The Role of Forecasting in a Supply Chain

Demand forecasts form the basis of all supply chain planning. Consider the push/pull view of the supply chain discussed in Chapter 1. All push processes in the supply chain are performed in anticipation of customer demand, whereas all pull processes are performed in response to cus­tomer demand. For push processes, a manager must plan the level of activity, be it production, transportation, or any other planned activity. For pull processes, a manager must plan the level of available capacity and inventory, but not the actual amount to be executed. In both instances, the first step a manager must take is to forecast what customer demand will be.

A Home Depot store selling paint orders the base paint and dyes in anticipation of customer orders, whereas it performs final mixing of the paint in response to customer orders. Home Depot uses a forecast of future demand to determine the quantity of paint and dye to have on hand (a push process). Farther up the supply chain, the paint factory that produces the base also needs forecasts to determine its own production and inventory levels. The paint factory’s suppliers also need forecasts for the same reason. When each stage in the supply chain makes its own separate forecast, these forecasts are often very different. The result is a mismatch between supply and demand. When all stages of a supply chain work together to produce a collaborative forecast, however, the forecast tends to be much more accurate. The resulting forecast accuracy enables supply chains to be both more responsive and more efficient in serving their customers. Leaders in many supply chains, from electronics manufacturers to packaged-goods retailers, have improved their ability to match supply and demand by moving toward collaborative forecasting.

Consider the value of collaborative forecasting for Coca-Cola and its bottlers. Coca-Cola decides on the timing of promotions based on the demand forecast over the coming quarter. Pro­motion decisions are then incorporated into an updated demand forecast. The updated forecast is essential for the bottlers to plan their capacity and production decisions. A bottler operating without an updated forecast based on the promotion is unlikely to have sufficient supply avail­able for Coca-Cola, thus hurting supply chain profits.

Mature products with stable demand, such as milk or paper towels, are usually easiest to forecast. Forecasting and the accompanying managerial decisions are extremely difficult when either the supply of raw materials or the demand for the finished product is highly unpredictable. Fashion goods and many high-tech products are examples of items that are difficult to forecast. In both instances, an estimate of forecast error is essential when designing the supply chain and planning its response.

Before we begin an in-depth discussion of the components of forecasts and forecasting methods in the supply chain, we briefly list characteristics of forecasts that a manager must understand to design and manage his or her supply chain effectively.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.

2 thoughts on “The Role of Forecasting in a Supply Chain

  1. marizon ilogert says:

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