BUSINESS ANALYTICS

1st Semester AY 2022-2023

Topic:

Forecasting Demand

ADRIAN O. RIVAL, CPA

Instructor
 Forecasting

• Forecasts are critical inputs to business plans, annual plans,

and budgets

• Finance, human resources, marketing, operations, and supply

chain managers need forecasts to plan: output levels,
purchases of services and materials, workforce and output
schedules, inventories, and long-term capacities

• Forecasts are made on many different variables

• Forecasts are important to managing both processes and

managing supply chains
 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
Demand Patterns
Demand Patterns
Demand Patterns
 Key Decisions
• Deciding what to forecast
 Level of aggregation
 Units of measure

• Choosing a forecasting system

• Choosing the type of forecasting technique
 Judgment and qualitative methods
 Causal methods
 Time-series analysis

• Key factor in choosing the proper forecasting

approach is the time horizon for the decision
requiring forecasts
 Judgmental Methods

 Other methods (casual and time-series) require an

adequate history file, which might not be available
 Judgmental forecasts use contextual knowledge gained
through experience
 Salesforce estimates
 Executive opinion is a method in which opinions,
experience, and technical knowledge of one or more
managers are summarized to arrive at a single forecast
 Delphi Method
 Judgment Methods

 Market research is a systematic approach to determine

external customer interest through data-gathering
surveys

 Delphi method is a process of gaining consensus from a

group of experts while maintaining their anonymity

 Useful when no historical data are available

 Can be used to develop long-range forecasts and

technological forecasting
 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
Linear Regression
Linear Regression
Using Linear Regression
Using Linear Regression
 Time Series Methods
 In a naive forecast the forecast for the next period
equals the demand for the current period (Forecast = Dt)
 Estimating the average: simple moving averages

 Used to estimate the average of a demand time series

and thereby remove the effects of random fluctuation
 Most useful when demand has no pronounced trend or
seasonal influences
 The stability of the demand series generally determines
how many periods to include
 Time Series Methods

Weekly Patient Arrivals at a Medical Clinic

Simple Moving Averages
Simple Moving Average
 Using the Moving Average
Example
Using the Moving Average
Moving Average Application
Moving Average Application
Moving Average Application
Weighted Moving Average
Weighted Moving Average
Application
Weighted Moving Average
Application
Exponential Smoothing
 Exponential Smoothing

 The emphasis given to the most recent demand levels

can be adjusted by changing the smoothing parameter
 Larger α values emphasize recent levels of demand and
result in forecasts more responsive to changes in the
underlying average
 Smaller α values treat past demand more uniformly and
result in more stable forecasts
 Exponential smoothing is simple and requires minimal
data
 When the underlying average is changing, results will
lag actual changes
Exponential Smoothing and
Moving Average
 Using Exponential Smoothing

Example
Using Exponential Smoothing
Using Exponential Smoothing
Exponential Smoothing
Application
Exponential Smoothing
Application
 Choosing Time Series Method

 Forecast performance is determined by forecast errors

 Forecast errors detect when something is going wrong
with the forecasting system
 Forecast errors can be classified as either bias errors or
random errors
 Bias errors are the result of consistent mistakes
 Random error results from unpredictable factors that
cause the forecast to deviate from the actual demand
Measures of Forecast Errors
 Calculating Forecast Errors
Example
 Calculating Forecast Errors
Example
Calculating Forecast Errors
Calculating Forecast Errors
 Calculating Forecast Errors

A CFE of –15 indicates that the forecast has a slight bias to

overestimate demand. The MSE, σ, and MAD statistics provide
measures of forecast error variability. A MAD of 24.4 means
that the average forecast error was 24.4 units in absolute
value. The value of σ, 27.4, indicates that the sample
distribution of forecast errors has a standard deviation of 27.4
units. A MAPE of 10.2 percent implies that, on average, the
forecast error was about 10 percent of actual demand. These
measures become more reliable as the number of periods of
data increases.
 Criteria for Selecting Method
Criteria to use in making forecast method and
parameter choices include
1. Minimizing bias
2. Minimizing MAPE, MAD, or MSE
3. Meeting managerial expectations of changes in the
components of demand
4. Minimizing the forecast error last period

Statistical performance measures can be used

1. For projections of more stable demand patterns, use
lower α and β values or larger n values
2. For projections of more dynamic demand patterns try
higher α and β values or smaller n values
 Using Multiple Techniques

Combination forecasts are forecasts that are

produced by averaging independent forecasts based
on different methods or different data or both

Focus forecasting selects the best forecast from a

group of forecasts generated by individual techniques
 Forecasting as a Process
 A typical forecasting process
Step 1: Adjust history file
Step 2: Prepare initial forecasts
Step 3: Consensus meetings and collaboration
Step 4: Revise forecasts
Step 5: Review by operating committee
Step 6: Finalize and communicate

 Forecasting is not a stand-alone activity, but

part of a larger process
Forecasting as a Process
 Forecasting Principles
TABLE 13.2 | SOME PRINCIPLES FOR THE FORECASTING PROCESS

 Better processes yield better forecasts

 Demand forecasting is being done in virtually every company, either formally
or informally. The challenge is to do it well—better than the competition
 Better forecasts result in better customer service and lower costs, as well as
better relationships with suppliers and customers
 The forecast can and must make sense based on the big picture, economic
outlook, market share, and so on
 The best way to improve forecast accuracy is to focus on reducing forecast
error
 Bias is the worst kind of forecast error; strive for zero bias
 Whenever possible, forecast at more aggregate levels. Forecast in detail
only where necessary
 Far more can be gained by people collaborating and communicating well
than by using the most advanced forecasting technique or model
Sample Problem 1
Sample Problem 1
Sample Problem 1
Sample Problem 1
Sample Problem 2
Sample Problem 2
Sample Problem 2
Sample Problem 2
Sample Problem 3
Sample Problem 3
Sample Problem 4
 Sample Problem 4

SOLUTION
a. Calculate the average daily mail volume for each week. Then for
each day of the week divide the mail volume by the week’s
average to get the seasonal factor. Finally, for each day, add the
two seasonal factors and divide by 2 to obtain the average
seasonal factor to use in the forecast.
Sample Problem 4
Sample Problem 4
 End of Presentation

References:
For Operations Management, 9e (Global Edition)
byKrajewski/Ritzman/Malhotra
© 2010 Pearson Education