Independent Demand

Independent demand items are finished

products or parts that are shipped as end
items to customers.
Forecasting plays a critical role
Due to uncertainty- extra units must be
carried in inventory

Dependent Demand
Dependent demand items are raw
materials, component parts, or
subassemblies that are used to produce a
finished product.
MRP systems

Demand Forecasting

Forecast
A statement about the future

Forecasting
Estimating the future demand for product
/services and the resources necessary to
produce them

Forecasting as Planning Tool

Forecasting is the branch of operations management
that addresses uncertainty issues & provides the
manager with set of tools & techniques for
estimation process.
Forecasting are estimates of the timing and
magnitude of occurrence
Forecasting plays a vital role.
An estimation tool
A way of addressing the complex & uncertain
environment
Toll for predicting events related to PCO
A vital prerequisite of planning in organization

Decisions that Need

Forecasts

Which markets to pursue?

What products to produce?
How many people to hire?
How many units to purchase?
How many units to produce?
And so on

Why do we Forecast

Dynamic & complex environments

Short term fluctuations in production
Better material management
Rationalized manpower decisions
Basis for planning & scheduling
Strategic decisions

Types of forecasts
Technological forecasts
Economic Forecasts
Demand Forecasts

Common Characteristics of
Forecasting

Forecasts are rarely perfect

Forecasts are more accurate for aggregated
data than for individual items
Forecast are more accurate for shorter than
longer time periods

Need of demand forecasting

New facility planning

Production planning
Workforce scheduling
Financial planning

Forecasting Time Horizon

Short Term

Medium Term

Long Term

Typical duration

1-3 months

12-18 months

5-10 years

Nature of
decisions

Purely tactical

Tactical as well
as strategic

Purely strategic

Key
considerations

Random effects

Seasonal &
cyclical effects

Long term trends

& business
cycles

Nature of data

Mostly
quantitative

Subjective &
quantitative

Largely
subjective

Degree of
uncertainty

Low

Significant

High

Examples

Revising
Quarterly
production plans

Annual
production
planning

New product
introduction

Forecasting
methods

Rescheduling
supply of raw
material

Capacity
augmentation

Extrapolation of
trends,

Collective
opinion, Time

New location
decision

Technological,Ec
onomic,Judgeme

Design of Forecasting
System

Forecasting Steps

Types of Forecasting Models

Qualitative (technological) methods:
Forecasts generated subjectively by the
forecaster

Quantitative (statistical) methods:

Forecasts generated through mathematical
modeling

Qualitative Methods

Statistical Forecasting
Time Series Models:
Assumes the future will follow same patterns
as the past

Causal Models:
Explores cause-and-effect relationships
Uses leading indicators to predict the future
E.g. housing starts and appliance sales

Composition
of Time Series Data
Data = historic pattern + random variation
Historic pattern may include:

Level (long-term average)

Trend
Seasonality
Cycle

Time Series Patterns

Methods of Forecasting the

Level

Simple Mean
Moving Average
Weighted Moving Average
Exponential Smoothing

Sources of DATA

Sales force estimates

Point of sales(POS)
Forecast from supply chain partners
Trade or Industry association journals
B2B portals/ Marketplaces
Economic survey & Indicators
Subjective Knowledge