FOREC ASTING

FORECASTING MATERIALS DEMAND

• Materials management needs to plan the annual

(aggregate) demand in order for the organization
operates smoothly.
• This requires the knowledge of forecasting
techniques. These are two broad categories of
forecasting.
• They are qualitative and quantitative forecasting.
 FORECASTING MATERIALS DEMAND

Qualitative forecasting: Applied when no

historical data is available.
• INFORMATION ENVIRONMENT

• UNDER Complete certainty - Objective

forecasting /quantitative
• UNDER Incomplete certainty

• Qualitative /subjective forecasting

 FORECASTING MATERIALS DEMAND

Quantitative forecasting: a technique used if

data are available and the future is somewhat
probable. It includes:
• Simple average
• Simple moving average
• Weighted average
• Exponential smoothing
• Time series analysis
• Regression analysis
 FORECASTING MATERIALS DEMAND

1. Simple average and moving average

• EXAMPLE:
• The annual demand for breads in BDU is as
follows:
How many quintals of bread are needed for
2022 ?
YEAR 2016 2017 2018 2019 2020 2021

DEMAND 2000 2300 2600 2700 3000 3500

IN
QUINALS
OF BREAD
 2000  2300  2600  2700  3000  3500
SA   2684
6
 FORECASTING MATERIALS DEMAND

Simple moving
average using 3
years
 3500  3000  2700
SMA3   3067
3
 Weighted average using 0, 5,7,15, 30, and 43 weights .

WA  (2000  0)  (2,300  .05)  (.07  2600)  (015  2700)

 (.3  3000)  (.43  3500)  3107

Quintals
 Exponential smoothing:

•In this method three pieces of data are needed

to forecast the future
1.The previous year's forecast
2. The actual demand for that year
3.A smoothing constant, alpha - reaction to
differences between forecast and actual
demand.
 Ft  Ft 1   ( At 1  Ft 1

Where
Ft = Forecast for this year

Ft 1 = Prior period forecast

 = A smoothing constant (percentage)

At 1 = prior period actual demand

 Example

Bahir Dar University forecasted 2500

quintals of bread for November 2020

while actual demand turned out to be



2300 quintals.

What would be December's forecast

using smoothing constant of 10%
FN  2500  .10(2300  2500)

 2500  .10( 200)

 2500  20  2480
Quintals
•if actual demand for December turned out to
be 2600 of quintals, what would be January's
forecast?

FD+1 = FD + α(AD – FD)

 B. EXPONENTIAL SMOOTHING
• USED BY COMPANIES WITH
HUNDREDS OF ITEMS IN
PRODUCT MIX
 ILLUSTRATION
SALES OF ‘X’ COMPANY OVER 6 YEARS
TIME PERIOD [t] ACTUAL SALES [Qt] [000]

1 60.0
2 64.0
3 58.0
4 66.0
5 70.0
6 60.0
7 ?
 SALES FOR THE VII YEAR
is given by

__
Q t+1 = α Q t + (1- α) Q t
WHERE

• SALES FORECAST FOR

Q t+1 THE NEXT YEAR

SMOOTHING
CONSTANT
WHERE

0  1
 Q
• CURRENT SALES IN PERIOD t


t
 Q
• SMOOTHED SALES IN PERIOD t

t
4. REGRESSION
ANALYSIS
1. SIMPLE REGRESSION

2. MULTIPLE REGRESSION
1. SIMPLE REGRESSION

THE FORMULA
Y  a  bX
VALUE OF THE DEPENDENT VARIABLE

Y
VALUE OF THE INDEPENDENT VARIABLE

X
 a
Y- INTERCEPT [CONSTANT VALUE]
 b
SLOPE OF THE LINE
    X  Y 
•
n  XY 
b =
n X   X 
2 2
a=
 Y
b
 X
n n
 Example

• Suppose you are a manager of a building

materials production company and you feel
demand for the board your company producing
and selling is related to the no of construction
permits issued by the municipalities in your
locality in the previous years.
• You have collected the following data.
• If construction permit for the next year is 30
what would you think the demand for the board
shall be?
(x) Construction permit Demand for boards (100)
15 6
9 4
40 16
20 6
25 13
25 9
15 10
35 16
30 ?