or seasonality.
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2. ADAPTIVE
FORECASTING
TREND-CORRECTED EXPONENTIAL
SMOOTHING (HOLT’S MODEL)
The moving average method is used when demand has no observable trend
or seasonality.

TREND- AND SEASONALITY-

CORRECTED EXPONENTIAL
SMOOTHING (WINTER’S MODEL)
This method is appropriate when the systematic component of demand has
a level, a trend, and a seasonal factor.
Presentation title 15

THE ROLE OF IT IN
FORECASTING
There is a natural role for IT in forecasting, given the large amount of data
involved, the frequency with which forecasting is performed, and the
importance of getting the highest quality results possible. Commercial demand
planning modules come with a variety of forecasting algorithms, which can be
quite advanced and are sometimes proprietary. These methodologies often give
a more accurate forecast than those produced through the use of a general
package such as Excel. Most demand planning applications make it fairly easy
to test the various forecasting algorithms against historical data to determine
the one that provides the best fit to the observed demand patterns. A good
forecasting package provides forecasts across a wide range of products that are
updated in real time by incorporating any new demand information. This
helps firms respond quickly to changes in the marketplace and avoid the costs
of a delayed reaction. Good demand planning modules link not only to
customer orders but often directly to customer sales information as well, thus
incorporating the most current data into the demand forecast.
Presentation title 16

RISK MANAGEMENT
IN FORECASTING
The risks associated with forecast error must be considered when planning
for the future. Errors in forecasting can cause significant misallocation of
resources in inventory, facilities, transportation, sourcing, pricing, and even
in information management. Forecast errors during network design may
cause too many, too few, or the wrong type of facilities to be built. Plans
are determined from forecasts so the actual inventory, production,
transportation, sourcing, and pricing plans that a company produces and
follows depend on accurate forecasting. Even on an operational level,
forecasting plays a role in the actual day-to-day activities that are executed
within a company. As one of the initial processes in each of these phases
that affects many other processes, forecasting contains a significant
amount of inherent risk. A wide range of factors can cause a forecast to be
inaccurate, but a few occur so often that they deserve specific mention.
Long lead times require forecasts to be made further in advance, thus
decreasing the reliability of the forecast.
Presentation title 17

FORECASTING IN
PRACTICE
• Collaborate in building forecasts
Collaboration with your supply chain partners can often create a much more
accurate forecast. It takes an investment of time and effort to build the
relationships with your partners to begin sharing information and creating
collaborative forecasts.
• Share only the data that truly provide value
The value of data depends on where one sits in the supply chain. A retailer
finds point-of-sale data to be quite valuable in measuring the performance of its
stores.
• Be sure to distinguish between demand and sales
Often, companies make the mistake of looking at historical sales and assuming
that this is what the historical demand was. To get true demand, adjustments
need to be made for unmet demand due to stockouts, competitor actions,
pricing, and promotions. Failure to do so results in forecasts that do not
represent the current reality.
Presentation title 18

SUMMARY OF
LEARNING
OBJECTIVES
1. Understand the role of forecasting for both an enterprise and
a supply chain.
2. Identify the components of a demand forecast.
3. Forecast demand in a supply chian given historical demand
data using time-series methodologies.
THANK YOU
Virly Indah Sucianti
virlyindahs@gmail.com