Characteristics of Forecasts

Before we begin an in-depth discussion of the components of forecasts and forecasting methods in the supply chain, we briefly list characteristics of forecasts that a manager must understand to design and manage his or her supply chain effectively. 

Companies and supply chain managers should be aware of the following characteristics of forecasts. 

Forecasts are always inaccurate and should thus include both the expected value of the forecast and a measure of forecast error. To understand the importance of forecast error, consider two car dealers. One of them expects sales to range between 100 and 1,900 units, whereas the other expects sales to range between 900 and 1,100 units. Even though both dealers anticipate average sales of 1,000, the sourcing policies for each dealer should be very different, given the difference in forecast accuracy. Thus, the forecast error (or demand uncertainty) is a key input into most supply chain decisions. Unfortunately, most firms do not maintain any estimates of forecast error. 

In general, the farther up the supply chain a company is (or the farther it is from the consumer), the greater the distortion of information it receives. One classic example of this phenomenon is the bullwhip effect (see Chapter 10), in which order variation is ampUfied as orders move farther from the end customer. Collaborative forecasting based on sales to the end customer helps upstream enterprises reduce forecast error. 

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In all instances of a supply chain the first step is to forecast what the customer demand will be in the future. It is important to note that is not possible to produce a perfect forecast as there are so many variables affecting a future demand, such as past demand, promotion and advertising of the product, market share, state of the economy, price discounts, competition and new products introduction. Peter Drucker once said the best way to predict future is to create it . There are also some recognized characteristics of forecasts, for example, there will always be a forecast error, longer-term forecasts are less accurate than short-term forecasts and aggregate forecasts are usually more accurate than individual forecasts. 

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