Demand Forecasting Principles and Quantitative Methods

Intuition Building and Motivation for Demand Forecasting

• What is Forecasting?
  • The act of predicting future events.
  • "All supply chain decisions made before demand has materialized are made to a forecast."
• How does it apply to Disneyland?
  • Serves as the analytical foundation for operations planning at the Resort.
  • Used by labor management, maintenance, operations, finance, and park scheduling.
  • Used to adjust opening times, rides, shows, staffing levels, and guests admitted.

Quantitative Approaches to Demand Forecasting

• What is a Sales/Demand Forecast?
  • An estimate of the level of sales you expect to achieve as a function of time.
  • Serves as the basis for supply chain decisions.
• What are the characteristics of forecasts?
  • Forecasts are always wrong/inaccurate and should thus include both the expected value of the forecast and a measure of forecast error.
  • Long-term forecasts are usually less accurate than short-term forecasts.
  • Aggregate forecasts are usually more accurate than disaggregate forecasts.
  • The farther up the supply chain a company is, the greater the distortion of information it receives.
• What are the different forecasting methods?
  • Qualitative: Primarily subjective; rely on judgment (e.g., jury of executive opinion, Delphi method, consumer market surveys).
  • Time Series: Use historical demand only; best with stable demand.
  • Causal: Relationship between demand and some other factor (e.g., statistical models, regression models, data mining).
  • Simulation: Imitate consumer choices that give rise to demand.
• What is Time Series Forecasting?
  • A collection of past values of the variable being predicted:
    • Set of evenly spaced numerical data.
    • Obtained by observing the response variable at regular time periods.
  • The goal is to isolate patterns in past data:
    • Assumes that factors influencing the past and present will continue to influence the future.
  • Components:
    • Trend: Identifies the rate of growth or decline over time.
    • Level: Average of the observations over time.
    • Seasonality: Identifies patterns of increase/decrease in demand that repeat themselves, usually caused by weather and customs.
    • Cyclic movements: Changes as a result of business cycles (over the longer term).
    • Random fluctuations: Residuals remaining after the effects of the other components are identified.
  • Components of Demand:
    •