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Demand Forecasting
Knowledge and Skills Needed for Competency Elements 1 and 2
The information included in this document is to help you prepare for the evaluation of competency elements 1 and 2. After studying this section you should: be able to explain what demand forecasting is be able to explain why demand forecasting is important know the various methods that are used for demand forecasting be able to use the historical demand forecasting method to predict future inventory needs

Introduction A. Demand Forecasting

Demand forecasting is used to predict future product and service demands so that we can supply our clients orders quickly and effectively. It defines which products will be required, the amount of these products, and when they are needed. It is the basis for companies to plan their internal operations.

B. The Importance of Demand Forecasting

Demand forecasting also helps us to control our inventory. The aim is to provide reliable, quality service to our clients while minimizing our inventory costs and maximizing our profit. We can use demand forecasting to balance our inventory. We want enough inventory to be able to supply our clients, but not too much, as this can be wasteful.

Champlain College Transportation and Logistics RAC: BJ72: Demand Forecasting

1. Positive Features of a Well-Balanced Inventory/Good Demand Forecasting: The convenience of having products available when required To provide and maintain good customer service To reduce costs through optimum purchase quantities To counter mistakes in planning To make provisions for sales/production fluctuations 2. Negative Features of an Unbalanced Inventory/Poor Demand Forecasting: It ties up capital It affects cash-flow It affects flexibility It costs money to store It costs money to handle It costs money to manage It can be lost, stolen or destroyed It usually depreciates in value It can mask poor quality: there is always another unit available It can mask poor planning: you stock everything in large quantities just in case it is needed It can mask poor relationships with suppliers: you cant rely on your suppliers and are worried that they will deliver late or deliver the wrong product 3. Limitations of Demand Forecasting: Demand forecasting is not a perfect science and we can rarely predict future needs with 100% accuracy. The reasons for this are that past patterns dont always continue into the future, past pattern are not understood correctly and that random fluctuations in demand and the market prevent patterns from being recognized. Therefore, it is usual to accept a margin of error, such as plus or minus 10% in your forecasting.

Champlain College Transportation and Logistics RAC: BJ72: Demand Forecasting

C. Methods of Demand Forecasting

There are numerous methods of demand forecasting that can be used to control inventory. These are listed below with an explanation of their use. Note, you will only have to use the Time Series demand forecasting method in the RAC evaluation, but you are required to know all demand forecasting methods. Method 1: Time Series Analysis This is based on the assumption that the item being forecasted follows a similar pattern over time. The forecaster must identify this pattern to develop his / her forecast. The basic elements of this pattern are: Constant value Trend Seasonal variations Cyclical variations Random variations Turning points Time series forecasting techniques include simple moving averages, weighted moving averages and exponential smoothing.

Method 2: Qualitative Qualitative forecasting consists of gathering opinions from a variety of people, then applying their own judgment. This technique is best used when there is not sufficient historical data.

Method 3: Causal This is the application of leading indicators to create a forecast; it assumes demand is strongly related to these indicators. Mortgage rates, for instance, strongly affect the purchase of new homes.

Method 4: Simulation Simulation forecasting combines the causal and time series methods; it is often used when creating what-if scenarios.
Champlain College Transportation and Logistics RAC: BJ72: Demand Forecasting

See website for exercises to practice using the Time Series Analysis method of demand forecasting.

Self-Evaluation
Use the information in the table below to help you check your understanding of the material in this section. Knowledge/Skills I can explain what demand forecasting is I can explain why demand forecasting is important I know the various methods that are used for demand forecasting I can use the time series demand forecasting method to predict future inventory needs Yes I need to study more

Champlain College Transportation and Logistics RAC: BJ72: Demand Forecasting