Learning Objectives
LO 6-1: Describe the demand management, forecasting, and aggregate planning processes.
Demand management process balances customer requirements with supply chain capabilities. Forecasting is an integral part of demand management. Forecasts provide estimates for future demand, supply prices, and labor requirements. Aggregate planning occurs when firms consider their long-term business plans such as new market expansion, forecast the demand, then translate this information into production, capacity, human resources, etc.
LO 6-2: Explain why forecasts are necessary and how they are used.
Forecasts are necessary for sound operations management decisions involving supply prices, labor requirements, etc. Forecasts are used help control inventory levels, reduce stockouts, smooth out production levels, reduce costs, and ensure quality customer service.
LO 6-3: Compare the accuracies of forecasting techniques.
Because of variables a company cannot control, their forecasts will never be 100% accurate. However, a company can compare different forecasting techniques, e.g., simple moving average, weighted moving average, exponential smoothing, etc., and determine which one is the most accurate and use it. The mean absolute deviation (MAD) is a common method for determining the accuracy of a forecasting technique. The technique with the lowest MAD is the most accurate. Mean absolute percentage error (MAPE) is another method to test forecasting technique accuracy. This method provides an indication of the magnitude of the forecast error. These methods can be supplemented by calculating the tracking signal. Note, since demand varies over time, forecasting techniques should be routinely tested for accuracy to ascertain if the specific technique is still the best one to use.
LO 6-4: Describe the collaborative planning, forecasting, and replenishment process.
Collaborative planning, forecasting, and replenishment process is when information is shared between suppliers and retailers that aids in the planning, forecasting, and satisfying of customer demands. Furthermore, this process allows for continuous updating of inventory and upcoming requirements; thus, resulting in less safety stock.
LO 6-5: Explain how Aggregate Planning is used to meet the objectives of the firm.
Aggregate planning occurs when firms consider their long-term business plans such as new market expansion, forecast the demand, and then translate this information into production, capacity, human resources, purchasing, logistics, and financial plans. Consequently, information provided by aggregate planning is used to meet company objectives in areas such as labor levels and overtime, inventory levels, production rates, etc. In summary, aggregate planning is used to meet forecasted demand while minimizing costs and maximizing customer service.
Chapter Outline
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