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CH 12
CH 12
CH 12
Forecasting
Lecture Outline
Strategic Role of Forecasting in Supply Chain
Management
Components of Forecasting Demand
Time Series Methods
Forecast Accuracy
Time Series Forecasting Using Excel
Regression Methods
12-2
Forecasting
Predicting the future
Qualitative forecast methods
subjective
12-3
quick response
JIT (just-in-time)
VMI (vendor-managed inventory)
stockless inventory
12-4
12-5
Forecasting
Quality Management
Accurately forecasting customer demand is a key to
providing good quality service
Strategic Planning
Successful strategic planning requires accurate
forecasts of future products and markets
12-6
12-7
Time Frame
Indicates how far into the future is forecast
Short- to mid-range forecast
typically encompasses the immediate future
daily up to two years
Long-range forecast
usually encompasses a period of time longer than
two years
12-8
Demand Behavior
Trend
a gradual, long-term up or down movement of demand
Random variations
movements in demand that do not follow a pattern
Cycle
an up-and-down repetitive movement in demand
Seasonal pattern
an up-and-down repetitive movement in demand
occurring periodically
12-9
Demand
Demand
Random
movement
Time
(b) Cycle
Demand
Demand
Time
(a) Trend
Time
(c) Seasonal pattern
Time
(d) Trend with seasonal pattern
12-10
Forecasting Methods
Time series
statistical techniques that use historical demand data to predict
future demand
Regression methods
attempt to develop a mathematical relationship between demand
and factors that cause its behavior
Qualitative
use management judgment, expertise, and opinion to predict
future demand
12-11
Qualitative Methods
Management, marketing, purchasing, and
engineering are sources for internal qualitative
forecasts
Delphi method
involves soliciting forecasts about technological
advances from experts
12-12
Forecasting Process
1. Identify the
purpose of forecast
2. Collect historical
data
6. Check forecast
accuracy with one or
more measures
5. Develop/compute
forecast for period of
historical data
4. Select a forecast
model that seems
appropriate for data
7.
Is accuracy of
forecast
acceptable?
No
Yes
8a. Forecast over
planning horizon
12-13
Time Series
Assume that what has occurred in the past will continue
to occur in the future
Relate the forecast to only one factor time
Include
moving average
exponential smoothing
linear trend line
12-14
Moving Average
Naive forecast
demand in current period is used as next periods
forecast
12-15
Naive forecasts
We sold 250 wheels last
week.... Now, next week we
should sell.
250 wheels
F(t+1) = At
At : Actual demand in period t
F(t+1) : Forecast of demand for period t+1
ORDERS
PER MONTH
Jan
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
Aug
130
Sept
110
Oct
90
Nov
FORECAST
120
90
100
75
110
50
75
130
110
90
12-17
i = 1 Di
MAn =
where
n
Di
= number of periods in
the moving average
= demand in period i
12-18
ORDERS
PER MONTH
Jan
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
Aug
130
Sept
110
Oct
Nov
90
-
MOVING
AVERAGE
103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0
i=1
MA3 =
Di
3
=
90 + 110 + 130
3
12-19
PER MONTH
Jan
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
Aug
130
Sept
110
Oct
Nov
90
-
MOVING
AVERAGE
99.0
85.0
82.0
88.0
95.0
91.0
i=1
MA5 =
=
Di
90 + 110 + 130+75+50
5
= 91 orders for Nov
12-20
Smoothing Effects
150
125
5-month
Orders
100
75
50
3-month
25
Actual
0
|
Jan
|
Feb
|
Mar
|
Apr
|
May
|
|
June July
|
|
Aug Sept
|
Oct
|
Nov
Month
Copyright 2011 John Wiley & Sons, Inc.
12-21
Wi Di
i=1
where
W = 1.00
i
12-22
WEIGHT
DATA
17%
33%
50%
130
110
90
WMA3 = i
= 1 Wi Di
12-23
Exponential Smoothing
Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
12-24
Exponential Smoothing
Ft +1 = Dt + (1 - )Ft
where:
Ft +1 = forecast for next period
Dt =
12-25
12-26
MONTH
DEMAND
F2 = D1 + (1 - )F1
1
Jan
37
Feb
40
Mar
41
Apr
37
May
45
Jun
50
Jul
43
Aug
47
Sep
56
10
Oct
52
11
Nov
55
12
Dec
54
= (0.30)(37) + (0.70)(37)
= 37
F3 = D2 + (1 - )F2
= (0.30)(40) + (0.70)(37)
= 37.9
F13 = D12 + (1 - )F12
= (0.30)(54) + (0.70)(50.84)
= 51.79
12-27
Exponential Smoothing
PERIOD
MONTH
DEMAND
1
2
3
4
5
6
7
8
9
10
11
12
13
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
37
40
41
37
45
50
43
47
56
52
55
54
FORECAST, Ft + 1
( = 0.3)
( = 0.5)
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
51.79
37.00
38.50
39.75
38.37
41.68
45.84
44.42
45.71
50.85
51.42
53.21
53.61
12-28
Exponential Smoothing
70
60
= 0.50
Actual
50
Orders
40
30
= 0.30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
11
|
12
|
13
Month
Copyright 2011 John Wiley & Sons, Inc.
