A-CAT CORP.

: FORECASTING

Dr. Ravi Kumar, PhD

NTPC School of Business, Noida
Brief Introduction of Case
• A-CAT Corp. produced electrical appliances in India and
largely catered to the price-sensitive rural market.
• These customers are quite sensitive about pricing.
• In the opinion of top level management, there was
more scope in this segment.
• Recently, production department has complaining
shortages of spare and components, especially the
major ones.
• The vice-president asked operations manager (Shirish
Ratnaparkhi) to focus on the issue and come up with
some practical solution ( forecasting report).
• The operations manager’s job was to collect data,
analyse data patterns, use forecasting methods, and
carry out back testing.
Issue
• In recent months, the sales of voltage regulators at
A-CAT had shown a very disturbing trend.
• In reaction, A-CAT wanted to look at their policy of
purchasing and stocking spare and components in
the system, with regards to schedule and stock-in-
hand inventory.
• The brief was to prepare a comprehensive plan for
better transformer purchasing, using various
forecasting techniques, and thoroughly analyse
results and finding.
Earlier, A-CAT has four suppliers, now only one.
Forecasting
• Forecasting is the art and science of predicting
future.
• Lead times require that decisions be made in
advance of uncertain events.
• Forecasting is important for all strategic and
planning decisions in a business organization.
• Forecasts of product demand, materials, labor, and
financing are an important inputs to scheduling,
acquiring resources, and determining resource
requirements.
Demand Management
• Demand management is the interface between
manufacturing planning & control and marketplace.
• Activities include
Forecasting
Order Processing
Making Delivery Promises
Forecasting Horizons
• Short Term (0 to 3 months): for inventory
management and scheduling.
• Medium Term (3 months to 2 years): for
production planning, purchasing, and distribution.
• Long Term (2 years and more): for capacity
planning, facility location, and strategic planning.
Principles of Forecasting

• Forecasts are never accurate.

• Every forecast must include an estimate of error.
• The greater the degree of aggregation, the more
accurate the forecast.
• Long-term forecasts are usually less accurate than
the shore-term forecasts.
Factors Affecting Forecasting
Methods
• Time Frame
• Demand Behaviour
• Causes of Behaviour
Demand Behaviour
• Trend
a gradual long-term up or down movement of
demand
• Cycle
an up and down repetitive movement in demand
• Seasonal Pattern
an up and down repetitive movement of demand
occurring periodically
• Random Variations
Movements in demand that do not follow a
pattern
 Demand
Demand

Random
movement

Time Time
(a) Trend (b) Cycle

Demand
Demand

Time Time
(c) Seasonal pattern (d) Trend with seasonal pattern
Forecasting Methods
• Qualitative
Use management judgement, expertise, and
opinion to predict the future demand
• Quantitative
Time Series: Statistical techniques that use
historical demand data to predict the future

Regression: Attempts to develop a

mathematical relationship between demand
and factors that cause its behaviour
 Forecasting Process
1. Identify the 2. Collect historical data 3. Plot data and identify
purpose of forecast patterns

6. Check forecast 5. Develop/compute 4. Select a forecast

accuracy with one or forecast for period of model that seems
more measures historical data appropriate for data

7.
Is accuracy of
8b. Select new
forecast
forecast model or
acceptable?
adjust parameters of
existing model

9. Adjust forecast based 10. Monitor results

8a. Forecast over
on additional qualitative and measure forecast
planning horizon
information and insight accuracy
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
Moving Average
• Naïve Forecast
• Demand of current period is used as next period’s
forecast
• Simple Moving Average
• Stable demand with no pronounced behavioural pattern
• Weighted Moving Average
• Weights are assigned to most recent data
Simple Moving Average

n

i=1
D i

MAn =
n
where

n = number of periods in
the moving average
Di = demand in period i
Weighted Moving Average

WMAn =  Wi Di
i=1

where

Wi = the weight for period i, between

0 and 100 percent

 W = 1.00
i
Exponential Smoothing
• Averaging method
• Weights most recent data more strongly
• Reacts more to recent changes
• Widely used, accurate method

Ft +1 = Dt + (1 - )Ft
where:
Ft +1 = forecast for next period
Dt = actual demand for present period
Ft = previously determined forecast for present period
= weighting factor, smoothing constant
Adjusted Exponential Smoothing
AFt +1 = Ft +1 + Tt +1
where
T = an exponentially smoothed trend factor

Tt +1 = (Ft +1 - Ft) + (1 - ) Tt
where
Tt = the last period trend factor
= a smoothing constant for trend
Linear Trend Line

xy - nxy
y = a + bx b =
x2 - nx2
where a = y-bx
a = intercept
b = slope of the line
where
x = time period
y = forecast for demand n = number of periods
for period x
x
x = = mean of the x values
n
y
y = n = mean of the y values
Seasonal Adjustments
• Repetitive increase/decrease in demand
• Use seasonal factor to adjust the demand

Di
Seasonal factor = Si = D
Forecast Accuracy
• Forecast Error
• MAD (Mean Absolute Deviation)
• MAPD (Mean Absolute Percent Deviation)
• RSFE (Running Sum of Forecast Error or Cumulative
Error)
• Average Error or Bias
MAD

 Dt - Ft 
MAD = n
where
t = period number
Dt = demand in period t
Ft = forecast for period t
n = total number of periods
 = absolute value
Mean absolute percent deviation (MAPD)
|Dt - Ft|
MAPD =
Dt
Cumulative error
E = et
Average error
et
E= n
 |Actual - Forecast|
Mean Absolute MAPE = Actual
Percent Error n
• Tracking signal
• monitors the forecast to see if it is biased high or low
(Dt - Ft) E
Tracking signal = =
MAD MAD
• 1 MAD ≈ 0.8 б
• The “Tracking Signal” quantifies “Bias” in a forecast.
No product can be planned from a badly biased
forecast. Tracking Signal is the gateway test for
evaluating forecast accuracy.

• Tracking signal is computed as the running sum of

forecast error (RSFE) divided by MAE. We compute
RSFE by summing up the forecast errors over time.