Introduction To Demand Forecasting Business Essay

Introduction To Demand soothsaying Business EssayIntroduction to Demand ForecastingForecasting provides an estimate of next make and the basis for think and hearty business decisions. Since all organizations deal with an un get byn future, some error amid a image and actual subscribe to is to be pass judgment. Thus, the goal of a good vaticination technique is to minimize the deviation between actual expect and fancy. Since a forecast is a prediction of the future, factors that influence aim, the extend to of these factors, and whether these factors bequeath continue influence future demands must be considered in interrupting an right forecast. In addition, buyers and sellers should component all relevant information to generate a single consensus forecast so that the correct decision on the provision and demand muckle be made. The benefits of a better forecast atomic number 18 lower inventories, reduce p atomic number 18nthood outs, smoother production plans, re duced costs and improved customer service. (Wisner, Tan, Leong, 2008)The impact of a execrable communication and inaccurate forecast resonates all along the release image and results the bull whip effects causing source outs, baffled sales, high cost of take stock and obsolesce, stuff shortages, poor responsiveness to market dynamics, and poor profitability. (Wisner, Tan, Leong, 2008)Matching depict And DemandThe concept of matching supply with demand is straightforward. Just strike the change surface out balance between what your customers want and the inventory investment undeniable to meet that demand. Demand forecasting may be apply in do pricing decisions, in assessing future efficacy requirements, or in making decisions on whether to enter a cutting market.Now a day business scenario is completely channelize revived. Demand, supply, logistics, whole supply chain direction. Now we have consumer who are more(prenominal) foc utilise demanding. Whole buying demeanor is turn into pull behavior where suppliers are more concern about consumers demand. Now a day retailer if supplier do not sound fill the target requirement of retailer of correct quantity, right time right worth that retailer would not wait long for supplier to follow up requirement rather prefer to switch supplier. (Wisner, Tan, Leong, 2008)Here matching supply demand forecast help any lodge to slice the threat of stock out, sales, customer relationship, business loyalities.in order to achieve sound supply chain, supplier must have forecast the future conditions so they can meet the expected targets deliver right commodities to its customers in a timely manner cost effective approach. (Wisner, Tan, Leong, 2008)Of course, its not that easy. Buying too much wastes time, money and space-and exposes you to potential losses from liquidating overstocks. Underestimating demand leads to backorders, cancellations and unsatisfied customers who turn to your competitors . Incorporating SCM no-hitly leads to a spick-and-span kind of competition on the global market where competition is no semipermanent of the company versus company form but rather takes on a supply chain versus supply chain form. (decisioncraft.com)The primary object of supply chain management is to follow through customer demands through the most efficient use of resources, including distribution capacity, inventory and labor. In theory, a supply chain seeks to match demand with supply and do so with the minimal inventory. Various aspects of optimizing the supply chain include liaising with suppliers to refuse bottlenecks sourcing strategically to strike a balance between lowest veridical cost and transportation, implementing JIT (Just In Time) techniques to optimize manufacturing flow maintaining the right mix and location of factories and warehouses to serve customer markets, and using location/allocation, vehicle routing analysis, dynamic programming and, of course, hand ed-down logistics optimization to maximize the efficiency of the distribution side. (decisioncraft.com)The effects that inventory aims have on sales. In the extreme case of stock-outs, demand coming into your store is not converted to sales out-of-pocket to a lack of availability. Demand is similarly untapped when sales for an item are decreased due to a poor display location, or because the desired sizes are no longer available. (Wisner, Tan, Leong, 2008)Demand for an item will likely rise if a competitor step-ups the price or if you promote the item in your weekly circular. The resulting sales increase reflects a change in demand as a result of consumers responding to stimuli that potentially twit additional sales. In this case demand forecasting uses techniques in causal modeling. Demand forecast modeling considers the size of the market and the dynamics of market share versus competitors and its effect on firm demand over a spot of time.No demand forecasting method is 100 % accurate. Combined forecasts improve the true and reduce the likelihood of large errors. (Wisner, Tan, Leong, 2008)Purposes of ForecastingPurposes of Short-Term ForecastingAppropriate production scheduling.Reducing costs of purchasing raw materials.Determining appropriate price policySetting sales targets and establishing controls and incentives.Evolving a suitable advertising and promotional campaign.Forecasting short term financial requirements.Purposes of Long-Term Forecasting mean of a new unit or expansion of an existing unit.Planning long term financial requirements.Planning man-power requirements.