A hidden anchor: The influence of service levels on demand forecasts

Abstract

Demand planning is informed by demand forecasts, service level requirements, replenishment constraints, and revenue projections. “Demand forecasts” differ from “demand plans” in that forecasts only represent the distribution (or the most likely value) of product demand. Motivated by common forecasting practices in industry, our research examines whether forecasters recognize this difference between demand forecasts and demand plans. Based on a lab experiment informed by data from two large FMCG companies, we found that forecasters factor service levels into their demand forecasts, even when they are clearly instructed to predict the most likely demand and incentivized to minimize the forecast error. We establish that this result holds for students and practitioners alike, and show that this behavior is driven by the service level information, and not some other anchor. We use data from a recent industry survey to support the external validity of our key findings.