3.1 Forecasting Methods and Techniques

Forecasting methods are crucial tools in supply chain management, helping businesses predict future demand and plan accordingly. Qualitative methods rely on expert opinions and intuition, while quantitative techniques use historical data and statistical models to generate forecasts.

Time-series forecasting techniques like moving averages and exponential smoothing analyze patterns over time. Selecting the right method depends on factors such as data availability and time horizon. Evaluating forecast accuracy through metrics like MAD and MAPE ensures continuous improvement in supply chain planning.

Forecasting Methods and Techniques

Qualitative vs quantitative forecasting methods

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• Qualitative forecasting methods
  • Based on subjective judgment and expert opinions rely on intuition and experience
  • Suitable for new products or markets with limited historical data lack quantifiable information
  • Delphi method uses iterative expert surveys to reach consensus
  • Market research gathers consumer insights through surveys and focus groups
  • Executive opinions leverage management expertise to forecast future trends
• Quantitative forecasting methods
  • Based on historical data and mathematical models use statistical techniques
  • Suitable for established products or markets with sufficient historical data require numerical inputs
  • Time series analysis examines patterns over time (seasonal sales fluctuations)
  • Regression analysis identifies relationships between variables (price vs demand)
  • Econometric models incorporate multiple economic factors (GDP, inflation)

Time-series forecasting techniques

• Moving average
  • Simple moving average (SMA)
    • Calculates average of most recent n periods smooths out short-term fluctuations
    • Formula: $SMA = \frac{\sum_{i=1}^n X_i}{n}$
    • Used for stable demand patterns (staple grocery items)
  • Weighted moving average (WMA)
    • Assigns different weights to each period emphasizes recent data
    • Formula: $WMA = \frac{\sum_{i=1}^n w_i X_i}{\sum_{i=1}^n w_i}$
    • Useful for trends with recent changes (fashion items)
• Exponential smoothing
  • Simple exponential smoothing
    • Formula: $F_{t+1} = \alpha Y_t + (1-\alpha)F_t$
    • α is the smoothing constant (0 < α < 1) determines weight of recent observations
    • Suitable for data without clear trend or seasonality (daily retail sales)
  • Double exponential smoothing (Holt's method)
    • Accounts for trends in data uses separate smoothing for level and trend
    • Effective for forecasting with consistent upward or downward trends (technology adoption)
  • Triple exponential smoothing (Holt-Winters method)
    • Accounts for trends and seasonality incorporates three smoothing equations
    • Ideal for data with both trend and seasonal patterns (holiday retail sales)
• Trend analysis
  • Linear trend
    • Formula: $Y = a + bX$
    • Assumes constant rate of change over time (population growth)
  • Non-linear trends (exponential, logarithmic, polynomial)
    • Capture more complex patterns in data
    • Exponential trend for rapid growth (viral content spread)
    • Logarithmic trend for diminishing returns (market saturation)

Selection of forecasting methods

• Factors to consider when selecting forecasting methods:
  • Data availability and quality determines method feasibility
  • Time horizon (short-term, medium-term, long-term) influences forecast accuracy
  • Pattern in historical data (trend, seasonality, cyclical) guides technique selection
  • Cost and complexity of implementation balances resources and benefits
  • Required accuracy level aligns with business objectives
• Impact of choosing the right method:
  • Improved decision-making leads to better strategic planning
  • Better resource allocation optimizes inventory and production
  • Enhanced supply chain performance increases efficiency and customer satisfaction

Evaluation of forecasting accuracy

• Mean Absolute Deviation (MAD)
  • Measures average absolute difference between forecast and actual values
  • Formula: $MAD = \frac{\sum_{i=1}^n |A_i - F_i|}{n}$
  • Lower MAD indicates better accuracy
  • Used to compare forecasts in same unit of measurement (units sold)
• Mean Absolute Percentage Error (MAPE)
  • Expresses forecast error as a percentage
  • Formula: $MAPE = \frac{100\%}{n} \sum_{i=1}^n |\frac{A_i - F_i}{A_i}|$
  • Allows comparison across different scales
  • Useful for comparing forecast accuracy across product lines
• Other accuracy metrics:
  • Mean Squared Error (MSE) penalizes large errors more heavily
  • Root Mean Squared Error (RMSE) provides error measure in original units
  • Tracking Signal monitors bias in forecasting model
• Importance of continuous monitoring and adjustment of forecasting models
  • Regular performance reviews ensure ongoing accuracy
  • Model recalibration adapts to changing market conditions
  • Combining multiple forecasting methods often improves overall accuracy