(webcache.com)Length of ForecastsShort-term forecasts up to 12 months, e.g., sales quotas, inventory control, production schedules, planning cash flows, budgeting.Medium-term 1-2 years, e.g., rate of maintenance, schedule of operations, and budgetary control over expenses.Long-term 3-10 years, e.g., capital expenditures, personnel requirements, financial requirements, raw mate rial requirements.(Most uncertain in nature)(webcache.com)Control Demand or Management ofDemandThe key to management of demand is the effective management of the purchases of final consumers.The management of demand consists in devising a sales strategy for a disperseicular product. It also consists in planning a product, or features of a product, around which a sales strategy can be built. Product design, model change, packaging and even performance reflect the need to provide what are called strong marketing points. (webcache.com)Forecasting TechniquesUnderstanding that the forecast is very often inaccurate does not mean that nothing can be done to improve e the forecast. two quantitative and qualitative forecast can be improved by seeking inputs from trading partners. Qualitative forecasting methods are establish on opinions and cognizance whereas quantitative forecasting methods use mathematical models and relevant historical data to generate forecast.Qualitative MethodsThe qualitative methods are subdivided into. The four common qualitative forecasting models are,Jury Of Executive OpinionQualitative forecasting in which a group of senior management executives who are knowledgeable about the market, competitors, and the business environs collectively breaked the forecast.Delphi MethodQualitative forecasting in which a group of internal and away experts are surveyed during several rounds in term of future events and long term forecasts of demand the group members do not physically meet.Sales Force CompositeQualitative forecast generated found on the sales forces knowledge of the market and estimates of the customers need.Consumer SurveyA questioner administered through telephone, mail, internet, or personal interviews that seeks inputs from customers on important issues much(prenominal) as future buying habits, new product ideas, and opinions about existing products. (Wisner, Tan, Leong, 2008)Quantitative MethodsTime series forecasting is based on the assumptions that the future is an extension of the past, thus, the historical that can be used to predict future demands. The components of time series data are,Trend VariationsEither increasing or decreasing ,movements over many years that are due to factors such as population growth, population shifts, cultural changes, and income shifts.Cyclical VariationsWave like movements that are longer than a year and influenced by macro economical and political factors.Seasonal VariationsPeaks and valleys that repeat over a constant interval such as hours ,days, weeks, months, years, or seasons.Random VariationsRandom peaks and valleys those are due to surprising or unpredictable events such as natural disasters (hurricanes, tornadoes, fire) strikes, and wars.(Wisner, Tan, Leong, 2008)Collaborative Planning, Forecasting and Replenishment (CPFR)Voluntary Inter industry Commerce Standards (VICS),a New Jersey based Association defines Collaborative Planning, Forecasting and Replenishme nt(CPFR) as, a business practice that combines the brainpower of two or more trading partners in planning the ways to fulfill the customer demand. They also explained the relationship that CPFR links better practices of sales and marketing, such as category management, to the implementation of supply chain planning and completion process, to increase availability while reducing inventory, transportation and logistics costs.Basically CPFR is an approach that deals with the requirements for good demand management. The most involved industries with CPFR are consumer products and food and beverage. (Collaborative Planning,Forecasting Replenishment CPFR)Objective of CPFRThe objective of CPFR is to optimize the supply chain process byImproving accuracy of forecasting demandDelivering the right product at the right time to the right locationReducing inventoryAvoiding stock outsImproving customer serviceBut the most important fact on which the achievement of objective and activities of CP FR numerate is to have collaborative trading partners who share risk and information mutually in the whole process.Without Collaborative planning and forecasting between the trading partners will make the supply chain suboptimal, thus will result in less-than-maximum supply chain profits. (Wisner, Tan, Leong, 2008)Real value of CPFRIt is observed that forecasting developed and by firm tends to be inaccurate most of the time so therefore