Forecasting is based on projecting historical information into the future to provide some type of goal or expectation for system performance. Forecasting can also be based on qualitative reasoning and correlating factors. Regardless of how a projection is made, there will be forecast errors - the difference between what was predicted and the actual result. Forecast errors can be used as feedback to help improve future predictions.
Consider that forecasting can be a feedback process. How would you use forecasting to help you determine your weekly ordering decision of Kentucky Swamp Brew?
Module - Background
Forecasting/EESC
Virtual World
EBBD EMAIL - for Internal Use Only
To: You
From: Danny Wilco
Subject: Re: Forecasting at EBBD
I want to give you a little more information about how we do forecasting and what we would like to know, to help guide you in this project.
Once a month, the Management Team meets to review our monthly financial report and the quarterly results once every three months. After we look at the financial picture in terms of costs and budgets, we look at sales, mostly in terms of volume. We compare the monthly volumes to our latest forecast that we generated in the previous monthly meeting. Then we try to generate the next month's sales forecast and update the quarterly forecast and the annual forecast. Of course this gets easier each month as we approach the end of the year. As you know, we have about 1500 individual products in inventory, which we have aggregated into 11 product lines.
We are looking at the numbers based on product lines, not individual products. We consider adding new products that our current suppliers are discussing with us and want us to distribute.
In November, when we have two months in the year left, we begin to forecast the annual sales for the next year, again based on product lines. We discuss our strategy for each product line, expanding or contracting each one. We discuss other potential product lines from suppliers we don't currently carry. We look at new products that are coming on the market from both current suppliers and other suppliers. We generate a trial forecast for next year.
In December, we revisit the trial annual forecast that we created in November. We finalize any new information, make final decisions on existing and new products, and finalize the annual forecast. Then we create the quarterly forecasts for each quarter. And finally we create the monthly forecasts for each of the first three months of the year. All this is done using spreadsheet technology.
One area which we want to add to the forecasting process is determining inflation factors on a quarterly basis. Most of our suppliers will pass along inflation of their costs on a quarterly basis. If we could forecast this inflation with some degree of accuracy, we could better utilize our inventory capacity and optimize profits. At the moment, we simply guess at inflation factors. We would like to know if there is a way to forecast these.
Be sure to mull this over. In the next few days I will give you a specific assignment on just what we want you to do.
~DW, VP LogOps.
Learning Wizard
Case : Resources
Read the following resources to gain requisite knowledge about forecasting for this task.
Specific Information you need to identify to use in your report:
1. Why is forecasting important in a distribution company? What is it you are specifically forecasting and what is this used for?
2. Why is forecasting accuracy important? How accurate does a forecast need to be?
3. What is the difference between forecasting for existing product lines and for new products?
4. Why should companies spend time and money to improve forecasting accuracy?
5. How should a company use different methods but yet integrate these methods?
6. How does strategic planning fit in with forecasting (at least for long term forecasting/planning)?
7. What is Forecasting and why is it necessary for Logistics?
Shamim, M. (2009). Encyclopaedia of logistics management: Volume I. Mumbai, IND, Global Media.
NOTE: The above resource provides good information about Logistics in general. Read Ch. 5 for info on planning and long term forecasting. Ch.6 is about forecasting. It is a bit long-winded, but you should find sections of it useful.
Various methods of Forecasting***THIS IS A MUST READ!!
Armstrong, J.S. (2001). Principles of forecasting: A handbook for researchers and practitioners. Hingham, MA, USA: Kluwer Academic Publishers.
This is a great article on forecasting inflation:
Meyer, B.H., & Pasaogullari, M. (2010). Simple ways to forecast inflation: What works best. Federal Reserve Bank of Cleveland.Retrieved from https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/economic-commentary-archives/2010-economic-commentaries/ec-201017-simple-ways-to-forecast-inflation-what-works-best.aspx
NOTE: keep in mind that EBBD is a distributor, it buys and sells, it does not produce. What is the focus of forecasting for this type of business?
You may want to do independent research to find additional resources on forecasting in the field of logistics and distribution. But be sure to read the ones here, too.
SLP 2 Resources
The Extended Enterprise Supply Chain
While the case in this module focuses on the micro-level fundamental of logistics, forecasting, this SLP will focus on the fundamental at the macro-level, the Extended Enterprise Supply Chain. All products and services are part of some supply chain. In fact there really is one big network in the world that is the complete global supply chain. But let's keep our focus somewhat narrow as we introduce this concept. You will develop the EESC for the target product, company, and industry you chose in SLP1.
Download and review this PowerPoint on the Extended Enterprise Supply Chain using Beer as an example. (Extended Enterprise Supply Chain)
Readings
How are businesses and industries classified and coded? The North American Industry Classification System (NAICS) has been in use since 2002. This link takes you to the page on the website for the 2007 version.
North American Industry Classification System (2007). US Census Bureau. Retrieved from https://www.census.gov/cgi-bin/sssd/naics/naicsrch?chart=2007