Demand-Driven Forecasting Wiley & SAS Business Series The Wiley & SAS Business Series presents books that help senior-level managers with their critical management decisions. Titles in the Wiley and SAS Business Series include: Activity-Based Management for Financial Institutions: Driving Bottom- Line Results by Brent Bahnub Big Data Analytics: Turning Big Data into Big Money by Frank Ohlhorst Branded! How Retailers Engage Consumers with Social Media and Mobility by Bernie Brennan and Lori Schafer Business Analytics for Customer Intelligence by Gert Laursen Business Analytics for Managers: Taking Business Intelligence beyond Reporting by Gert Laursen and Jesper Thorlund The Business Forecasting Deal: Exposing Bad Practices and Providing Practical Solutions by Michael Gilliland Business Intelligence Success Factors: Tools for Aligning Your Business in the Global Economy by Olivia Parr Rud CIO Best Practices: Enabling Strategic Value with Information Technology, Second Edition by Joe Stenzel Connecting Organizational Silos: Taking Knowledge Flow Management to the Next Level with Social Media by Frank Leistner Credit Risk Assessment: The New Lending System for Borrowers, Lenders, and Investors by Clark Abrahams and Mingyuan Zhang Credit Risk Scorecards: Developing and Implementing Intelligent Credit Scoring by Naeem Siddiqi The Data Asset: How Smart Companies Govern Their Data for Business Success by Tony Fisher Delivering Business Analytics: Practical Guidelines for Best Practice by Evan Stubbs Demand-Driven Forecasting: A Structured Approach to Forecasting by Charles Chase Demand-Driven Inventory Optimization and Replenishment by Robert A. Davis The Executive’s Guide to Enterprise Social Media Strategy: How Social Networks Are Radically Transforming Your Business by David Thomas and Mike Barlow Executive’s Guide to Solvency II by David Buckham, Jason Wahl, and Stuart Rose Fair Lending Compliance: Intelligence and Implications for Credit Risk Management by Clark R. Abrahams and Mingyuan Zhang Foreign Currency Financial Reporting from Euros to Yen to Yuan: A Guide to Fundamental Concepts and Practical Applications by Robert Rowan Health Analytics: Gaining the Insights to Transform Health Care by Jason Burke Human Capital Analytics: How to Harness the Potential of Your Organization’s Greatest Asset by Gene Pease, Boyce Byerly, and Jac Fitz-enz Information Revolution: Using the Information Evolution Model to Grow Your Business by Jim Davis, Gloria J. Miller, and Allan Russell Manufacturing Best Practices: Optimizing Productivity and Product Quality by Bobby Hull Marketing Automation: Practical Steps to More Effective Direct Marketing by Jeff LeSueur Mastering Organizational Knowledge Flow: How to Make Knowledge Sharing Work by Frank Leistner The New Know: Innovation Powered by Analytics by Thornton May Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics by Gary Cokins Retail Analytics: The Secret Weapon by Emmett Cox Social Network Analysis in Telecommunications by Carlos Andre Reis Pinheiro Statistical Thinking: Improving Business Performance, Second Edition by Roger W. Hoerl and Ronald D. Snee Taming the Big Data Tidal Wave: Finding Opportunities in Huge Data Streams with Advanced Analytics by Bill Franks Too Big to Ignore: The Business Case for Big Data by Phil Simon The Value of Business Analytics: Identifying the Path to Profi tability by Evan Stubbs Visual Six Sigma: Making Data Analysis Lean by Ian Cox, Marie A. Gaudard, Philip J. Ramsey, Mia L. Stephens, and Leo Wright Win with Advanced Business Analytics: Creating Business Value from Your Data by Jean Paul Isson and Jesse Harriott For more information on any of the above titles, please visit www.wiley.com. Demand-Driven Forecasting A Structured Approach to Forecasting Second Edition Charles W. Chase, Jr. Cover image: © iStockphoto.com/Olena_T Cover design: Wiley Copyright © 2013 by SAS Institute, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. First Edition: Demand-Driven Forecasting: A Structured Approach to Forecasting, ISBN: 9780470415023. Published by John Wiley & Sons, Inc. Copyright © 2009. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with standard print versions of this book may not be included in e-books or in print-on-demand. If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com. For more information about Wiley products, visit www.wiley.com. Library of Congress Cataloging-in-Publication Data Chase, Charles. Demand-driven forecasting : a structured approach to forecasting / Charles W. Chase, Jr.—Second edition. pages cm.—(Wiley & SAS business series) Includes index. ISBN 978-1-118-66939-6 (cloth); ISBN 978-1-118-73564-0 (ebk); ISBN 978-1-118-73557-2 (ebk) 1. Economic forecasting 2. Business forecasting. 3. Forecasting. I. Title. HB3730.C48 2013 330.01’12—dc23 2013015670 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 Contents Foreword xi Preface xv Acknowledgments xix About the Author xx Chapter 1 Demystifying Forecasting: Myths versus Reality 1 Data Collection, Storage, and Processing Reality 5 Art-of-Forecasting Myth 8 End-Cap Display Dilemma 10 Reality of Judgmental Overrides 11 Oven Cleaner Connection 13 More Is Not Necessarily Better 16 Reality of Unconstrained Forecasts, Constrained Forecasts, and Plans 17 Northeast Regional Sales Composite Forecast 21 Hold-and-Roll Myth 22 The Plan that Was Not Good Enough 23 Package to Order versus Make to Order 25 “Do You Want Fries with That?” 26 Summary 28 Notes 28 Chapter 2 What Is Demand-Driven Forecasting? 31 Transitioning from Traditional Demand Forecasting 33 What’s Wrong with The Demand-Generation Picture? 34 Fundamental Flaw with Traditional Demand Generation 37 Relying Solely on a Supply-Driven Strategy Is Not the Solution 39 What Is Demand-Driven Forecasting? 40 What Is Demand Sensing and Shaping? 41 Changing the Demand Management Process Is Essential 57 vii viii ▸ CONTENTS Communication Is Key 65 Measuring Demand Management Success 67 Benefi ts of a Demand-Driven Forecasting Process 68 Key Steps to Improve the Demand Management Process 70 Why Haven’t Companies Embraced the Concept of Demand-Driven? 71 Summary 74 Notes 75 Chapter 3 Overview of Forecasting Methods 77 Underlying Methodology 79 Different Categories of Methods 83 How Predictable Is the Future? 88 Some Causes of Forecast Error 91 Segmenting Your Products to Choose the Appropriate Forecasting Method 94 Summary 101 Note 101 Chapter 4 Measuring Forecast Performance 103 “We Overachieved Our Forecast, So Let’s Party!” 105 Purposes for Measuring Forecasting Performance 106 Standard Statistical Error Terms 107 Specifi c Measures of Forecast Error 111 Out-of-Sample Measurement 115 Forecast Value Added 118 Summary 122 Notes 123 Chapter 5 Quantitative Forecasting Methods Using Time Series Data 125 Understanding the Model-Fitting Process 127 Introduction to Quantitative Time Series Methods 130 Quantitative Time Series Methods 135 Moving Averaging 136 Exponential Smoothing 142 Single Exponential Smoothing 143 Holt’s Two-Parameter Method 147 Holt’s-Winters’ Method 149 Winters’ Additive Seasonality 151 Summary 156 Notes 158