3.3 Logistics needs forecasting
In your text
Read Chapter 8 - Forecasting logistics requirements.
This chapter is very thorough in the techniques of forecasting and the need to forecast accurately. In this section, we will succinctly discuss the importance of forecasting logistics demand.
The need to know what quantity of any product or commodity will be required is important because it affects all the processes involved in the logistics chain, from sourcing till consumption by the customer. For the purpose of logistics, forecasting demand means defining all the requirements to make the product reach the market. This includes forecasting the level of inventory to be maintained, allocating money and material resources to various markets that have to be serviced, and planning activities that will service the demand. Underlying all this is the element of cost. While all the activities named above must be carried out, that should be done at optimal cost.
In the continual drive to efficiency in logistics operations over the last decade or so, extensive research into forecasting demand has resulted in a number of ways to carry out this function, including the development of sophisticated software packages. A number of forecasting methods and techniques are discussed in the textbook. However, it is important to bear in mind that the only accurate outcome of any forecast is that it is never 100% accurate! This truism has a direct impact on costs: the less accurate the forecast, and the longer the lead time to production, the more expensive the forecast errors. While forecasts are being made as accurate as possible, lead time is also being reduced as much as possible. The combination of these two is aimed at reducing costs. As lead times becomes shorter, forecasting becomes less critical because firms can adjust output quickly to respond to the market conditions.
Reading 3.3 explains the importance of forecasting in the logistics performance. The paper is a holistic discussion of the logistics chain and the important role that forecasting plays in logistics.
Reading 3.3
Lawrence, F (1999), 'Closing the logistics loop: A tutorial' , Production and Inventory Management Journal, First quarter, 1999, pp. 43 - 51 .
Forecasting of logistics needs, then, includes forecasting the existing and future demand for an item, influences that can vary that demand, levels of inventory required to be maintained, lead times in various scenarios, competing demands for other items and from other sources in the industry as well as from the customers. In your text, you would have come across the section on 'Lumpy versus Regular Demand'. The specific outcome of such variable demand is the amount of inventory that needs to be held in stock. If demand is regular, the inventory levels can be quite low, but if that is not the case inventory levels (plus warehouse location and size) need to be high. This has obvious implications for cost.
In the context of logistics, forecasting is divided into three categories:
- Long range
Made for three or more years, these forecasts are strategic in nature. They tend to be aimed at sections of the market and are linked to capacity and cost. They usually address resource allocation and identifying desired asset levels. - Medium range
Made for between one and three years, these forecasts are usually aimed at designing budgets and planning sales. They will also be linked to cost but to specific products rather than market segments. Most often, these forecasts tend to identify quarterly variables. - Short range
Made for up to one year, these forecasts are operational in nature. They address specific items and units.
Basically, the activity of forecasting is based on information gathering. It is supported by information support systems . This will be discussed later in this chapter.
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