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Chopra SCM7GE INPPT 07
Chopra SCM7GE INPPT 07
Chapter 7
Demand Forecasting in a
Supply Chain
2. Time Series
– Use historical demand only
– Best with stable demand
3. Causal
– Relationship between demand and some other factor
4. Simulation
– Imitate consumer choices that give rise to demand
Ft l [L (t l )T ]St l
Where
L = estimate of level at t = 0
T = estimate of trend
St = estimate of seasonal factor for Period t
Dt = actual demand observed in Period t
Ft = forecast of demand for Period t
p
t –1
2
Dt – p Dt p 2Di
2 2 p
i t 1–
2
(2 p ) for p even
Dt
( p –1)
t 2
( p –1)
Di
i t –
2
p for p odd
p
t –1
2
Dt – p Dt p p 2Di
2 2
i t 1–
2
Dt
(2 p )
4
D1 D5 2Di
i 2
Di
St
Dt
S
j 0
jp i
Si
r
Where
Lt = estimate of level at the end of Period t
Tt = estimate of trend at the end of Period t
St = estimate of seasonal factor for Period t
Ft = forecast of demand for Period t (made
Period t – 1 or earlier)
Dt = actual demand observed in Period t
Et = Ft – Dt = forecast error in Period t
Copyright © 2019 Pearson Education, Ltd.
Steps in Adaptive Forecasting
• Initialize
– Compute initial estimates of level (L0), trend (T0), and
seasonal factors (S1,…,Sp)
• Forecast
– Forecast demand for period t + 1
• Estimate error
– Compute error Et+1 = Ft+1 – Dt+1
• Modify estimates
– Modify the estimates of level (Lt+1), trend (Tt+1), and
seasonal factor (St+p+1), given the error Et+1
Copyright © 2019 Pearson Education, Ltd.
Moving Average
• Used when demand has no observable trend or seasonality
(Dt Dt 1 … Dt – N +1 )
Lt
N
Ft 1 Lt and Ft n Lt
(Dt +1 Dt … Dt N 2 )
Lt +1 , Ft 2 Lt +1
N
122 114 127 120 120.75
4
125 122 114 127 122
4
Copyright © 2019 Pearson Education, Ltd.
Simple Exponential Smoothing (1 of 3)
• Used when demand has no observable trend or seasonality
Systematic component of demand = level
• Initial estimate of level, L0, assumed to be the average of all
historical data
Revised forecast
using smoothing Lt 1 Dt 1 (1 – )Lt
constant (0 < α < 1)
t –1
Thus Lt 1 (1 – )n Dt 1– n (1 – )t D1
n 0
F1 = L0 = 120.75
E1 = F1−D1 = 120.75−120 = 0.75
L1 = αD1+(1−α)L0
= 0.1×120+0.9 ×120.75=120.68
Dt = at + b
T0 = a, L0 = b
• In Period t, the forecast for future periods is
Lt 1 Dt 1 1 α Lt Tt
Tt +1 Lt 1 Lt 1 Tt
Copyright © 2019 Pearson Education, Ltd.
Trend-Corrected Exponential Smoothing
(Holt’s Model) (3 of 4)
• Smartphone player demand
• Period 1 error
• With new L1
• Continuing
Et Ft – Dt n
Et
1 n
Dt
100
t 1
MSEn Et2 MAPEn
n t 1 n
At Et
1 n
MADn At biasn Et
n t 1 t 1
1.25MAD biast
TSt
MADt
t –1 1–
Declining alpha t
t –1 1 – t
Copyright © 2019 Pearson Education, Ltd.
Summary of Learning Objective 4
Forecast error measures the random component of demand. This
measure is important because it reveals how inaccurate a forecast
is likely to be and what contingencies a firm may have to plan
for. The MSE, MAD, and MAPE are used to estimate the size of
the fore- cast error. The bias and TS are used to estimate if the
forecast consistently over- or under- forecasts or if demand has
deviated significantly from historical norms.
• Software is important
– Large amounts of data
– Frequency of forecasts
– Importance of high-quality results
• Can forecast demand by products and markets
• Real time updates help firms respond quickly to changes in
marketplace
• Facilitates demand planning