Supply chain management
CHAPTER 9 • Forecasting 251
9.1 Forecast Types
Organizations often need to forecast variables other than demand. In this section, we describe some of the most common forecast types: demand, supply, and price forecasts.
Demand Forecasts
When we talk about demand forecasts, we need to distinguish between overall market demand and firm-level demand. Both types of demand are of interest to businesses but for different reasons. For instance, suppose the worldwide demand for new hybrid vehicles is expected to reach 5 million by 2016. Working from this number, automotive manufacturers must decide what percentage of this overall demand they will capture. But the demand for new hybrid vehicles is not the only demand the automotive manufacturers face. It will combine with other sources of demand—including warranty repairs, spare parts, and the like—to determine firm-level demand for all assemblies and components that go into hybrid vehicles. Once firms have accurately forecasted this firm-level demand, they can begin to plan their business activities accordingly.
Supply Forecasts
Supply forecasts can be just as important as demand forecasts, as an interruption in sup-ply can break the flow of goods and services to the final customer. A supply forecast might provide information on the number of current producers and suppliers, projected aggregate supply levels, and technological and political trends that might affect supply. To illustrate, one of the world’s largest supplies of manganese is located in central Africa. Because political turmoil in this region has interrupted manganese shipments in the past, companies whose products depend on this mineral need to pay close attention to what is going on in this area of the world.
Price Forecasts
Many businesses need to forecast prices for key materials and services they purchase. When commodity prices are expected to increase, a good strategy is forward buying, in which compa-nies buy larger quantities than usual, store them in inventory for future use, and save on the price they pay. Alternatively, companies can use futures contracts to protect themselves. A futures con-tract is a legal agreement to buy or sell a commodity at a future date at a price that is fixed at the time of the agreement. If prices are falling, a better strategy is to buy more frequently in smaller quantities than usual, with the expectation that prices will go down over time. But the point is this: In order to decide on a purchasing strategy, firms must first have the price forecasts. The following Supply Chain Connections feature highlights how forecasts of jet fuel prices can affect a wide range of decisions for airlines.
