All strategic and operating decisions in a supply chain are based on the forecast of future demand. The amount of product produced per period of the time the production capacity that must be made variable is all based open the forecast of customer demand for the period under consideration.
This fact emphasizes that forecasting should be highly accurate or the forecasting errors must be as low as possible.
The various steps involved in the basic approach to forecasting are briefly discussed in the following points:
1. Understanding the Objectives of Forecasting
The objective of every forecast is to support certain decisions based on the forecast.
All members of the supply chain (departments or firms in the supply chain) must be aware of the link between the decision and the forecast.
For instance, a large departmental store planning a promotion in which it will offer a discount to a particular product (say soap or detergent) during a particular duration of time (season or period of the festival) should this information with the manufacturer, transporters, and others involved in filling the demand.
All parties in the supply chain should use the same forecast for the promotion period and share a common action plan based on the forecast.
2. Integrating Demand Planning and Forecasting
All planning activities within a supply chain such as capacity planning, production planning, promotion planning, purchasing, etc., should be linked to the forecast of demand (or sales).
Since a variety of functions are affected by the outcome of the planning process, it is important that all these functions are integrated into the forecasting process.
3. Identifying Major Factors that Influence the Demand Forecast
A proper analysis of the major factors which influence the demand forecast is crucial for developing an appropriate forecasting method or technique.
These major factors are:
- Product-related factors such as design, price, packaging, promotion, brand image, quality, availability, product variety, etc.
The firm should ascertain the nature of the demand, whether it is increasing or decreasing, whether it has seasonality etc. The firm should examine the price elastically and promote elasticity of demand and also the relationship among the different products in the product line (like, whether the products are supplementary or complementary to one another within the product line).
On the supply side, the firm needs an accurate forecast of demand for its products, if a single or few suppliers with long lead times exist in the supply market. If alternative suppliers, who can supply with short lead times, are available a highly accurate forecast may not be very critical.
Of the product-related factor, if cross elasticity of demand exists between two products or brands of the firms, it is better to make the forecast jointly.
For example, when the firm introduces a modified version of an existing product, customers would buy the improved version rather than the existing product for which the demand will be on the decline.
4. Understanding and identifying Customer Segments
Customers are grouped or segmented based on factors such as:
- Similarities in-service requirements,
- The volume of demand,
- Frequency of ordering,
- The volatility of demand and,
- Seasonality of demand.
Generally, firms may use different forecasting methods for different segments, and therefore a clear understating of the customer segments would be helpful for better forecasting.
5. Determining the Appropriate Forecasting Technique
To select an appropriate forecasting method or technique, a firm must have a clear understanding of the several dimensions which are relevant to the forecast.
These dimensions are:
- Geographical location and area,
- Products groups and,
- Customer segments. It is advisable to have the forecast product group-wise, customer segment-wise, and geographical location wise (regions or status districts) Different forecasting methods or techniques may have to be used for each dimension. Sometimes, using aa combination of the four forecasting methods namely, 1. Qualitative, 2. Time Series, 3. Casual and.
- The simulation would be the most effective approach to forecasting.
6. Establishing Measures of Performance and Error for Forecast
To evaluate the accuracy and timeliness of the forecast, nit is necessary that the firm establishes a clear performance measurement system.
The performance measures (or metrics) should correlate with the objectives of the business decision the firm takes based on the forecasts.
Several major decisions such as production capacity, inventory levels, warehousing space, human resources, etc., are based on the forecast of demand for the products the firm wants to produce and sell.
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