OM Forecasting GM 13

FORECASTING
In SCM
OPERATION MANAGEMENT
LECTURER/FACILITATOR
.
Dr. MUHAMMAD HANAFI, ST, MBA, IPM
Institut Teknologi Bandung

Table of
Content
INTRODUCTION FORECASTING METHOD
What Is Forecasting? Forecasting Approaches
Forecasting Time Horizons Overview of Qualitative Methods

Case
The Influence of Product Life Overview of Quantitative Methods
Cycle :Starbuck DC
Types of Forecasting
Quantitative Approach
The Strategic Importance Of
Time Series Forecasting
Forecasting
Associative Forecasting
Seven Steps In The
Forecasting System
Dr. Muhammad Hanafi, ST, IPM, MBA

What is Forecasting?
 Process of
predicting a future
event
 Underlying basis of
all business
decisions
 Production
 Inventory
 Personnel
 Facilities
Heizer

Types of Forecasts
 Economic forecasts
 Address business cycle – inflation rate, money
supply, housing starts, etc.
 Technological forecasts
 Predict rate of technological progress
 Impacts development of new products
 Demand forecasts
 Predict sales of existing product
Heizer

The Role of Forecasting
 Forecasting is a vital function and affects every significant
management decision.
Finance and accounting use forecasts as the basis for budgeting and
cost control.
Marketing relies on forecasts to make key decisions such as new
product planning and personnel compensation.
Production uses forecasts to select suppliers; determine capacity
requirements; and drive decisions about purchasing, staffing, and
inventory.
 Different roles require different forecasting approaches.
 Decisions about overall directions require strategic forecasts.
 Tactical forecasts are used to guide day-to-day decisions.
Chase & Jacobs
Dr. Muhammad Hanafi, ST, IPM, MBA 18-5

Product Life Cycle
Introduction Growth Maturity Decline

Best period to Practical to change Poor time to change Cost control
Company Strategy/Issues increase market price or quality image image, price, or critical
share quality
Strengthen niche
R&D engineering is Competitive costs
critical become critical
Defend market
position
TV Cable
Online
Hostel FF Vehicle
E Commerce
TV per
Smart TV view Fax machines
Sales
EV 3 1/2”
Drive-through Floppy
restaurants, disks DVD
Flip Cell phone Swab Test
CD-ROM
Heizer updated
Figure 2.5
Product Life Cycle
Introduction Growth Maturity Decline
Product design and Forecasting critical Standardization Little product
development Product and Less rapid product differentiation
critical process reliability changes – more Cost
Frequent product minor changes minimization
OM Strategy/Issues
Competitive
and process product Optimum capacity Overcapacity in
design changes improvements and the industry
Increasing stability
Short production options of process Prune line to
runs Increase capacity eliminate items
Long production
High production Shift toward runs not returning
costs product focus good margin
Product
Limited models Enhance improvement and Reduce
Attention to quality distribution cost cutting capacity
Heizer
Figure 2.5
Strategic Importance of
Forecasting
 Human Resources – Hiring, training,
laying off workers
 Capacity – Capacity shortages can result
in undependable delivery, loss of
customers, loss of market share
 Supply-Chain Management – Good
supplier relations and price advance
Heizer

Forecasting Approaches
Qualitative Methods
 Jury of executive opinion
 Pool opinions of high-level executives, sometimes
 Used when situation is vague and augment by statistical models
little data exist
 Delphi method
 Involves intuition, experience
 Panel of experts, queried iteratively
 e.g., forecasting sales on Internet
 Sales force composite

 Estimates from individual salespersons are reviewed for
reasonableness, then aggregated
 Consumer Market Survey

 Ask the customer
Heizer

Quantitative Methods 1. Naive approach
 Used when situation is ‘stable’ and historical data exist 2. Moving
 Existing products
averages Time-
 Current technology
Series
 Involves mathematical techniques 3. Exponential
Models
 e.g., forecasting sales of color televisions smoothing
4. Trend
projection
5. Linear
regression
Associative
6. Causal Model
Relationship
7. Simulation
Chase & Jacobs

Heizer

Quantitative Methods
1. Naive approach
2. Moving
averages Time-Series
Models
3. Exponential
smoothing
4. Trend
projection
Heizer

Time Series Component
Trend
component
Demand for product or service
Seasonal peaks Chase & Jacobs
Actual
demand
Cyclical
Average
demand over
Random four years
variation
| | | |
1 2 3 4 Heizer
Year