12-29
12-30
MONTH
DEMAND
Jan
37
Feb
40
Mar
41
Apr
37
May
45
Jun
50
Jul
43
Aug
47
Sep
56
10
Oct
52
11
Nov
55
12
Dec
54
T3
= (F3 - F2) + (1 - ) T2
= (0.30)(38.5 - 37.0) + (0.70)(0)
= 0.45
12-31
MONTH
DEMAND
FORECAST
Ft +1
1
2
3
4
5
6
7
8
9
10
11
12
13
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
38.50
39.75
38.37
38.37
45.84
44.42
45.71
50.85
51.42
53.21
53.61
TREND
Tt +1
ADJUSTED
FORECAST AFt +1
0.00
0.45
0.69
0.07
0.07
1.97
0.95
1.05
2.28
1.76
1.77
1.36
37.00
38.95
40.44
38.44
38.44
47.82
45.37
46.76
58.13
53.19
54.98
54.96
12-32
60
Actual
50
Demand
40
30
Forecast ( = 0.50)
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
12-33
xy - nxy
b = x2 - nx2
a = y-bx
where
n = number of periods
x
x = n = mean of the x values
y
y = n = mean of the y values
12-34
y(DEMAND)
xy
x2
1
2
3
4
5
6
7
8
9
10
11
12
73
40
41
37
45
50
43
47
56
52
55
54
37
80
123
148
225
300
301
376
504
520
605
648
1
4
9
16
25
36
49
64
81
100
121
144
78
557
3867
650
12-35
12-36
Demand
50
40
30
20
10
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
12-37
Seasonal Adjustments
Repetitive increase and decrease in demand
Use seasonal factor to adjust forecast
Holiday season: toys, sport equipments,
clothing, wine, fruit, etc.
Seasonal factor = Si =
Di
D
12-38
Seasonal Adjustment
YEAR
2002
2003
2004
Total
8.6
10.3
10.6
29.5
D1
42.0
S1 =
=
= 0.28
D 148.7
D2
29.5
S2 =
=
= 0.20
148.7
D
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
45.0
50.1
53.6
148.7
D3
21.9
S3 =
=
= 0.15
D 148.7
D4
55.3
S4 =
=
= 0.37
148.7
D
12-39
Seasonal Adjustment
For 2005
y = 40.97 + 4.30x = 40.97 + 4.30(4) = 58.17
SF1 = (S1) (F5) = (0.28)(58.17) = 16.28
SF2 = (S2) (F5) = (0.20)(58.17) = 11.63
SF3 = (S3) (F5) = (0.15)(58.17) = 8.73
SF4 = (S4) (F5) = (0.37)(58.17) = 21.53
12-40
Forecast Accuracy
Forecast error
difference between forecast and actual demand
MAD
mean absolute deviation
MAPD
mean absolute percent deviation
Cumulative error
Average error or bias
12-41
t = period number
Dt = demand in period t
Ft = forecast for period t
n = total number of periods
= absolute value
12-42
MAD Example
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
DEMAND, Dt
Ft ( =0.3)
(Dt - Ft)
|Dt - Ft|
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
3.00
3.10
-1.83
6.72
9.69
-0.20
3.86
11.70
4.19
5.94
3.15
3.00
3.10
1.83
6.72
9.69
0.20
3.86
11.70
4.19
5.94
3.15
49.31
53.39
557
12-43
MAD Calculation
Dt - Ft
MAD =
n
53.39
=
11
= 4.85
12-44
|Dt - Ft|
Dt
Cumulative error
E = et
Average error
et
E= n
Copyright 2011 John Wiley & Sons, Inc.
