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The following basic,six-step approach helps an organization perform effective forecasting:
Understand the objective of forecasting.The objective of every forecast is to support decisions that are based on the forecast,so an important first step is to clearly identify these decisions.Examples of such decisions include how much of a particular product to make,how much to inventory,and how much to order.All parties affected by a supply chain decision should be aware of the link between the decision and the forecast.Failure to make these decisions jointly may result in either too much or too little product in various stages of the supply chain.
Integrate demand planning and forecasting throughout the supply chain.A company should link its forecast to all planning activities throughout the supply chain.These include capacity planning,production planning,promotion planning,and purchasing,among others.This link should exist at both the information system and the human resource management level.As a variety of functions are affected by the outcomes of the planning process,it is important that all of them are integrated into the forecasting process.To accomplish this integration,it is a good idea for a firm to have a cross-functional team,with members from each affected function responsible for forecasting demand-and an even better idea to have members of different companies in the supply chain working together to create a forecast.
Understand and identify customer segments.Here a firm must identify the customer segments the supply chain serves.Customers may be grouped by similarities in service requirements,demand volumes,order frequency,demand volatility,seasonality,and so forth.In general,companies may use different forecasting methods for different segments.A clear understanding of the customer segments facilitates an accurate and simplified approach to forecasting.
Identify the major factors that influence the demand forecast.A proper analysis of these factors is central to developing an appropriate forecasting technique.The main factors influencing forecasts are demand,supply,and product-related phenomena.On the demand side,a company must ascertain whether demand is growing,declining,or has a seasonal pattern.These estimates must be based on demand-not sales data.On the supply side,a company must consider the available supply sources to decide on the accuracy of the forecast desired.If alternate supply sources with short lead times are available,a highly accurate forecast may not be especially important.However,if only a single supplier with a long lead time is available,an accurate forecast will have great value.On the product side,a firm must know the number of variants of a product being sold and whether these variants substitute for or complement each other.If demand for a product influences or is influenced by demand for another product,the two forecasts are best made jointly.
Determine the appropriate forecasting technique.In selecting an appropriate forecasting technique,a company should first understand the dimensions that will be relevant to the forecast.These dimensions include geographical area,product groups,and customer groups.The company should understand the differences in demand along each dimension.A firm would be wise to have different forecasts and techniques for each dimension.At this stage,a firm selects an appropriate forecasting method from the four methods discussed earlier-qualitative,time series,causal,or simulation.Using a combination of these methods is often effective.
Establish performance and error measures for the forecast.Companies should establish clear performance measures to evaluate the accuracy and timeliness of the forecast.These measures should correlate with the objectives of the business decisions based on these forecasts.
Each organization must use all six steps to forecast effectively.

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