Forecasting is a very important necessity in planning since it drives the process of accommodating the requirements of customers in many supply chain arrangements. Forecast has six main components, which include base demand, seasonal, trend, cyclic, promotion and irregular. Base demand is the average long-term demand after removing the remaining components. It is, therefore, the forecast for items, which do not have of trend, promotion, seasonality, and cyclic components. Seasonal component is the yearly downward and upward recurring movement in demand. For instance, there are items whose demand is low during the first four quarters of a year just to shoot in the four quarter towards December: demand for a toy for example.
Trend component is periodic sales, which occur, in long-range shift. The direction of trend may be neutral, negative, or positive. When a trend takes a positive, direction it implies that there is increase in sales overtime, when it is negative it means that there is decrease in sale and when it is neutral, it means that there is no change in change in sales overtime. If trend index is greater than 1.0 it means, there is increase in periodic demand and the opposite is true if the value is less than 1.0. Cyclic, another component of trend is represented by downward or upward periodic shift in demand, which last more than one year. For instance, demand for major appliances and housing is tied to business cycle. Promotional component represents swings in demand caused by marketing activities of a firm such as deals, promotions, or advertising.
The swings are due to increase in sales during promotion to be followed by decline in sales when customers use or sell inventory purchased as an advantage of the promotion. Irregular component comprises of unpredictable or random quantities, which do not fit within other categories. It is not possible to predict this component, but it is important to minimize its magnitude by predicting and tracking other components. It is important to decompose demand into these components when developing new forecasts to understand all the components associated with demand and their implication in a business. This is paramount because it will ensure that caution and necessary measures are taken to prevent negative impacts associated with the components. The components help to anticipate requirements of customers to guide and monitor supply chain.