1. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 1 Chapter 5: Demand Management and Forecasting Process Management: Creating Value Along the Supply Chain (1 st edition) Wisner and Stanley

2. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 2 Chapter Outline Introduction Demand Management Defined Types of Demand The Forecasting Process Forecasting Methods Qualitative Forecasting Methods Time Series Methods Associative Forecasting

3. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 3 Chapter Outline (cont.) Forecast Accuracy Collaborative Planning, Forecasting and Replenishment Summary

4. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 4 Learning Objectives After completing this chapter, you should be able to: Explain the role of demand management and forecasting in an organization. Describe the demand management process. Identify the components of a forecast.

5. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 5 Learning Objectives (cont.) After completing this chapter, you should be able to: Understand qualitative and quantitative forecasting methods. Determine the accuracy of a forecast. Describe the collaborative planning, forecasting and replenishment process.

6. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 6 Introduction Forecasts are the basis for budgeting, planning capacity, sales, production and inventory, personnel, purchasing, and more. Enable managers to anticipate the future so they can plan accordingly. Forward buying: buying more than immediately necessary because of unexpected promotions or incentives offered by a vendor. Successful forecasting requires a skillful blending of art and science.

7. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 7 Demand Management Defined Demand management process: balances customer requirements with supply chain capabilities. Forecasting: firms estimate resource requirements by identifying and quantifying all sources of demand. Sales and operations planning: sales and operations coordinate their plans based on the forecasts. Planning horizon: managing the relationships with other members of supply chain.

8. Services Collect Data Select Model Plot DataDevelop Forecast Check Accuracy Forecast Adjust Forecast Monitor Forecast Sales and Operations Planning Master SchedulingCustomer Scheduling Materials Planning Workforce Scheduling Order Scheduling Manufacturing Forecasting Figure 5.1 COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

9. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Demand Management Functions involved in the demand management process: Field sales: pricing, promotion, distribution and display of finished goods to retailers Marketing: building brand awareness, new product introduction, sales-force allocation Finance: plant/equipment investment, budgetary planning Supply management: procurement of materials, parts, components, and finished goods Manufacturing: scheduling, inventory control, capacity planning, work assignments and workloads Distribution: filling customer order Transportation: moving goods from the organization’s distribution centers to the customer’s distribution centers 9

10. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 10 Types of Demand Independent demand: demand for any finished product Point-of-sale (POS) data: data used to forecast demand is collected from retailers’ POS data Derived demand: intermediaries forecast the number of lots needed to meet the needs of other intermediaries in the supply chain. Dependent demand: demand for the raw materials, parts, and components used to manufacture a product. Material requirements planning (MRP)

11. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 11 The Forecasting Process Begins with collecting historical data. Components of a forecast Base demand: average sales demand Seasonal effects: short-term, fairly regular variations Trends: long-term upward or downward movement in the data Cyclical patterns: wavelike variations of more than one year’s duration. Promotions: special advertising and pricing Random effects: impossible to predict and occur at irregular times. Top-down / decomposition approach: national brand are proportioned down to individual product items per location forecasts Bottom-up / aggregation approach : item per location forecasts are aggregated to create a national brand forecast

12. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 12 Qualitative Forecasting Methods Sales force estimates: members of the sales staff or customer service staff are often good sources of information. Consumer surveys: because it is the customers who ultimately determine demand, it seems natural to solicit input from them. Delphi method: an iterative process in which managers and staff complete a series of questionnaires each developed from the previous one, to achieve a consensus forecast. Jury of executive opinion: a small group of upper-level managers may meet and collectively develop a forecast.

13. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 13 Time Series Forecasting Methods Simple moving average where F t+1 = forecast for Period t + 1 n = number of periods used to calculate moving average A t = actual demand in Period t

14. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 14 Time Series Forecasting Methods (cont.) Weighted moving average where F t+1 = forecast for Period t + 1 n = number of periods used in determining the moving average w = weights assigned to Period i ( with  w = 1) A t = actual demand in Period t

15. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 15 Time Series Forecasting Methods (cont.) Exponential smoothing where F t+1 = forecast for Period t + 1 F t = forecast for Period t A t = actual demand for Period t α = smoothing constant (0  α  1) or

16. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 16 Time Series Forecasting Methods (cont.) Trend-adjusted exponential smoothing method (1) Smoothing Initial Forecast: (2) Smoothing the Trend: (3) Trend-adjusted forecast:

17. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 17 Forecast Accuracy Forecast bias: persistent tendency for forecasts to be greater or less than the actual values of a time series. Forecast error: difference between the actual value and the value that was predicted for a given period where e t = forecast error for Period t A t = actual demand for Period t F t = forecast for Period t

18. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 18 Forecast Accuracy (cont.) Mean absolute deviation (MAD): the average absolute forecast error where |e t |= absolute value of the forecast error for Period t n = number of periods of evaluation.

19. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 19 Forecast Accuracy (cont.) Mean absolute percentage deviation (MAPE): the average absolute percent error. where et = forecast error for Period t n = number of periods of evaluation At = actual demand for Period t

20. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 20 Forecast Accuracy (cont.) Running sum of forecast errors (RSFE): provides a measure of forecast bias where e t = forecast error for Period t

21. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 21 Forecast Accuracy (cont.) Tracking signal: the ratio of cumulative forecast error to the corresponding value of MAD, used to monitor a forecast

22. Collaborative Planning, Forecasting and Replenishment Source: Voluntary Interindustry Company Standards, May 2004. Reprinted with permission. CPFR® is a registered trademark of VICS. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. Figure 5.9

23. COPYRIGHT © 2008 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license. 23 Collaborative Planning, Forecasting and Replenishment Focuses on information sharing among supply chain trading partners for purposes of planning, forecasting, and inventory replenishment. Example: Wal-Mart