Before I go any further I would like make one point very clear: Dynamics AX is not a forecasting tool (it’s no Nostradamus), it will not predict future sales (unless there are confirmed future order or quotes)!!
However, it provides the ability to setup forecast plans and link forecast with core AX modules such as Master Planning, Inventory Management, Sales/Purchase/General Ledgers and Projects. Forecast can be setup up manually or can be imported from external forecasting tools such as Demand Planner.
This article provides an in-depth explanation of how forecasting works in AX and covers the following topics:
1. Importance of Forecasting
2. Forecast in Dynamics AX 2009 – An Overview
3. Setting up Forecast Models
4. Setting up Forecast Plans
5. Forecasting - from an Inventory Management perspective
6. Forecasting - from a Master Planning perspective

1. Importance of Forecasting

A forecast is basically a prediction of the future of a business variable, the term variable here is refrying to an ‘inconsistent’, or even ‘dependent’ quantitative value such as sales, revenue, expense or cash flow. Forecast can also be applied on the organizations financial model to generate projections.
Fundamentally forecast produce feasibility analysis, as they help develop business models, as well as, identification of resource and capital requirements and setting up of milestones. They also assist the management identify risk and setup benchmarks. More recently, forecast are starting to be used as a means for fund raising, as the modern day workers are ardently looking out to invest in companies with high growth potential.



2. Forecast in Dynamics AX 2009 – An Overview

Possibility amongst the most productive forecasting features dynamics AX provides, is the ability to link forecast plans with master scheduling. Typically an organisation will run Forecast Scheduling before running Master Planning. This ensures that the latest forecasts are incorporated in to the planned purchase orders that are to be generated by the master scheduler.
Accuracy of the forecast is of immense importance, as corrupt forecast can lead to over (or under) production or purchases.
Three are 3 types of forecast available in Dynamics AX 2009:
i. Sales Forecast
Sales forecast is user defined (or downloaded from demand planner). An important point to note here, is that Dynamics AX inherently assumes and works on the belief that forecast for all items are mutually exclusive from one another.
ii. Purchase Forecast
Purchase forecast is also user defined (and can be downloaded from demand planner). Companies implementing purchase forecast need to carefully consider its impact (for example, master scheduler can generate Purchase Orders, which could be sent automatically/accidently to the vendor, giving the company a disadvantage when negotiating prices). Purchase forecast usually are only implemented by companies that have fixed purchasing agreements with the vendors.

iii. Inventory Forecast:
Inventory forecast is a result of sales and purchase forecast generation and is not user defined.


3. Setting up Forecast Models

Forecast Models are the ‘building block of the forecasting process’, a model enables the user to differentiate and set hierarchies within a forecast plan. For example, to get an accurate sales forecast, a company might want to apply a more pessimistic model while forecasting sale for a particular sales group (a group of employees, responsible for defined sales activity, area or market), compared to the more optimistic model that has been applied to the other sales groups

To setup forecast Models browse to Inventory Management > Setup > Forecast -> Forecast Models

Fields:
• Model – id field used to refer to the model
• Name – Name or description of the model
• Stopped – if this box is checked, then it basically states that changes have been stopped on the model, i.e. the forecast lines (covered in next sections), the model is associated with cannot be edited.
This box is normally checked after budgets have been approved, this would prevent accidental amendments to the forecast lines.
• Cash Flow Forecast – if this box is checked, a ledger coverage plan is made for the selected forecast model. This basically means that the forecast lines associated with the model, will generate(or be a part of ) cash flow forecast in general ledger (General Ledger > Chart of accounts > select account and hit Cash flow Forecast (ribbon), or Setup (button) and select Cash flow forecast).
Cash flow forecast are transferred to the accounts specified on the items posting profile and a periodic job (Stock Management > Periodic > Forecast> Purchase/Sales Budget to Ledger) has to be executed to initiate this process.

Sub Models:
This tab, associates subs modes with models and helps define a hierarchy within the model structure.
Note: Though forecast models can have multiple sub models associated with it, the depth in hierarchy can only go up to 1 level (model and its sub models), i.e. all the sub models associated with a model are at the same level (and also, if a model has sub models associated with it, then it cannot be assigned as a sub model itself).


Note: if you are using demo data provided with the Ax2009 vpc, then the above example might error out. The reason being is that fact that ‘Total Model (100)’, has sub models associated with it, hence it cannot be assigned as a sub model itself.

Project:

Fields:
• Use Project Date as Invoice Date: use the project date to budget the invoice revenue date.
• WIP on Time/Material, Fixed Price and Investment Projects :
Time/Material, Fixed Price and Investment are different Project Types. WIP (Work in Progress) is used to track project cost, in balance accounts until the customer is invoiced. The WIP accounts can be setup in (Projects > setup> Posting> Ledger Posting).
The check boxes here enable the user to budget with WIP of the selected project type (time-material, fixed price or investment).
• Automatic Forecast Reduction and Check Cost against remaining budget(Hours, Items and Expenses) :
The check cost against remaining budget options are editable only with the corresponding attribute is checked in the Automatic forecast reduction section. These options are mainly used to balance project cost against project budget. If the check cost against remaining budget check box is checked then, additional cost are not created if the budget does not suffice.





