Demand Forecasting in a Supply Chain - Part 1

Forecasting future demand is critical to a supply chain managers decision making and planning processes. There are numerous ways of predicting future demand based on historical demand information. More importantly, there are also many ways to forecast demand AND estimate a forecasts accuracy.

Production and distribution decisions are critical for a company's supply chain, but world class firms use forecasts of future demand as the basis for many other decisions made in the "push pull" phase of their supply chain. Important decisions by functional area that depend on demand forecasts include:

- Production: Scheduling, inventory control, aggregate planning.
- Marketing: Sales force allocation, promotions, new product introduction.
- Finance: Plant and equipment investment, budgetary planning.
- Personnel: Workforce planning, hiring, reductions in work force.

Ideally, supply chain decisions should not be segregated by function, as they are highly interrelated - and should be made jointly. Mature products with stable demand are the easiest to forecast. Forecasting and the corresponding management decisions are much more (if not extremely) difficult when either the supply of raw materials or the demand of finished products is highly variable. In highly variable, or seasonal demand environments forecasting demand is critical to make sure a manufacturing firm does not over or under produce, since there is little chance to recover. Ideally supply exactly matches demand.

More on this complex subject tomorrow - Characteristics of great forecasts...

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