in CPFR when both the buyer and seller collaborate in forecasting, consequently it makes possible to match buyer needs with supplier production plans, thus ensuring competent replacement. CPFR also helps in avoiding expensive corrections after the fact when demand or promotions have changed. (Wisner, Tan, Leong, 2008)Benefits of CPFRStrengthens supply chain partner relationshipsProvides analysis of sales and order forecast which improves the forecast accuracyManage the demand chain and proactively eliminate problems before they appearAllow coll aboration on future requirements and plansCombine planning, forecasting and logistic activitiesProvides efficient category management and understanding of consumer purchasing patterns (Wisner, Tan, Leong, 2008) vitrine 1West Marine is one of the companies that has greatly benefited by implementing CPFR.They had CPFR relationships with 200 suppliers, 85 percent forecast accuracy, and 80 percent on-time shipments.For CPFR success collaboration with external part is important, and it is equally important that effective collaboration within the company is emphasized. For example logistics, planning and replenishment personnel must work closely together. guinea pig 2CPFR was also implemented by ITTs Jabsco division, West Marines largest customer. During the process they experienced a reduction in cycle time from twenty-five days to triplet days, an increase in total sales of 11 percent, and a great improvement in on-time deliveries from 74 to 94 percent.Example 3Wal-Mart is one of the earliest implementer of CPFR. CPFR enabled Wal-Mart to move into Just-in-Time (JIT) system that resulted in significant savings in inventory carrying costs for Wal-Mart, as well as its suppliers.Example 4In former(a) 1990s, most of the large American-based multinational companies such as Procter Gamble (PG) and Wal-Mart enter into a system called Collaborative Planning, forecasting and Replenishment. (Williams)Challenges for CPFR implementationThere are overtake three difficulties faced by organizations in implementing CPFRMaking internal changes Internal changes must always be tackled by top management as change is always difficult but if the top management is dedicated to the project and in educating employees about the benefits of CPFR then there are more chances of getting a successful internal change.Total implementation cost Although cost is an important factor to be considered always but companies must determine whether they are at a competitive disadvantage.Trust is one of the biggest hurdles in general implementation of CPFR as many retailers are unwilling to share the information required to implement CPFR. For example Wal-Mart may be willing to share their sensitive data with the Wal-Mart only as they do not want other suppliers to know their information.(Wisner, Tan, Leong, 2008)Emerging TrendsCompanies are finding new and innovative ways to collaborate. For example, Procter and Gamble has implemented CPFR not only with some of its retail customers, but also with its suppliers, and even inside the company, between functions and divisions. (Sheffi, 2002)Standard CPFR Trading Partner ProcessesSource 2008 Hypatia Research, LLC.(Collaborative Planning,Forecasting Replenishment CPFR)CPFR Key TenetsThe consumer is the ultimate focus of all effortsBuyers (retailers) and sellers (manufacturers) collaborate at every levelJoint forecasting and order planning reduces surprises in the supply chainThe timing and quantity of physical flows is synchronized across all partiesPromotions no longer serve as disturbances in the supply chain censure management is systemized (Edward, 2003)CPFR Process ModelThe CPFR reference model provides a framework for planning, forecasting and replenishment process. Figure below represents the framework components. A buyer and a seller work as Collaboration Partners and work together to satisfy the customer demand which at the centre of the model.http//www.sql-server-performance.com/admin/article_images_new/2008_images/BI_Collaborative_Planning_Forecasting_Replenishment/Image1.jpgThe key CPFR activities to enhance performance of Collaboration partners are 1.Strategy Planning Establish the rules for collaborative relationship. Determine the product mix and develop event plans for the period.2.Demand and Supply Management Project consumer (POS) demand, as well as order and shipment requirements over the planning period.3.Execution Place orders, fig up and deliver shipments, receive and stock products in retail stores, record sales transactions and make payments.4.Analysis Monitor planning and execution activities for exception conditions. heap up results and calculate KPIs. Share insights and adjust plans for better performance. (www.ncsm.edu)CPFR Tasks in DetailTo understand in greater detail what businesses and their trading partners need to plan as part of their collaboration activities we need to analyze the tasks under from each one of the four identified Collaboration Activities. The collaborations tasks and their mapping to collaboration activities is entrustn in the table below CPFR performance Task MappingCPFR ActivityCPFR TaskTrading