1/17/2024

BM60116 – Modeling in Operations Management

Forecasting for Operations

Management

Sushil Punia
VGSOM, IIT KGP

Jan-May 2024

Time Series Forecasting

Smoothing Methods
Winters’ method (Triple exponential smoothing)
- used when demand has both trend and seasonality
Assuming the time series is of the form of :
Xt = (level+trend)*seasonality + random error
Smoothing equations (Multiplicative form):
• Level equation: Lt = α (Xt/St-p) + (1−α) (Lt-1+ Tt-1)
• Trend equation: Tt = β (Lt − Lt-1) + (1− β) Tt-1
• Seasonality equation: St = γ (Xt/ Lt) + (1− γ) St-p

Next period Forecast equation: Ft+h = (Lt + h*Tt)* St+h-p

α: smoothing constant for the Level 0 < α < 1

β: smoothing constant for the Trend 0 < β < 1
γ: smoothing constant for the Seasonality 0 < γ < 1

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Associative Forecasting

• Used when changes in one or more independent

variables can be used to predict the changes in the
dependent variable

• Most common technique is linear regression analysis

• Similar to trend analysis

Regression Analysis

• Forecasting an outcome based on predictor variables

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 though to
predict the value of the dependent
variable
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Regression Analysis
Sales Area Payroll
($ millions), y ($ billions), x
2.0 1
3.0 3
2.5 4
2.0 2
4.0 –
2.0 1
3.5 7 3.0 –
Sales

∑xy - nxy 2.0 –

b=
∑x2 - nx2
1.0 –

| | | | | | |
a = y - bx 0 1 2 3 4 5 6 7
Area payroll

Regression Analysis

Sales, y Payroll, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
∑y = 15.0 ∑x = 18 ∑x2 = 80 ∑xy = 51.5

∑xy - nxy 51.5 - (6)(3)(2.5)

x = ∑x/6 = 18/6 = 3 b= = 80 - (6)(32)
= .25
∑x2 - nx2

y = ∑y/6 = 15/6 = 2.5 a = y - bx = 2.5 - (.25)(3) = 1.75

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Regression Analysis

y^ = 1.75 + .25x Sales = 1.75 + .25(payroll)

If payroll next year

4.0 –
is estimated to be
$6 billion, then: 3.25
Nodel’s sales 3.0 –

2.0 –
Sales = 1.75 + .25(6)
Sales = $3,250,000 1.0 –

| | | | | | |
0 1 2 3 4 5 6 7
Area payroll

Multiple Regression Analysis

• More than one independent variable is to be used in

the model
• Linear regression can be extended to multiple
regression to accommodate several independent
variables

^
y = a + b1x1 + b2x2 …

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Multiple Regression Analysis

• In the previous example, including interest rates in the

model gives the new equation:

^ = 1.80 + .30x - 5.0x

y 1 2

After regression fitting:

Sales = 1.80 + .30(6) - 5.0(.12) = 3.00

Sales = $3,000,000

Monitoring of forecasts

• Use a tracking signal

• A tracking signal is a measurement of how well a forecast
is predicting actual values.

• Positive tracking signals indicate that demand is greater

than forecast. (using Bias = Actual – Forecast)
• Negative signals mean that demand is less than forecast.

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Monitoring of forecasts

What is good TS? (Target: Forecasts without bias)

• Positive and negative errors should balance one another so that
the tracking signal centers closely around zero.
• A consistent greater or less than the actual values is not desirable

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Forecasting rules
1. Techniques assume some underlying causal system that
existed in the past will persist into the future

1. Forecasts are not perfect (or always wrong!)

1. Forecasts for groups of items are more accurate than

those for individual items

1. Forecast accuracy decreases as the forecasting horizon

increases

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An example:
Use MA(4) for each product

Month P1 P2
1 10000 8000
2 14000 4000
3 16000 2500
4 12000 6500
5 18000 2000
6 15000 4000
7 14000 3000
8 11000 7000
9 13000 5000
10 11000 6000

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Why do organizations need to

do aggregate planning?
MAD1 = 2291.67
MAPE1 = 17.1318
MAD2 = 1604.167
MAPE2 = 46.5377

MAD = 1020.83
MAPE = 5.66

Forecast Accuracy:
P1 - 82.87% P2 - 53.46% Aggregated
(P1 + P2) - 94.33%

Refer Excel Sheet.

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Thanks