The Smart Forecaster
Pursuing best practices in demand planning,
forecasting and inventory optimization
Most demand forecasts are partial or incomplete: They provide only one single number: the most likely value of future demand. This is called a point forecast. Usually, the point forecast estimates the average value of future demand. Interval forecasts provide an estimate of the possible future range of demand (i.e. demand has a 90% chance of being between 50 – 100 units). Probabilistic forecasts take it a step further and provide additional information. Knowing more is always better than knowing less and the probabilistic forecast provides that extra information so crucial for inventory management. This video blog by Dr. Thomas Willemain explains each type of forecast and the advantages of probabilistic forecasting.
Point forecast (green) shows what is most likely to happen. The Interval Forecast shows the range (blue) of possibilities.
Probability Forecast shows the probability of each value occurring
The New Forecasting Technology derives from Probabilistic Forecasting, a statistical method that accurately forecasts both average product demand per period and customer service level inventory requirements.
When setting a target service level, make sure to take into account factors like current service levels, replenishment lead times, cost constraints, the pain inflicted by shortages on you and your customers, and your competitive position.
To make the right decision, you’ll need to know how demand forecasting supports inventory management, choice of which policy to use, and calculation of the inputs that drive these policies.The process of ordering replenishment stock is sufficiently expensive and cumbersome that you also want to minimize the number of purchase orders you must generate.