Chapter 5

DEMAND
FORECASTING

Prepared by Mark A. Jacobs, PhD

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or
duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OBJECTIVES
You should be able to:
Explain the role of demand forecasting in a supply
chain
Identify the components of a forecast
Compare & contrast qualitative & quantitative
forecasting techniques
Assess the accuracy of forecasts
Explain collaborative planning, forecasting, &
replenishment
2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction
Supply chain members find it important
to manage demand, especially in pull
manufacturing environments.
Suppliers must find ways to better
match supply & demand to achieve
optimal levels of cost, quality, &
customer service to enable them to
compete with other supply chains.
Improved forecasts benefit all trading
partners in the supply chain & mitigates
supply-demand mismatch problems.

Demand Forecasting
A forecast is an estimate of future demand &
provides the basis for planning decisions
The goal is to minimize forecast error
The factors that influence demand must be
considered when forecasting.
Managing demand requires timely & accurate
forecasts
Good forecasting provides reduced inventories,
costs, & stockouts, & improved production plans &
customer service

Forecasting Techniques
Qualitative forecasting is based on opinion &
intuition.
Quantitative forecasting uses mathematical
models & historical data to make forecasts.
Time series models are the most frequently used
among all the forecasting models.

Forecasting Techniques
(Continued)

Qualitative Forecasting Methods

Generally used when data are limited, unavailable, or
not currently relevant. Forecast depends on skill &
experience of forecaster(s) & available information
Four qualitative models used are
1. Jury of executive opinion
2. Delphi method
3. Sales force composite
4. Consumer survey

Forecasting Techniques
(Continued)

Quantitative Methods
Time series forecasting based on the assumption
that the future is an extension of the past. Historical
data is used to predict future demand
Cause & Effect forecasting assumes that one or
more factors (independent variables) predict future
demand
It is generally recommended to use a combination of
quantitative & qualitative techniques

Forecasting Techniques
(Continued)

Components of Time Series

Data should be plotted to detect for the following components

Trend variations: increasing or decreasing

Cyclical variations: wavelike movements that are
longer than a year (e.g., business cycle)
Seasonal variations: show peaks & valleys that
repeat over a consistent interval such as hours,
days, weeks, months, seasons, or years
Random variations: due to unexpected or
unpredictable events

Steps in the
Forecasting Process
Step 1 : Determine the purpose of forecast
Step 2: Pick an appropriate time horizon
Step 3: Select a forecasting technique - Plotting data may reveal
patterns
Step 4: Gather and analyze data in detail State assumptions
Validate Data: May need to cleanse or filter for past events
Step 5: Calculate forecast
Step 6: Analyze/Monitor the forecast- Measure Accuracy Are results
acceptable?
No: Return to Step 3, revising forecast technique
Yes: Publish forecast
Step 7 : For ongoing forecasting: repeat Steps 4 through 6

2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.