Chapter 7: Demand Forecasting in a Supply Chain Supply Chain Management, 6/e, Global

Edition

Chapter 7 Discussion Questions

1. Is Dell adapting the pull or push processes, or a combination of the two, in its
supply chain demand forecasting?

Pull processes are initiated by a customer order whereas push processes are
initiated and performed in anticipation of customer orders. For pull processes, we
must plan the level of available capacity and inventory but not the actual amount.
However, we must plan the level of activity in case of push processes.
Dells build-to-order model adapts both pull and push processes where individual
components are determined by forecasting (push) but final assembly is basically
determined by customer request (pull).

2. Briefly describe the major characteristics of forecasts in supply chain

management.

There are four major characteristics of forecasts: (1) forecasts are usually not
accurate and hence it should provide a measure of forecast error; (2) short-term
forecasts are more accurate than long-term; (3) aggregate forecasts are more
accurate than disaggregate forecast as they tend to have a smaller standard
deviation of error relative to the mean; and (4) greater distortion of information
would be expected for going farther up the supply chain.

3. What role does forecasting play in the supply chain of a mail order firm such as
LL Bean?

LL Bean has historically operated almost exclusively in a make-to-stock mode

and with very few exceptions, stocked products that did not go out of style as
rapidly as many other clothing and accessory lines. A pre-worldwide web
existence would have relied on communication with manufacturers about what
products might be featured on the front of their catalog. The lead times involved
in printing and distributing the catalog and producing the product line were such
that elaborate planning and forecasting tools were not required. A quick visit to
the web site demonstrates that this is changing; the featured products on the web
site can be changed daily or programmed to rotate each time the web page is
refreshed. LL Bean and their supply chain, including the logistics component, are
well aware of the demand forecast and can all receive sales data as orders are
placed. LL Bean probably has an extranet to communicate sales data with
suppliers and allows customers to create accounts to manage purchases, wish lists,
and track orders.

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Chapter 7: Demand Forecasting in a Supply Chain Supply Chain Management, 6/e, Global
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4. Discuss any four forecasting methods. Which one is more suitable in cold supply
chain management?

(1) Qualitative forecasting methods are primarily subjective and rely on expert
judgment; (2) time series forecasting makes use of historical demand to predict
the future; (3) causal forecasting methods assume demand forecast is correlated
with certain functions of the environment; and (4) simulation forecasting methods
try to imitate consumer choices in demand. It is hard to decide which one is
suitable in cold supply chain management but multiple forecasting methods
usually work better than any single one.

5. As a supply chain manager, do you need to forecast the random component of the
observed demand for products that displays seasonal demand?

Observed demand can be divided into two parts: the systematic component and
the random component. The random component is the part of the forecast that
deviates from the systematic part. Though a company can predict the size and
variability of the random component, it is not possible to forecast its direction.
Hence, the company should not forecast the direction of the random component.

6. Identify any six factors that should be taken into consideration when
implementing demand forecasting in a department store.

There are a number of different factors that need to be considered for a

department store during the demand forecasting process. In particular, following
six factors must be understood before selecting an appropriate forecasting
methodology: previous demand history, lead time for different products
replenishment, planned advertising or marketing promotion efforts, planned price
discounts, economic situation, and actions that other department stores
(competitors) have taken.

7. List the five basic steps of demand forecasting in supply chain management.
Which step is more important?

The five basic steps of demand forecasting are: (1) understand the objectives of
forecasting, (2) integrate demand planning and demand forecasting throughout the
supply chain, (3) identify the key factors that affect the demand forecasting
process, (4) forecast at the appropriate level of aggregation, and (5) establish
performance and error measures. All steps are essential and of equally
importance.

