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Estimating Demand Uncertainty Using Judgmental Forecasts

  • Vishal Gaur

    ()

    (Leonard N. Stern School of Business, New York University, 44 West Fourth Street, New York, New York 10012)

  • Saravanan Kesavan

    ()

    (Harvard Business School, Morgan Hall, Soldiers Field, Boston, Massachusetts 02163)

  • Ananth Raman

    ()

    (Harvard Business School, Morgan Hall, Soldiers Field, Boston, Massachusetts 02163)

  • Marshall L. Fisher

    ()

    (The Wharton School, University of Pennsylvania, Jon M. Huntsman Hall, 3730 Walnut Street, Philadelphia, Pennsylvania 19104-6366)

Registered author(s):

    Measuring demand uncertainty is a key activity in supply chain planning, but it 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 data sets: 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 data sets) 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 data sets with sales forecasts made three to nine months before the 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.

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    File URL: http://dx.doi.org/10.1287/msom.1060.0134
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    Article provided by INFORMS in its journal Manufacturing & Service Operations Management.

    Volume (Year): 9 (2007)
    Issue (Month): 4 (April)
    Pages: 480-491

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    Handle: RePEc:inm:ormsom:v:9:y:2007:i:4:p:480-491
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