Research Summary
Research Summary
Estimating Demand Uncertainty Using Judgmental Forecasts
Description
Measuring demand uncertainty is a key activity in supply chain planning, but is difficult when demand history is unavailable such as for new products. One method that can be applied in such cases uses dispersion among forecasting experts as a measure of demand uncertainty. This paper provides a test for this method, and presents a heteroscedastic regression model for estimating the variance of demand using dispersion among experts forecasts and scale. We test this methodology using three datasets, demand data at item level, sales data at firm level for retailers, and sales data at firm level for manufacturers. We show that the variance of a random variable (demand and sales for our datasets) is positively correlated with both dispersion among experts forecasts and scale: the variance increases sublinearly with dispersion and more than linearly with scale. Further, we use longitudinal datasets with sales forecasts made 3-9 months before earnings report date for retailers and manufacturers to show that the effects of dispersion and scale on variance of forecast error are consistent over time.