PartnersStrategy PlanningCollaboration Arrangement Joint Business PlanManufacturer, RetailerDemand Supply ManagementSales Forecasting graze Planning/ForecastingManufacturer, RetailerExecutionOrder GenerationOrder FulfillmentManufacturer, RetailerAnalysisException ManagementPerformance AssessmentManufacturer, Retailer(www.12manage.c om)(www.ncsm.edu)CPFR in ActionOrganizations can begin with successful CPFR with cooperation and timely plans. This combined approach helps all the trading partners such as retailers and manufacturers to unite in a formal agreement to perform the supply chain processes and establish a joint business plan. The CPFR softwares enables manufacturers, distributors and retailers to make the right decision about the material, stock and other resources required before placing the final order.CPFR is one of the powerful tools as it supports the whole supply chain process followed by nine steps defined as (Edward, 2003) manikin I PlanningIn this phase, the emphasis is on developing element of trust between the hatful so that they give devoted work at distinct stages and processes. All types of barrier should be removed by the companys top management such as cultural barriers so that employees may feel comfortable working with them and will remain motivated towards their task performance.Fi rstly, the trading partners must clearly share their identities and processes in order to make a stronger bond between them, thus, the strong relationship will later help in setting a standard benchmark with mutual acceptance making more chances to be successful in achieving their organization targets. (Edward, 2003)There are two major steps that make up a front-end agreement and a joint business plan.measure 1 obtaining Collaboration AgreementThe Business Intelligence modules allow partners to define and measurement specific KPIs. Web Planning ensures that all partners have access to the information simultaneously, while the Portal makes all the data and information visible across the supply chain. (Edward, 2003)The buyers and sellers must agree on the objectives of collaboration, ground rules, for resolving disagreements, confidentiality of information to be shared, sales forecast exception criteria, review cycle, time frame, and frozen time period with acceptable tolerance, fi nancial incentives and success metrics. (Wisner, Tan, Leong, 2008)Step 2 Crafting a Joint Business PlanA joint business plan is developed by sharing the companies business strategies and plans. The plan typically involves developing a joint product category and promotional plan in which the appropriate category strategies inventory policies, promotional activities, and pricing policies are specified. (Wisner, Tan, Leong, 2008)The front-end agreement should produce a long-term pact spanning the life of the business. Obviously, an enormous amount of information will flow between partners. Who should get what? When? Where? How much should they get (Edward, 2003)Phase II ForecastingThe J.D. Edwards CPFR solution begins with a collaborative forecast of end-user demand and continues through all aspects of supply chain planning, providing support for both long-term and day-to-day decisions. In Phase II, an organization creates the sales forecast, which then feeds into the order forecast . (Edward, 2003)Step 3 Forecasting Sales utilize the Demand Forecasting application, organizations can build multi-dimensional models, which may include product hierarchies, geographies, channels, and specific customers. Causal variables such as pricing, promotions, and new store openings can also be completely integrated. In addition, historical data can be combined with near real-time variations in the channel to get the most accurate forecast. (Edward, 2003)Either partner or both partners may generate the sales forecast. The forecasting techniques used can be qualitative or quantitative. When both partners each generate a forcast, middleware is used to highlight the difference, based on predetermined exception criteria previously agreed upon by the partners. (Wisner, Tan, Leong, 2008)Steps 4 and 5 Collaborating to Develop a Shared ForecastBeginning with Demand Forecastings statistical forecast, users can make changes to an existing forecast or import their own forecast based on the most up-to-date information.Multiple forecasts can be reconciled using a powerful algorithm that takes into account the historical accuracy of different forecast contributors. Exceptions are easily identified and messages are sent to reconcile unusual items.Examples of sales forecast exception criteria are retail in stock is less then 95 %, sales forecast error is greater the 20 %, the difference in sales forecast from the same period of the previous year is greater then 10%, or any changes that have occurred in timing of promotional active stores, The real-time joint decision making reduces the risk increase the confidence in the single forecast. (Wisner, Tan, Leong, 2008)Each contributor (partner, supplier, and customer) becomes an integral part of the real-time collaborative process. The final enterprise forecast is the conclave of the most accurate and timely information available.