Forecasting Time Horizons
Time Series analysis - Using the past to predict the future
 Short-range forecast
 Use mainly for tactical decision
 Up to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforce levels, job assignments,
production levels
 Medium-range forecast
 Used to develop a strategy that will be implemented over the next 3
months to 3 years(e.g., meeting demand)
 Sales and production planning, budgeting
 Long-range forecast
 3+ years
 New product planning, facility location, research and development
 Useful for detecting general trends and identifying major turning
points
Heizer

Seven Steps in Forecasting
 Determine the use of the forecast
 Select the items to be forecasted

Choosing an appropriate
 Determine the time horizon of the forecast forecasting model depends upon
1. Time horizon to be forecast
 Select the forecasting model(s)
2. Data availability
 Gather the data 3. Accuracy required
4. Size of forecasting budget
 Make the forecast
5. Availability of qualified
 Validate and implement results personnel
Chase & Jacobs
Heizer

Moving Average Example
Heizer
Chase & Jacobs

Moving Average Example
Chase & Jacobs

Weighted Moving Average
 Used when trend is present
 Older data usually less important
 The simple moving average formula implies

equal weighting for all periods.
 A weighted moving average allows unequal

weighting of prior time periods.
 Weights based on experience, Trial error, and
intuition
 The sum of the weights must be equal to one.
 Often, more recent periods are given higher
weights than periods farther in the past.
 If the data are seasonal, weights should reflect
this appropriately.
Heizer

Moving Average And
Weighted Moving Average
Potential Problems With Moving Average
Heizer

Exponential Smoothing
 Form of weighted moving average
 Weights decline exponentially
 Most recent data weighted most
 Requires smoothing constant ()

 Ranges from 0 to 1
 Subjectively chosen
 The most used of all forecasting techniques

 Well accepted, relatively accurate, formulating
easy, easy to test accuracy
Heizer

Impact Different Alpha
Heizer

Comparison of Forecast Error
Exercise.1
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5 175 5
2 168 176 8 178 10
3 159 175 16 173 14
4 175 173 2 166 9
5 190 173 17 170 20
6 205 175 30 180 25
7 180 178 2 193 13
8 182 178 4 186 4
84 100
MAD 10.50 12.50
MSE 194.75 201.50
MAPE 5.70% 6.85%
Heizer

Exponential Smoothing with Trend Adjustment
When a trend is present, exponential

smoothing must be modified
Heizer
Chase & Jacobs
Chase & Jacobs

Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.8 1.92 14.72
3 20
4 19
5 24
6 21
7 31
8 28
9 36
10
Heizer
Table 4.1

Example
Exercise.2
Table 4.1
Heizer

Trend Projections
Fitting a trend line to historical data points to

project into the medium-to-long-range
Linear trends can be found using the least
squares technique
^
y = a + bx
where y^ = computed value of the variable to be

predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
Heizer

Least Squares Method
The least squares method determines the

parameters a and b such that the sum of
the squared errors is minimized – “least
squares”
Heizer
Dr. Muhammad Hanafi, ST, IPM, MBA Figure 4.4

Least Squares Example
∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(4 2)
a = y - bx = 98.86 - 10.54(4) = 56.70

Heizer

Regression with Excel
 Microsoft Excel
includes data
analysis tools,
which can perform
least squares
regression on a
data set.
Chase & Jacobs

Seasonal Variations In Data The multiplicative seasonal model can
modify trend data to accommodate
seasonal variations in demand
Chase & Jacobs
Heizer

Determining Seasonal Factors :
Simple Proportions Example 18.3
The seasonal factor (or index) is the ratio of the amount sold during each
season divided by the average for all seasons.
Chase & Jacobs

Seasonal Index Example
Chase & Jacobs
Heizer

Decomposition Using Least
Squares Regression Using the data for periods 1-12, apply time series analysis
(decomposition, linear regression, trend estimate & seasonal
Decomposition – Steps 1 and 2 indices) to forecast for periods 13-16
Chase & Jacobs

Decomposition – Steps 3 and 4
Develop a least squares regression line for the de-seasonalized
data.
Project the regression line through the period of the forecast.
Regression Results:
Y = 555.0 + 342.2t
Forecast for
periods 13-16
Chase & Jacobs

Decomposition – Step 5
Create the final forecast by adjusting the

regression line by the seasonal factor.
Chase & Jacobs

Monitoring and Controlling Forecasts Tracking Signal
 Forecast error is the difference between the forecast
value and what actually occurred.
 All forecasts contain some level of error.
 Sources of error
 Bias – when a consistent mistake is made
 Random – errors that are not explained by the model
being used Heizer
 Measures of error
 Mean absolute deviation (MAD)
 Mean absolute percent error (MAPE)
 Tracking signal
Chase & Jacobs