4. Setting up Forecast Plans
Forecast plans define the settings or parameters that determine the result of forecast scheduling. Forecast plans are similar to Master Plans, and when scheduling (periodic job) for forecast plans is executed, it results in planned purchase orders.
Forecast plans are used in two ways:
I. Forecast Scheduling:
When forecast scheduling is executed (Master Planning > Periodic > Forecast Scheduling), it generates planned purchase order, based on the parameters/ settings defined in the forecast plan.
II. Master Scheduling:
The forecast plans can directly be linked to master plans (via Master Planning > Setup > Plans > Master Plans -> General(Tab). This ensures that the forecast plans settings are used in the calculations of forecast requirements, which in turns in fed as input in calculating net requirements (i.e. Mater Scheduling will not only look at the coverage groups an item belongs to, but also the forecasted sales and purchases).
To setup forecast plans, browse down to the following form:
Master Planning > Setup > Plans > Forecast Plans


Forecast Plan – Id for the forecast plan
Name – Name/Description of the forecast plan

General (Tab):

Fields:
• Include Purchase Forecast: If this checkbox is checked, then forecasted Purchase order are taken into consideration, while generating planned purchase order
• Include Sales Forecast: If this check box is checked, then forecasted Sales Orders are taken into consideration while generating planned purchase orders.
Note: use these check boxes with caution and only if the company is confident that their forecasts are accurate
• Inventory Forecast Model: select the forecast model that is to be associated with the forecast plan. If the associated model has sub models, then all the sub models are automatically associated with the forecast plan.
Note: There can be multiple Forecast plans associated with a single Forecast mode. Though this setup can be used to test the effect of the parameters on forecast plans (this should be done in a test environment), the recommendation is to always have a 1:1relationship between forecast plans and forecast models.
• Planned Order Number Sequence: This number sequence will be used when planned orders are generated (as an outcome of Forecast Scheduling) and can be used to visually differentiate planned purchase order that are generated from various plans, or even from the ones generated from Master Scheduling.
• Session Number Sequence: Every time Forecast Scheduling is executed, a forecast session is created. The session log/history can be viewed by clicking on the ‘Session Log’ button.
• Skip Coverage Calculations: This checkbox is New in Dynamics AX 2009 and I believe it is a part of the MS initiative to make Forecast and Master Scheduling run much faster.
If this box is checked, then the forecast scheduler will not generate planned purchase orders, unless there are forecasted purchase orders (that need to be converted to planned orders). This means that the forecasted sales orders are not taken in to consideration, in calculating requirements for planned purchase orders.
Note: use this filed to improve the schedulers processing speed and if you would like to execute forecast scheduling only in order to create a master schedule.

Time Fences (Tab):

Fields:
• Coverage Time Fence : The coverage time fence determines the period in which forecast scheduling transfers and covers the purchase and sales forecast.
• Explosion Time Fence : Is the period in which BOMs are exploded for requirements for component items.
• Capacity Time Fence: is the period in which planned BOMs are capacity scheduled. Forecast scheduling uses the item's active production route and schedules backward from the requirement date. If the requirement date for a planned BOM falls outside the capacity time fence, the lead time is determined by the item's delivery time
Note:
• All of the above time fences are calculated in Days
• Forecasting Time fence is also setup in ‘Coverage Groups’ (Master Planning >Setup > Coverage Groups -> Other (tab)). However, those times fences (ones setup in coverage groups) do not apply to Forecast Scheduling.

Safety Margin (Tab):

Fields:
• Receipt Margin: The safety margin applicable to receipts during forecast scheduling. Receipts can be identified as item movements that result in items being delivered to inventory, for example for purchase forecast lines or planned BOMs. The forecast plan’s safety margin is specified in days and is added to the coverage group’s receipt margin.
• Issue Margin: is expressed in days, and is deducted from the issue's requirement date during forecast scheduling. Note that safety margins for the coverage group and safety margins for the forecast plan are summed during forecast scheduling.
For example, if the safety margin is set to 4 days, and a forecast line is scheduled for delivery on the fifteenth of the month, forecast scheduling calculates the adjusted delivery date as the eleventh of the month.
• Recorder Margin: is expressed in days, and is added to an item's lead time. The safety margin could, for example, express internal administrative processing time. Note that safety margins for the coverage group and safety margins for the forecast plan are summed during forecast scheduling.
The safety margin is not used directly in forecast scheduling. It is used to calculate net requirement order dates.