8. How do static and adaptive forecasting methods differ?

Static methods assume that the estimates of level, trend, and seasonality within
the systematic component do not vary as new demand is observed. Once these
parameters are estimated, there is no need to adjust them and they can be used for

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Chapter 7: Demand Forecasting in a Supply Chain Supply Chain Management, 6/e, Global
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all future forecasts. In adaptive forecasting, the estimates of level, trend, and
seasonality are updated after each demand observation, that is, as data are
collected, they are incorporated into the forecasting process. Adaptive methods
allow a forecaster to react (or overreact) to recent developments. Should a
disruptive technology affect demand, the adaptive forecast will respond
immediately, albeit dragging several historical data points along for the ride. The
static approach would not take this new data into account and presumably the
forecasts would suffer. We would like to think that a forecaster using an invalid
static method would recognize its futility in light of a paradigm shift, but painful
personal experience suggests otherwise.

9. What information do the MSE, MAD, and MAPE provide to a manager? How
can the manager use this information?

A measure of forecast accuracy is the mean absolute deviation (MAD). To

compute the MAD, the forecaster sums the absolute value of the forecast errors
and then divides by the number of forecasts ( |FE| N). By taking the absolute
value of the forecast errors, the offsetting of positive and negative values are
avoided. This means that both an over forecast of 50 and an under forecast of 50
are off by 50. When compared to the result of other alphas, the forecaster will
know that the alpha with the lowest MAD is yielding the most accurate forecast.
Mean square error (MSE) can also be utilized in the same fashion. MSE is the
sum of the forecast errors squared divided by N-1 [((FE)) (N-1)]. Squaring the
forecast errors eliminates the possibility of offsetting negative numbers, since
none of the results can be negative. As with MAD, the forecaster may compare
the MSE of forecasts derived using various values of alpha and assume the alpha
with the lowest MSE is yielding the most accurate forecast.

The mean absolute percent error (MAPE) is the average absolute percent error. To
arrive at the MAPE one must take the sum of the ratios between forecast error and
actual demand times 100 (to get the percentage) and divide by N [( | Actual
demand forecast | Actual demand) 100 N]. As with MAD and MSE, the
lower the relative error the more accurate the forecast.

It should be noted that in some cases the ability of the forecast to change quickly
to respond to changes in data patterns is considered to be more important than
accuracy. Therefore, one's choice of forecasting method should reflect the relative
balance of importance between accuracy and responsiveness, as determined by
the forecaster.

10. What information do the bias and TS provide to a manager? How can the
manager use this information?

Bias is the sum of the forecast errors [(FE)]. If one assumes that a low bias
indicates an overall low forecast error, one could compute the bias for a number
of potential values of alpha and assume that the one with the lowest bias would be

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Chapter 7: Demand Forecasting in a Supply Chain Supply Chain Management, 6/e, Global
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the most accurate. However, caution must be observed in that wildly inaccurate
forecasts may yield a low bias if they tend to be both over forecast and under
forecast (negative and positive). For example, over three periods a firm may use a
particular value of alpha to over forecast by 75,000 units (75,000), under
forecast by 100,000 units (+100,000), and then over forecast by 25,000 units
(25,000), yielding a bias of zero (75,000 + 100,000 25,000 = 0). By
comparison, another alpha yielding over forecasts of 2,000 units, 1,000 units, and
3,000 units would result in a bias of 5,000 units. If normal demand was 100,000
units per period, the first alpha would yield forecasts that were off by as much as
100 percent while the second alpha would be off by a maximum of only 3 percent,
even though the bias in the first forecast was zero.

The tracking signal (TS) is the ratio of the bias and the MAD. If the TS at any
period is outside the range, this is a signal that the forecast is biased and is either
under forecasting or over forecasting. This may happen because the forecasting
method is flawed or the underlying demand pattern has shifted. When demand
has a growth trend and the manager is using a forecasting method such as moving
average the TS will result in a large negative. Because trend is not included, the
average of historical demand is always lower than future demand. The negative
TS detects that the forecasting method consistently underestimates demand and
alerts the manager.

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