Appendix: To Forecast or Not To Forecast

Step-by-step

This is the appendix to my other piece:

To Forecast, or Not To Forecast, That is the Supply Chain Question

Note: some charting functions in the support file may require using an optional free Excel add-in for best performance.

Detailed step-by-step workings of the examples provided below and also available in the illustrative support file you can freely download.

Let us assume a Normal probability distribution, with mean = 50 and standard deviation = 10. We will have 100 units of product in our warehouse, so to limit the size of the simulation.

Normal probability density function for mean = 50 and stdev = 10. Image source: author from Evo Pricing (CC with attribution)

In a normal distribution, the mean is the same as the mode and the average, and the curve is perfectly symmetrical, so everything is easier. The same logic would nevertheless apply to any other type of probability function.

The most likely outcome is undoubtedly N=50, even if its actual % likelihood is just around 4%. In cumulative terms, the probability of selling up to N pieces grows monotonically from 0 to infinity by definition.