5. Forecasting - from an Inventory Management perspective
Inventory Management is the hub module for creating/ entering forecast lines.
Forecast lines can be entered for any of the following entities:
I. Items
II. Item Groups
III. Customers
IV. Customer Groups
V. Vendors Vendor Groups
There are multiple paths that can be used to enter forecast lines, for example a user can define the Sales and Inventory for an item from:
Items List Page (Plan tab)

Users can also browse to the ‘inquires’ section to view sales and purchase forecast.
Personally, I prefer entering forecast via the periodic section
Inventory Management > Periodic> Entry
Here one can select forecast of any of the entities (items, item groups, customers, etc).
Click on the required entity to open the related form.
Note: for items and item groups, the user will have the select the type of forecast (sales or purchase) that is being entered, however for customers only sales forecast can be entered, and similarly for vendors only purchase forecast and be entered.
In this example I would be creating a sales forecast for an item:
Browse to Inventory Management > Periodic> Entry > Items
This should open up the flowing form, which list all the items sold by the company

Select the item you would like to create a forecast for and press the ‘Sales’ button.
Note: Multi select is not allowed on this form
The following form open up and this form will be used to create/enter forecast lines

• Model: specify the model the item is associated with. Forecasted planned purchase order are generated for the item, only if the Forecast plans, that is associated with the Model (that the items is linked with), is scheduled to run as a periodic job.
Note: A single item can be associated with multiple forecast plans. This can helpful, in situations, where the item sales are seasonal and hence the same model cannot be applied on the item through the year.
• Date: Starting Date of the forecast line. This date is requirement data for gross requirements, if forecasting is linked with master scheduling.
• Customer/Customer Group: specify a customer or a customer group, if the forecast is being created for a specific customer (or group). This is used in scenarios where most of the company’s business comes from a small set of customers.
• Item Allocation Key: This field enables the user to easily and efficiently enter forecast for items with multiple dimensions (or dimension combinations).
Item Allocation keys are setup from the following form:
Inventory Management > setup > Forecast -> Item Allocation Key


An allocation key can be composed of multiple items (and dimension combinations). Hence items can be grouped in to one allocation key, rather than having a separate allocation key for every item.
• Sales Quantity: enter the forecasted sales quantity here.
• Unit: the sales unit is automatically populated here, but it can be changed to any unit provide there is unit conversion with the sales unit.
• Amount: is the amount with which the forecast transaction contributed to the forecast. This field is automatically calculated (by multiplying the quantity entered with the sales Price), however it can be edited if required.
• Allocation:
o Method: Planning Method for Forecast Line. This helps in creating multiple forecast lines. There are 3 types of methods:
 None: no method is applied, and user is expected to enter each forecast line separately for the item


 Period: this method is used when the forecast line is to be used across multiple periods. This method should be used if an item has consistent sales.

The above picture depicts the result, if a period model is selected. In this example, use is setting up a forecast for an item, which starts on 6/8/2008 and ends on 7/22/08. The forecast predicts that 1 item (defined by sales quantity) will be sold every 5 days (defined in the per field) till 7/22/2008. The Exploded section is automatically populated.
 Key: this method should be used if the item does not have consistent sales.

A pre defined Period key has to be selected, which automatically populated the exploded section, based on the periods defined in the key.
Period keys can be setup from the following form:
Inventory Management > Setup > Forecast -> Period Allocation Keys

Click on the lines button to view/create the period distribution for the forecast.
Use the ‘fixed’ check box to specify that the key periods will start from the opening year period of the company. If this box is not checked, then the system date is used as the default starting date
In the form that open up (after pressing the lines button), create periods and assign an ‘allocation percentage’. This percentage defines the quantity that is allocated to the period from the total quantity specified in the forecast line. The total allocation % does not necessarily have to add up 100, irrespective of what the total % adds upto, only the % assigned in the allocation percent is allocated to the period. Hence it’s recommended that the periods are distributed such that the total % adds up to 100 and hence the total quantity defined in the forecast line is utilized.

Items Sales Forecast (General Tab):



• Active: if this check box is not checked, then the forecast is neither included in forecast scheduling nor is it a part of any forecast reports (Inventory Management > Reports> Forecast).
• Reports: this field is not user editable and defines when the forecast are to be include in reports. This field is only checked, if the forecast is active and the allocation model is set to none.


7. Forecasting - from a Master Planning perspective
To execute forecast scheduling and to integrate forecast with master plans, once must run the forecast scheduler.
Master Planning > Periodic -> Forecast Scheduling

Planned Purchase orders are generated if the scheduler picks up any requirements.
In this example, Master plan 10 is linked with the executed forecast Plan:


When master Scheduling is executed for the Master plans (10), planned purchase order will be generated, which would have taken the forecasted sales into consideration

References:
1. http://ezinearticles.com/?The-Importance-Of-Budgeting-And-Forecasting-For-Start-Ups&id=171022
2. http://ecommerce.hostip.info/pages/457/Forecasting-Business.html
3. Master Planning – Chapter 5: Forecast Plans (Dynamics AX 4 learning material)
4. Dynamics AX 2009 help.