12-45
Comparison of Forecasts
FORECAST
MAD
MAPD
(E)
4.85
4.04
3.81
9.6%
8.5%
7.5%
49.31
33.21
21.14
4.48
3.02
1.92
2.29
4.9%
12-46
Forecast Control
Tracking signal
monitors the forecast to see if it is biased high or low
1 MAD 0.8
Control limits of 2 to 5 MADs are used most
frequently
Tracking signal =
(Dt - Ft)
MAD
E
= MAD
12-47
DEMAND
Dt
FORECAST,
Ft
1
2
3
4
5
6
7
8
9
10
11
12
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
TS3 =
Copyright 2011 John Wiley & Sons, Inc.
ERROR
Dt - Ft
3.00
3.10
-1.83
6.72
9.69
-0.20
3.86
11.70
4.19
5.94
3.15
E =
(Dt - Ft)
MAD
3.00
6.10
4.27
10.99
20.68
20.48
24.34
36.04
40.23
46.17
49.32
3.00
3.05
2.64
3.66
4.87
4.09
4.06
5.01
4.92
5.02
4.85
TRACKING
SIGNAL
1.00
2.00
1.62
3.00
4.25
5.01
6.00
7.19
8.18
9.20
10.17
6.10
= 2.00
3.05
12-48
3
2
1
0
-1
-2
-3
|
0
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
12-49
(Dt - Ft)2
n-1
12-50
UCL = +3
Errors
6.12
0
-6.12
-12.24
-18.39
LCL = -3
|
0
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
12-51
Moving average
Exponential smoothing
Adjusted exponential smoothing
Linear trend line
12-52
=C10+D10
=ABS(B10-E10)
=SUM(F10:F20)
=G22/11
Copyright 2011 John Wiley & Sons, Inc.
12-53
12-54
12-55
12-56
12-57
Regression Methods
Linear regression
mathematical technique that relates a dependent
variable to an independent variable in the form of a
linear equation
Correlation
a measure of the strength of the relationship between
independent and dependent variables
12-58
Linear Regression
y = a + bx
a = y-bx
xy - nxy
b = x2 - nx2
where
a = intercept
b = slope of the line
x
x = n = mean of the x data
y
y = n = mean of the y data
12-59
y
(ATTENDANCE)
xy
x2
4
6
6
8
6
7
5
7
36.3
40.1
41.2
53.0
44.0
45.6
39.0
47.5
145.2
240.6
247.2
424.0
264.0
319.2
195.0
332.5
16
36
36
64
36
49
25
49
49
346.7
2167.7
311
12-60
xy - nxy2
b=
x2 - nx2
(2,167.7) - (8)(6.125)(43.36)
=
(311) - (8)(6.125)2
= 4.06
a = y - bx
= 43.36 - (4.06)(6.125)
= 18.46
Copyright 2011 John Wiley & Sons, Inc.
12-61
Attendance, y
40,000
30,000
20,000
10,000
|
0
y = 18.46 + 4.06(7)
= 46.88, or 46,880
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
Wins, x
Copyright 2011 John Wiley & Sons, Inc.
12-62
Coefficient of determination, r2
Percentage of variation in dependent variable
resulting from changes in the independent variable
12-63
Computing Correlation
r=
n xy - x y
[n x2 - ( x)2] [n y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
r=
12-64
=INTERCEPT(B5:B12,A5:A12)
=SUM(B5:B12)
=CORREL(B5:B12,A5:A12)
12-65
12-66
12-67
Multiple Regression
Study the relationship of demand to two or more
independent variables
y = 0 + 1x1 + 2x2 + kxk
where
0
= the intercept
1, , k = parameters for the
independent variables
x1, , xk = independent variables
Copyright 2011 John Wiley & Sons, Inc.
12-68
Regression equation
coefficients for x1 and x2
12-69
12-70
12-71
Week
1
10
11
10
13
Moving average =
n
Week Auto
Sales
Three-Week Moving
Average
10
11
(8 + 9 + 10) / 3 = 9
10
(10 + 9 + 11) / 3 = 10
13
(9 + 11 + 10) / 3 = 10
Last week
Total
Week
Auto
Sales
10
11
10
13
Exponential smoothing
Smoothing constant
.2
.05
Example 1
Example 2
Month
Actual
Battery Sales
Forecast
January
20
22
February
21
March
15
April
14
May
13
June
16
Example 3
Given the forecast demand and actual
demand for 10-foot fishing boats, compute
the tracking signal and MAD.
Year
Forecast Demand
Actual Demand
78
71
75
80
83
101
84
84
88
60
85
73
Forecast errors
MAD =
n
70
11.7
6