Tracking Signal
Tracking Signal
Heizer

Tracking Signal Example
The variation of the tracking signal between -2.0 and +2.5 is

within acceptable limits
Heizer

Tracking Signal Example
Chase & Jacobs

Causal Relationship Forecasting
Used when changes in one or more independent
variables can be used to predict the changes in the
dependent variable
Chase & Jacobs If payroll next year is

estimated to be $600
Most common technique is linear million, then:
regression analysis
Sales = 1.75 + .25(6)
Heizer
Sales = $325,000

Multiple Regression Techniques
Heizer

The Realities!
 Forecasts are seldom perfect

 Most techniques assume an underlying
stability in the system
 Product family and aggregated
forecasts are more accurate than
individual product forecasts
Heizer

Take Away
Forecasting is a fundamental step in any planning
process.
Forecast effort should be proportional to the
magnitude of decisions being made.
All forecasts have errors – understanding and
minimizing this error is the key to effective
forecasting processes.
Forecasting helps determine the level of inventory
needed at the decoupling points.

Group
Presentation

FOR YOUR
TIME & ATTENTION

IA MET ITB-Geometallurgy




Nengah Sugita-Forecasting



SIMULATION FORECAST Case Freeport
Surface Mine, MINESIGHT MILL, METBAL & PI
& Dispatch system system
▪ Push back Design ▪ Mine head grade
▪ Dump Design and Reclamation ▪ SAG Capacity capped
▪ Resource Model ▪ Mine plan
▪ Mining Rate and Cut of Grade ▪ Specific material/ore
type
UG Mine, PCBC dan Vulcan ▪ Mill Record
▪ Block Model
▪ Cut Of Grade
▪ HOD Limits
▪ Shut off Grade
▪ Undercut and Draw point
schedule


FORECASTING FLOW PROCES at Freeport

Forecast Result
▪ Mine Mill Plan
- Short Range
- Long range
- Material and Ore Type
▪ Equipment Availability
- Truck Availability
- Shovel Availability
- Dump plan with Material distribution
- Mill Equipment availability
▪ Overburden Placement
▪ Total Drill and Blast requirement

Example Forecast Result

Planning -Forecast Result

FOR YOUR
TIME & ATTENTION

OM Forecasting GM 13

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FORECASTING

Dr. MUHAMMAD HANAFI, ST, MBA, IPM

Institut Teknologi Bandung

What Is Forecasting? Forecasting Approaches

Forecasting Time Horizons Overview of Qualitative Methods

Dr. Muhammad Hanafi, ST, IPM, MBA

Dr. Muhammad Hanafi, ST, IPM, MBA

Dr. Muhammad Hanafi, ST, IPM, MBA

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA 18-5

Introduction Growth Maturity Decline

Dr. Muhammad Hanafi, ST, IPM, MBA

 Sales force composite

 Consumer Market Survey

Dr. Muhammad Hanafi, ST, IPM, MBA

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA

Dr. Muhammad Hanafi, ST, IPM, MBA

Seasonal peaks Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA

Dr. Muhammad Hanafi, ST, IPM, MBA

 Select the items to be forecasted

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA 18-16

 The simple moving average formula implies

 A weighted moving average allows unequal

Dr. Muhammad Hanafi, ST, IPM, MBA

Dr. Muhammad Hanafi, ST, IPM, MBA

 Requires smoothing constant ()

 The most used of all forecasting techniques

Dr. Muhammad Hanafi, ST, IPM, MBA

Dr. Muhammad Hanafi, ST, IPM, MBA

Dr. Muhammad Hanafi, ST, IPM, MBA

When a trend is present, exponential

Chase & Jacobs

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA

Dr. Muhammad Hanafi, ST, IPM, MBA

Dr. Muhammad Hanafi, ST, IPM, MBA

Fitting a trend line to historical data points to

where y^ = computed value of the variable to be

Dr. Muhammad Hanafi, ST, IPM, MBA

The least squares method determines the

Dr. Muhammad Hanafi, ST, IPM, MBA Figure 4.4

∑xy - nxy 3,063 - (7)(4)(98.86)

a = y - bx = 98.86 - 10.54(4) = 56.70

Dr. Muhammad Hanafi, ST, IPM, MBA

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA 18-28

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA 18-30

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA 18-32

Chase & Jacobs

Dr. Muhammad Hanafi, ST, IPM, MBA 18-33