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Forecasting PDF
Forecasting PDF
Forecast
A prediction of
future events used
for planning
purposes.
Forecasting across organization
HR
Finance
Planning
Materials
Demand Patterns
A time series is the repeated observations of
demand for a service or product in their order of
occurrence
There are five basic time series patterns
Horizontal
Trend
Seasonal
Cyclical
Random
Demand Patterns
Quantity
Time
Figure 8.1
Time
Figure 8.1
Year 1
Quantity
Year 2
| | | | | | | | | | | |
J F M A M J J A S O N D
Figure 8.1 Months
(c) Seasonal: Data consistently show peaks and valleys
Demand Patterns
Quantity
| | | | | |
1 2 3 4 5 6
Figure 8.1 Years
(d) Cyclical: Data reveal gradual increases and decreases over
extended periods
Demand Management Options
Demand Management
The process of changing demand patterns using
one or more demand options
Demand Management Options
Complementary Products
Promotional Pricing
Prescheduled Appointments
Reservations
Revenue Management
Backlogs
Backorders and Stockouts
Key Decisions on Making Forecasts
Deciding What to Forecast
Level of aggregation
Units of measurement
Quantitative methods
Qualitative/Judgmental methods
Sales force estimate
Expert Opinion
Market research
Delphi Technique
Causal Methods: Linear Regression
A dependent variable is related to one or more
independent variables by a linear equation
The independent variables are assumed to cause
the results observed in the past
Simple linear regression model is a straight line
Y = a + bX
where
Y = dependent variable
X = independent variable
a = Y-intercept of the line
b = slope of the line
Linear Regression
Y
Deviation, Regression
or error equation:
Estimate of Y = a + bX
Dependent variable
Y from
regression
equation
Actual
value
of Y
Value of X used
to estimate Y
X
Figure 8.3
Independent variable
Linear Regression
The sample correlation coefficient, r
Measures the direction and strength of the relationship
between the independent variable and the dependent
variable.
The value of r can range from 1.00 r 1.00
The sample coefficient of determination, r2
Measures the amount of variation in the dependent
variable about its mean that is explained by the regression
line
The values of r2 range from 0.00 r2 1.00
The standard error of the estimate, syx
Measures how closely the data on the dependent variable
cluster around the regression line
Example 8.2
The supply chain manager seeks a better way to forecast the
demand for door hinges and believes that the demand is
related to advertising expenditures. The following are sales
and advertising data for the past 5 months:
Month Sales (thousands of units) Advertising (thousands of $)
1 264 2.5
2 116 1.3
3 165 1.4
4 101 1.0
5 209 2.0
The company will spend $1,750 next month on advertising for the
product. Use linear regression to develop an equation and a
forecast for this product.
Example 8.2
We used POM for Windows to determine the best values
of a, b, the correlation coefficient, the coefficient of
determination, and the standard error of the estimate
a= 8.135
b= 109.229X
r= 0.980
r2 = 0.960
syx = 15.603
200 X
X X
150
Data
X X
100
Forecasts
50
| |
0
1.0 2.0
Figure 8.4
Advertising ($000)
Example 8.2
Forecast for month 6:
Y = 8.135 + 109.229X
Y = 8.135 + 109.229(1.75)
Exponential smoothing
Simple Moving Averages
Specifically, the forecast for period t + 1 can be
calculated at the end of period t (after the actual
demand for period t is known) as
where
Dt = actual demand in period t
n = total number of periods in the average
Ft+1 = forecast for period t + 1
Example 8.3
a. Compute a three-week moving average forecast for the
arrival of medical clinic patients in week 4. The numbers
of arrivals for the past three weeks were as follows:
Week Patient Arrivals
1 400
2 380
3 411
E5 = 805 780 = 25
E4 = 415 392 = 23
c. The new forecast for week 5 would be
or 394 patients.
Application 8.3
Suppose that there were 790 arrivals in month 4 (Dt ),
whereas the forecast (Ft) was for 783 arrivals. Use exponential
smoothing with = 0.20 to compute the forecast for month 5.
Ft+1 = Ft + (Dt Ft) 783 + 0.20(790 783) = 784.4
= 788.52