Demand forecasting estimates how much of each product customers will need in the future, so warehouses can prepare inventory, labor, and transport capacity before orders arrive. In logistics, a good forecast reduces stockouts, overstock, late shipments, and wasted warehouse space. It also helps managers decide when to reorder, where to store goods, and how many workers or trucks are needed.
Forecasting matters because small prediction errors can grow into large costs across a supply chain.
Key Facts
- Forecast error = actual demand - forecast demand.
- MAE = sum of |actual - forecast| / n.
- MAPE = 100 × sum of |actual - forecast| / actual / n.
- Moving average forecast = sum of demand over last k periods / k.
- Exponential smoothing forecast: F_next = alpha × A_current + (1 - alpha) × F_current.
- Safety stock helps protect service level when demand or lead time is uncertain.
Vocabulary
- Demand forecast
- A demand forecast is an estimate of future customer orders for a product over a specific time period.
- Lead time
- Lead time is the time between placing a replenishment order and receiving the goods into the warehouse.
- Safety stock
- Safety stock is extra inventory kept to reduce the risk of running out when demand or supply is uncertain.
- Forecast error
- Forecast error is the difference between actual demand and the predicted demand.
- Service level
- Service level is the probability or target rate of meeting customer demand without a stockout.
Common Mistakes to Avoid
- Using only last month's demand, which is wrong because one period may include unusual events and may not represent the normal pattern.
- Ignoring seasonality, which is wrong because products such as coats, school supplies, or holiday items can have predictable demand peaks.
- Treating all forecast errors the same, which is wrong because underforecasting can cause stockouts while overforecasting can create excess storage and holding costs.
- Forgetting lead time, which is wrong because inventory must be ordered early enough to arrive before demand occurs.
Practice Questions
- 1 A warehouse recorded weekly demand of 120, 150, 135, and 165 units. What is the 4-week moving average forecast for next week?
- 2 A product had actual demand of 500 units and a forecast of 450 units. Find the forecast error and the absolute percentage error.
- 3 A retailer expects a large promotion next month, but the historical demand data shows no similar promotion. Explain why a forecast model based only on past averages may be inaccurate and what extra information should be added.