Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

12.2.2 Consuming the Forecast by Actual Demand

Intended learning outcomes: Explain the principle of forecast consumption.

Consuming the forecast or forecast consumption is the process of reducing the forecast by customer orders or other types of actual demand as they are received ([ASCM22]).

Independent demand determined by stochastic methods, that is, a forecast, can be used as an alternative to customer demand not yet received. Viewed quasi-deterministically, it enables deterministic dependent demand to be calculated at lower product structure levels by exploding the bills of material to trigger production or procurement of these items in good time and in sufficient quantity.

The forecast is gradually replaced or “consumed” by actual demand, that is, by customer orders. The actual (deterministic) demand thus “overlays” the stochastic independent demand, which either immediately precedes it along the time axis or is the earliest forecast along the time axis that has not yet been completely replaced by customer demand.

The resulting forecast consumption rules are as follows:

  1. If a customer demand is canceled, the demand forecastremains unchanged.
  2. If a customer demand is issued, it “overlays” the corresponding forecast and thus “consumes” its open quantity, which is then regarded as “issued.” There are two variations of this. In variation 2.1, the demand forecast that immediately precedes it on the time axis is reduced. In variation 2.2, all the forecasts preceding the customer demand whose forecast quantities have not yet been reduced — in chronological order — are reduced.
  3. Option overplanning: If the sum of the customer demands is too large, the quantity by which it exceeds the forecast quantity is regarded as net requirements.

The adjustments yield the value of the remaining forecast for each period. Figure shows the principle of forecast consumption, both before and after the issue of two customer demands. This is variation 2.1.

Fig.       The principle of forecast consumption.

The demand time fence (DTF) is that point in time inside of which the forecast is no longer included in total demand and projected available inventory calculations. Inside this point, only customer orders are considered ([ASCM22]).

With option overplanning, an order may only be planned in the period where new cus­to­mer orders are currently being accepted. This is typically just after the demand time fence.

Course section 12.2: Subsections and their intended learning outcomes