Supply Management (CUSCM 208)

Supply chain planning

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Outline
 Learning objectives
 Introduction
 Definitions
 Demand Forecasts
 Factors affecting demand forecasting
 Role of forecasting in SCM
 Characteristics of Forecasting
 Forecasting methods
 Application of forecasting
 Conclusion

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Learning Objectives
 To explain the term forecasting and
demand forecasting
 To determine the factors that influence
forecasting
 To establish the role of forecasting in
supply chain
 To apply forecasting in supply chain

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 DEFINITIONS

 A forecast is a prediction of future events

which provide useful estimates for
planning purposes. ( Krajewski L. J and
Ritzman L.P..1993)
 A demand forecast is the basis for
important planning decisions-regarding
scheduling, inventory, production, facility
layout & design, workforce, distribution &
purchasing. (Russell et.al 2003)

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 FORECASTING IN SCM
• In the modern supply chain, forecasting is
necessary for companies that manufacture
items for inventory and that are not made
to order.
• Manufacturers will use material forecasting
to ensure that they produce the level of
material that satisfies their customers
without producing an overcapacity situation
where too much inventory is produced and
remains on the shelf.
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 FORECASTING IN SCM
• Forecasts are developed for a company’s
finished goods, components and service
parts.
• The forecast is used by the production team
to develop production or purchase order
triggers, quantities and safety stock levels.
• The forecast is not static and should be
reviewed by management on a regular basis.
This is to ensure that information on future
trends, the internal or external environment
is incorporated into the forecast to give a
more accurate calculation.
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Discussion
 Discuss how procurement personnel use
the forecasting technique ?

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 Demand Forecasting?

• Demand forecasting is an activity involving

top management and the sales team where
demand is projected or forecasted by
product and customer for a given period of
time (i.e the Sales Horizon).

• Most companies use sales forecasting

software to help them model the historical
sales activity and the demand estimates
provided by the sales team to create a
future projection.
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 Demand Forecasting?

• Demand forecasting in the supply chain

is a difficult task. The accuracy of the
forecast has an enormous impact on the
cost of manufacturing.
• Un-forecasted demand often generates
overtime costs, expedited material costs,
and expedited shipping costs.

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 Factors affecting demand
forecasting
 External factors
 General state of the economy
 Government actions
 Consumer tastes
 Public image of product
 Competitor actions

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 Factors affecting demand
forecasting
Internal factors
• Product service /design
• Price & advertising promotions
• Packaging design
• Salesperson qouta& incentives
• Expansion/ contraction of geographical
market target areas
• Product mix
• Backlog pricing

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 ROLE OF FORECASTING IN
SUPPLY CHAIN
MANAGEMENT
 Forecasting is designed to help decision-making and
planning in the present.
 Introduces change in an organisation
 Used for both push and pull processes
 Management uses forecast to plan e.g. product types,
services to offer, facilities & equipment.
 Management plans the use of the system, e.g. planning
inventory levels, employment levels & purchasing activities.
 Forecasts are usually part of the organization’s strategic
plan, made covering a time period b/w 2-15 yrs,
 They can be used to plan profits, revenue& productivity

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Assumptions in Forecasting
There are several assumptions about forecasting:
 There is no way to state what the future will be with
complete certainty.
 Regardless of the methods that we use there will always be
an element of uncertainty until the forecast horizon has
come to pass.
 There will always be blind spots in forecasts, for example,
one can not forecast completely new technologies for which
there are no existing paradigms.
 Providing forecasts to policy-makers will help them
formulate social policy. The new social policy, in turn, will
affect the future, thus changing the accuracy of the forecast.

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 Examples of forecasting

Production: scheduling, inventory, aggregate

planning
Marketing: sales force allocation, promotions,
new production introduction
Finance: plant/equipment investment, budgetary
planning
 Personnel: workforce planning, hiring,
layoffs

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 ROLE OF FORECASTING IN
SCM
 Functions of the S.C. are affected in the
short-run by product demand & in the
long run by new products & processes,
technological advances & changing
markets.
 Forecasts of product demand determine
the quantity of inventory needed & the
quantities to produce& materials
required from suppliers to meet
forecasted demand.

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 ROLE OF FORECASTING IN
SCM
 The forecasts will determine the mode
of transportation needed & the
location of plants, warehouse &
distribution centres in order to deliver
goods & services on time.
 Accurate forecasting determines the
quantity of inventory a company must
keep at various points along its supply
chain

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 Challenges of Forecasts

 Forecasts are always wrong. Should

include expected value and measure of
error.
 Long-term forecasts are less accurate
than short-term forecasts (forecast
horizon is important)
 Aggregate forecasts are more accurate
than disaggregate forecasts

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 Forecasting Methods

• Qualitative: primarily subjective; rely on

judgment and opinion
• Time Series: use historical demand only
– Static
– Adaptive
• Causal: use the relationship between
demand and some other factor to develop
forecast
• Simulation
– Imitate consumer choices that give rise to
demand
– Can combine time series and causal methods
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 Forecasting Methods
Time series methods
• Time series methods use historical data as the
basis of estimating future outcomes.
• -It is a family of techniques where time is used as
a proxy to replace all other independent
variables. e.g. to forecast demand for october,
one uses an average of the past six months 1/6
(april, may, june, july, august, sept)
• Rolling forecast is a projection into the future
based on past performances, routinely updated
on a regular schedule to incorporate data.

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 Forecasting Methods

Causal / econometric methods

• Some forecasting methods use the
assumption that it is possible to identify the
underlying factors that might influence the
variable that is being forecast. For example,
sales of umbrellas might be associated with
weather conditions. If the causes are
understood, projections of the influencing
variables can be made and used in the
forecast.
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 Forecasting Methods
• Judgmental methods
• Judgmental forecasting methods
incorporate intuitive judgements,
opinions and subjective probability
estimates.
• Composite forecasts
• Surveys
• Scenario building

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 Applications of forecasting
• Supply chain management - Forecasting can
be used in Supply Chain Management to
make sure that the right product is at the
right place at the right time. Accurate
forecasting will help retailers reduce excess
inventory and therefore increase profit
margin. Accurate forecasting will also help
them meet consumer demand.
• Transport planning and Transportation
forecasting
• Product forecasting

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