FORECASTING

Session 05 – January 18, 2022

 Learning Outcomes
• LO1. Explain the role of demand planning in operations management, in
the firm and the supply chain
• LO2. Understand the necessity of forecasting
• LO3. Describe various qualitative and quantitative demand forecast
procedures
• LO4. Differentiate types of forecasting techniques
• LO5. Develop forecasts using various techniques
• LO6. Evaluate and select forecasting models using various measures of
accuracy

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 Uncertainty in supply and demand
• Demand may be

predictable unpredictable

Þ Both supply and demand uncertainty makes planning

and control more difficult.
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 Independent vs. Dependent
Demand
Independent Demand
Finished Goods

Dependent Demand
Raw Materials,
Component parts,
Sub-assemblies, etc.

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Independent vs. Dependent
Demand

Raw materials Finished goods

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 Forecasting
• The process of projecting the values of one or more
variables into the future.

High forecast Low forecast

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 Why do we forecast?
• To minimise uncertainty.
• To anticipate change.
• To make better decisions.

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 Demand Forecasts
• Marketing and Sales Forecast:
Specific Products
• Production Schedule
• Maintenance Schedule

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 Supply Forecasts
• Capacity
• Supply Chains
• Labour
• Raw material
• Technology

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 Forecasting Keys
• Accurate historical data.
• Understand causes of change.
• Monitor forecast vs actual demand.
• Adjust forecasts as conditions change.
• Examine causes of forecast error.

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 Types of Forecasts
Qualitative Quantitative
• Built on the estimates • Based only on a series of
and opinions of past demands.
experts. • Assume that a demand
pattern of the past will
• Panel method. continue in the future.
• Time Series Analysis.
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 Quantitative Method:
Time Series Analysis
• Use historical data.
• Many types of models available.
• Pick a model based on:
1. Fits previous data best.
2. Time horizon to forecast.
3. Data availability.
4. Accuracy required.

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 Simple Moving Average
𝐃𝐭 " 𝐃𝐭"𝟏 "𝐃𝐭"𝟐 "..."𝐃𝐭"𝐧&𝟏
Ft+1 = 𝐧
• Dt = actual demand from period t
• Ft+1 = forecast of demand for period t+1 (next
period that has not occurred yet)
• Forecast for the next period t+1 = average from the
last n periods of actual demand.
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 Simple Moving Average Exercise 1
WEEK DEMAND
1 821
• Let’s develop 3-week and 4-week 2 770
moving average forecasts for 3 690
demand for this item. 4 650
5 620
6 550
7 600
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 Simple Moving Average Exercise 2
WEEK DEMAND
1 844
2 789
3 920

• Let’s develop 3-week and 5-week 4 892

moving average forecasts for 5

6
756
850
demand for this item. 7 910
8 859
9 743
10 710
11 678
12 665

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 Weighted Moving Average
Ft+1 = w𝐭 𝐃𝐭 + w𝐭"𝟏 𝐃𝐭"𝟏 +w𝐭"𝟐 𝐃𝐭"𝟐 +. . . +w𝐭"𝐧&𝟏 𝐃𝐭"𝐧&𝟏
𝐧

! 𝐰𝐢 = 𝟏
𝐢"𝟏

• Dt = actual demand from period t

• Ft+1 = forecast of demand for period t+1 (next period
that has not occurred yet)
• wt = the weight given to the demand value in period t
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 Weighted Moving Average Exercise 1
• Determine the 3-period WEEK DEMAND
weighted moving average 1 821
forecast with weight as follow: 2 770
3 690
• t = 0.5
4 650
• t – 1 = 0.3 5 620
• t – 2 = 0.2 6 550
7 600
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 Weighted Moving Average Exercise 2
WEEK DEMAND

• Determine the 3-period 1

2
844
789
weighted moving average 3 920

forecast with weight as follow: 4

5
892
756
6 850

a. t = 0.5; t – 1 = 0.3; t – 2 = 0.2 7 910

8 859
9 743
b. t = 0.7; t – 1 = 0.2; t – 2 = 0.1 10 710
11 678
12 665

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 Exponential Smoothing
(a is the smoothing parameter)
Ft+1 = a Dt + (1-a)Ft
• Premise — we should determine how much weight to put on
recent information versus older information.
• 0<α<1
• High α (0.7) puts weight on recent demand.
• Low α (0.2) puts weight on previous periods.
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 Exponential Smoothing Exercise 1
WEEK DEMAND
1 821
• Determine exponential smoothing 2 770
forecasts by using α=0.7 3 690
4 650
• Let D1= F2 5 620
6 550
7 600
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Exponential Smoothing Exercise 2
WEEK DEMAND
• Determine exponential 1 844
2 789
smoothing forecasts by using 3 920
4 892
5 756
a. α=0.6; b. α=0.8 6 850
7 910
8 859
c. α=0.5; d. α=0.7 9 743
10 710
11 678

• Let D1= F2 12 665

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 Forecast Error
1. The projection of actual demand (D), called the forecast
(F) which projects historical patterns or relationships.

2. The error (E) which defines deviation between the

forecast and the actual demand.

Measures of Forecast Error: Et = Dt - Ft

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 Forecast Error
Mean Forecast Error Mean Absolute Deviation
(MFE) (MAD)
∑(
%&' (% ) *% ∑(
%&' |(% ) *% |
MFE = MAD =
+ +

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 Forecast Errors Exercise
Determine the Error for the four forecast periods

Month Sales Forecast

1 220
2 225 255
3 215 225
4 350 320
5 300 315

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 Homework
• Historical demand for KMK Inc., is presented on
the Excel file.
a. Complete the Forecast using three methods.
b. Conduct the forecast error by using MFE and
MAD.
c. Which method is the most appropriate to use?
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THANK YOU!