1. Supply Chain Management (SCM) Forecasting 3
Dr. Husam Arman
4/10/2009

2. Today’s Outline Qualitative methods Economic indicators
Market research
Historical analogy
Delphi method
Sales force composites
Scenario writing and analysis
Contemplations and conclusions

3. Qualitative forecasting techniques
Often use data and models but with human interpretation/ judgment to form a view on the future

4. Qualitative forecasting techniques
Economic indicators
Scenario writing
Sales force composites
Market research
More human judgment
More models and data
Delphi Methods
Historical analogy

5. Economic indicators 1 Originated in the US following the depression
Monthly, quarterly and annual series on prices, employment, production etc
Closely relates to observed economic activity and business cycles
Useful for interpretative, judgmental forecasting by many organizations

6. Economic indicators 2
Economic indicator: an economic series from which a forecast is based
Leading indicators: advance warning of probable change in economic activity
Coincident indicators: reflect current performance of economy
Lagging indicators: confirm changes previously signaled
Interpretation/impact depends on nature of the forecast, sector, type of organization, location etc

7. Market research 1
Extracts information form a sample of a target market and infers something about the population
Useful for information on product preferences
e.g. opinions on existing products, opinions on new products, opinions on competitors products and more general preferences
May provide sophisticated accurate forecasts on market potential

8. Market research 2
Needs to be designed, executed and analyzed with care
Decisions on sample size and sample type
Decisions on medium and method for information gathering
Prior selection methods for statistical inference
Many sources of expertise
May be costly and time-consuming
How do we do it? 

9. Historical analogy 1
Forecasting relation to new products, take up of new technologies where little or no previous market experience
Link the new products with an assumed analogous occurrence in the past
Forecast for the demand for a product in a new market might be made by analogy with the known demand for the same product in a mature market

10. Historical analogy 2
Forecast demand for a new product by analogy with known demand for a related product
Analogy of mail order as a basis for predicting the development of e-shopping
If Ad-hoc method, many potential dangers
May aid understanding with qualitative information on the shape of the demand curve

11. Delphi methods
DELPHI method attempts to systematically evaluate expert judgment on the likelihood of future events without expert or analyst interaction

12. Delphi steps Establish panel of expert Establish a questionnaire
Evaluate responses by producing numerical summary
- Modal values and extreme values are highlighted
Controlled feedback
- Make the extremists justify their position and decide whether to include or exclude extreme values.
Repeat (3) and (4) until a clear, not necessarily unanimous, forecast emerges. Extremes may persist
Summaries the result

13. Delphi
Difficulties
How many experts to use, how many rounds are appropriate, when should extremes be eliminated?
Time consuming and may be costly
Successful in broad studies of issues that affect demand in many businesses in the longer term. e.g.
future of the Common Agricultural
growth in different tourist destinations

14. Sales force composites
Utilizes knowledge and experience of sales-force to produce a forecast
Useful when
complex product mix, few customers
where sales force have close contact with customers, technical expertise, closely involved in negotiation, pricing and specification
but there are many problems / sources of error,
like what ?

15. Scenario writing and analysis 1
A scenario is a narrative description of future conditions and how a business and its competitors may react to those conditions
Identifies the principal factors that affect the future and explores a number of different future scenarios with some indications of the likelihood of each scenario occurring
Closely linked with corporate strategy and planning

16. Scenario writing and analysis 2
Attempts to understand and plan for the future rather than producing ’blind’ forecasts
Acknowledges that different scenarios may be plausible from a given starting point
No generally accepted way of constructing scenarios
Simulation approaches may be useful particularly System Dynamics

17. Contemplation and Conclusions
Many ‘advanced’ time series extrapolation methods – little evidence that complex methods significantly outperform simpler approaches
Errors made consistently in one direction imply bias, important to track errors and bias over time
Automation of forecasting techniques for large scale inventory systems is difficult - challenging in ERP

18. How much should we invest in forecasting?
Decreasing forecast errors
Increasing costs
Cost of operating a forecasting process
Cost of forecasting error
Naive models
Sophisticated models

19. Forecasting in SCM
Whatever techniques are employed, forecasts need to be embedded in the decision making processes
Failure to forecast or act on forecasts may
lead to implicit acceptance of a previous outdated forecasts
may be an assumption that present conditions will persist in the future
result in lack of preparation for change

20. Longer term/higher level forecasting
In operations we typically need longer term forecasts for:
Strategy – decide if demand is sufficient to entre a market
e.g years
Longer term capacity needs for facility design
e.g. exceeding 2 years
Medium term capacity and resource ‘flexing’
recruiting/shedding labor, balancing production across multiple sites
supply chain ‘ramp’ up and down
e.g. 6 months to 2 years

21. Selecting the appropriate forecasting techniques
What is the purpose of the forecast? How is it to be used?
What are the dynamics of the system for which the forecast will be made?
How important is the past in estimating the future?
What about the different stages of the product life cycle?
Can we use more than one technique?