(Edward, 2003)Step 6 Forecasting OrdersThe order forecast relies on point-of-sale (POS) data , causal information, and inventory strategies to generate a specific forecast that supports the shared sales forecast. Actual volume numbers are time-phased and reflect inventory objectives sorted by product and receiving location. The order forecast allows the manufacturer to allocate production capacity against demand while minimizing safety stock.J.D. Edwards supports this process by systematically aligning production capacity and scheduling items to give retailers increased confidence that orders will be delivered. With return and Distribution Planning, it is possible to break down the sales forecast by sales period, sales region, and to more specific levels, such as individual stores. The order forecast integrates the sales forecast with order requirements to develop specific demand at retail level. Production and Distribution Planning ensures that the right product is built and delivered to the right aisle of the right store at the right time.In turn, Production and Distribu tion Planning works with Production Scheduling, breaking down production requirements on a daily or even hourly basis to ensure that the correct capacity and throughput are optimized to fill the necessary order. Operating through real-time collaboration reduces the uncertainty between trading partners and leads to consolidated supply chain inventories.Inventory levels are decreased, customer responsiveness is increased, and a platform for continual improvement among trading partners is established.(Edward, 2003)Steps 7 and 8 Identifying and Resolving ExceptionsIdentifying exceptions, determines what items fall outside the order forecast constraints established by the partners. The result is a list of exception items that are identified using the criteria established in the front-end agreement.Step eight, resolving exceptions, involves the process of canvas order forecast exceptions by querying shared data and submitting results to changes in the order forecast. Once again, the gui delines set down in the front-end agreement (or negotiations among partners) determine how those exceptions are resolved. (Edward, 2003)Phase III ExecutingDuring the final CPFR phase, front-end planning and forecasting come together with supply chain execution. Through J.D. Edwards collaborative CPFR solution, the order is generated and committed to delivery, enabling successful order delivery execution.Step 9 Generating OrdersThe final step in the CPFR process is generating the order and promising the delivery. The essence of maintaining positive relationships with partners and customers is to deliver on promises.Order Promising tags inventory (or raw materials) and addresses production schedules and transportation constraints to ensure that the product is ready when needed. Using Order Promising, companies can instantly determine where orders can best be satisfied from inventory at any location, planned production orders, or purchase receipts. When there is a promotion (such as a new store opening or product launch), Order Promising allows companies to quote future delivery dates or other key information related to the event. (Edward, 2003)Step 10 Executing to the CPFR PlanAlthough order generation is the ninth and final step of the formal CPFR model, the process doesnt end there. In effect, there is a 10th step involving execution of the order. This is whereJ.D. Edwards distinguishes itself. Once CPFR planning is complete, the model can feed data directly into J.D. Edwards Supply Chain Execution applications. Manufacturing, warehousing, order fulfillment, and transportation plans are completely synchronized into an integrated package to monitor and ensure on-time execution of the order delivery process.(Edward, 2003)ConclusionProper demand forecasting enables better planning and utilization of resources for business to be competitive. Forecasting is an integral part of demand management since it provides an estimate of the future demand and the basis for planning and making sound business decisions. A mismatch in supply and demand could result in excessive inventory and stock outs and loss of profit and goodwill. Both qualitative and quantitative methods are available to help companies forecast demand better. Since forecasts are seldom completely accurate, management must monitor forecast errors and make the necessary improvement to the forecasting process.Forecast made in isolation tend to be inaccurate. Collaborative planning, forecasting, and replenishment are an approach is which companies work together to develop mutually agreeable plans and take responsibility for their actions. The objectives of CPFR is to optimize the supply chain by generating a consensus demand forecast, delivering the right product at the right time to the right location, reducing inventories, avoiding stock outs, and improving customer services. Major corporations such as Wall-Mart, Warner-Lambert, and Proctor Gamble are early adopters of CPFR. Althoug h the benefits of CPFR are well recognized, astray spread adoption has not materialized.