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Unlike some other industries, point-of-sale data is not readily available, which creates a demand
visibility problem. Manufacturers typically purchase data on filled prescriptions and dispensed drugs
from third parties. Prescription data suffers from a time lag it is usually available 10-12 days
following the preceding month. In addition, the data relies on sampling and extrapolation for
locations such as independent pharmacies and clinics.
A company must be knowledgeable about numerous factors that are related to the demand forecast. Some of
these factors are listed next.
Past demand
Lead time of product
Planned advertising or marketing efforts
State of the economy
Planned price discounts
Actions that competitors have taken
The following basic, six-step approach helps an organization perform effective forecasting.
1. Understand the objective of forecasting.
2. Integrate demand planning and forecasting throughout the supply chain.
3. Understand and identify customer segments.
4. Identify the major factors that influence the demand forecast.
5. Determine the appropriate forecasting technique.
6. Establish performance and error measures for the forecast.
Forecast= SYSTIMATIC (Level,trend,seasonlaity) + Randon component
Forecast calculation methos:
Statistical methos-> F=(L+T)*S
Adaptive methods->
o Moving avg-> Only Level, no trend and seasonlity in demand= Systematic component of
demand = level
o Simple exponential smoothning -> Systematic component of demand = level
Lr+l = r:xDt+l + (1 - et)Lr x=smoothning constant
o Trend-Corrected Exponential Smoothing (Holt's Model): Systematic component of demand =
level + trend
L1 = a01 + (1 - a)(L0 + T0 )
T1 = I3(L1 -La)+ (1 - 13)To
o Trend- and Seasonality-Corrected Exponential Smoothing (Winter's Model)
Systematic component of demand= (level+ trend) X seasonal factor
Managers use error analysis to determine whether the current forecasting method is
predicting the systematic component of demand accurately
Forecasting errors
o Error= sum of all errors(F-D)
o Mean squared error= sum(E*E)/n
o Mean absolute deviation MAD= > Absolute deviation=Absolute value
of error
= (1/n) sum(|E|)
Total annual cost ,TC= material cost (Total demand* Cost per item)+ Holding cost (Quantity or Cycle inv
* Holding cost per item)+ ordering cost(no of orders * ordering cost)
= CD
+ (Q/2)*HC + (D/Q)*S
EOQ= under root of (2DS/HC)
Safety inventory is inventory carried to satisfy demand that exceeds the amount forecasted for a
given period. Safety inventory is carried because demand is uncertain and a product shortage may
result if actual demand exceeds the forecast demand
SS is needed to cater Uncertainty in demand during LEAD TIME