Forecasts of future demand are essential for making all critical supply chain decisions

SCM 611- Supply Chain Planning & Control Instructor: Ejazur Rahman Topic: Forecasts of future demand are essential for making all critical supply chain decisions Submitted By MD.HELAL UDDIN (112001306)

SCM 611- Supply Chain Planning & Control

Forecasts of future demand are essential for making all critical supply chain decisions

Introduction Effective future demand planning and forecasting across the supply chain can bring a host of benefits. Specifically, it can help improve labor productivity, reduce head count, cut inventories, speedup product flows, and increase revenues and profits. Forecasting A demand forecast is the prediction of what will happen to your company's existing product sales. It would be best to determine the demand forecast using a multi-functional approach. The inputs from sales and marketing, finance, and production should be considered. The final demand forecast is the consensus of all participating managers. You may also want to put up a Sales and Operations Planning group composed of representatives from the different departments that will be tasked to prepare the demand forecast. 1. Statistical Forecasts Estimating the likelihood of an event taking place in the future, based on available data. Statistical forecasting concentrates on using the past to predict the future by identifying trends, patterns and business drives within the data to develop a forecast. This forecast is referred to as a statistical forecast because it uses mathematical formulas to identify the patterns and trends while testing the results for mathematical reasonableness and confidence Statistical forecasts are very much based on actual data created from system transactions. Many organizations choose to utilize specialist forecasting software that commonly take data from the ERP system and extrapolate it into a future demand profile. For many organizations this data analysis is supported by what is known by the organization (i.e. market intelligence) to tune the demand profile into what is thought to be realistic. Data integrity is obviously key for organizations following this approach and the benefits include that the organization is basing its forecast on non-subjective transactional data (often that which is happening in real time) the forecast is configured in such a way that the forecasting solution can deliver a number of outputs or models depending on preconfigured criteria.

SCM 611- Supply Chain Planning & Control

Forecasts of future demand are essential for making all critical supply chain decisions

2. Non Statistical Forecasts Another method of forecasting is without the use of statistical data. These are forecasts that have been devised from subjective estimates of what demand might be. The forecast may take a number of inputs from previous demand through to market intelligence but is often based on current or near term demand. The non-statistical forecasts can take into account sudden changes in production, sudden fluctuations that are not based on statistics, so there are times when both types of forecasts are required.

Importance for Forecasting in Supply Chain Management Forecasting in business allows companies to make accurate predictions regarding customer demand based on past data. Businesses can use forecasting to estimate sales, demand, the lifetime value of a customer and the supply chain ordering demands of the company. Supply chain management relies on forecasting data to manage the flow of inventory through the organization.

1. Accurate Inventory Levels Accuracy in sales forecasting allows supply chain managers to make accurate predictions in the level of inventory required to meet customer demand. An organization that practices lean philosophies must have the ability to make accurate predictions on the level of inventory necessary to produce products. Lean management requires the company to keep the lowest level of inventory in stock to meet the demand. With lower levels of inventory, the accuracy of the amount stored on hand becomes even more important. Inaccurate forecasts can result in overstocking or stock outs. Purchasing, planning and production rely on accurate inventory levels. 2. Timing of Deliveries Forecasting sales help a company predict the timing of increases or decreases in inventory needs. For example, forecasting may use historical sales data to show an increase in demand during specific times of the year. The company can prepare to increase the inventory levels during those times. Likewise, the company can plan to decrease inventory levels during times of forecasted demand decreases. 3. Improved Customer Satisfaction The accuracy of the inventory levels established through sales forecasting prevents stock outs or overstocking inventory. Stock outs can lead to late deliveries and decreasing

SCM 611- Supply Chain Planning & Control

Forecasts of future demand are essential for making all critical supply chain decisions

customer satisfaction. Consistent late deliveries may drive customers to competitors, which decreases sales for the organization as well. 4. Cost Savings Forecasting that leads to accuracy in purchasing, planning and inventory levels can also provide savings to the organization. Spending on excessive inventory prevents the organization from making investments in the company that could lead to growth and development. Smaller quantities of inventory allow the company to remain flexible and quickly respond to changes in customer demand. Produce that what customer demand It is very important to understand/forecast the customer demand/needs. Many times some company tries to sale what they produce which is wrong. Disadvantage of forecasting It is not possible to accurately forecast the future. Because of the qualitative nature of forecasting, a business can come up with different scenarios depending upon the interpretation of the data. For this reason, organizations should never rely 100 percent on any forecasting method. However, an organization can effectively use forecasting with other tools of analysis to give the organization the best possible information about the future. Making a decision on a bad forecast can result in financial ruin for the organization, so an organization should never base decisions solely on a forecast. Conclusion Being able to estimate material needs is a crucial activity for those companies looking to have available stock to cover customer requirements rather than making product to order. However, forecasting is obviously difficult, simply because it is not an exact science and it as the supply chain is subject to sudden changes, difficulties and external factors forecasts must be maintained. It should be reviewed by management on a regular basis. This is to ensure that information on future trends, the internal or external environment is incorporated into the forecast to give a more accurate calculation.

SCM 611- Supply Chain Planning & Control

Forecasts of future demand are essential for making all critical supply chain decisions

Reference:

Forecasting In The Supply Chain By Martin Murray, About.com Guide http://logistics.about.com/od/strategicsupplychain/a/Forecasting.htm Introduction To The Role Of Forecasting Filed Under Articles http://supplychain-mechanic.com/?p=251

What Is Demand Planning? http://supplychain-mechanic.com/?p=194

Importance for Forecasting in Supply Chain Management, eHow.com; http://www.ehow.com/info_8462890_importance-forecasting-supply-chainmanagement.html#ixzz1qTRPTfD4 Essentials of Supply Chain Management, eHow.com; http://www.ehow.com/info_8172111_essentials-supply-chainmanagement.html#ixzz1qTS6eeAA

Definition of forecasting http://www.investopedia.com/terms/f/forecasting.asp#axzz1qyOMBECc Advantage and disadvantage of Forecasting by Brian Bass http://smallbusiness.chron.com/advantages-disadvantages-forecasting-methodsproduction-operations-management-19309.html

SCM 611- Supply Chain Planning & Control