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Forecasting
D1 DELL, 2/16/2012
Forecasting and Supply Chain
Management
Accurate forecasting determines how much
inventory a company must keep at various points
along its supply chain
Continuous replenishment
supplier and customer share continuously updated data
typically managed by the supplier
reduces inventory for the company
speeds customer delivery
Variations of continuous replenishment
quick response
JIT (just-
(just-in
in--time)
VMI (vendor-
(vendor-managed inventory)
stockless inventory
Forecasting and TQM
Depend on
time frame
demand behavior
causes of behavior
Time Frame
Long--range forecast
Long
usually encompasses a period of time longer
than two years
Demand Behavior
Trend
a gradual, long-
long-term up or down movement of
demand
Random variations
movements in demand that do not follow a pattern
Cycle
an up-
up-and
and--down repetitive movement in demand
Seasonal pattern
an up-
up-and
and--down repetitive movement in demand
occurring periodically
Forms of Forecast Movement
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 judgment, expertise, and opinion to
predict future demand
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 Methods
7.
Is accuracy of No 8b. Select new
forecast forecast model or
acceptable? adjust parameters of
existing model
Yes
9. Adjust forecast based 10. Monitor results
8a. Forecast over
on additional qualitative and measure forecast
planning horizon
information and insight accuracy
Time Series
Naive forecast
demand of the current period is used as
next period’s forecast
Simple moving average
stable demand with no pronounced
behavioral patterns
Weighted moving average
weights are assigned to most recent data
Moving Average:
Naïve Approach
ORDERS
MONTH PER MONTH FORECAST
Jan 120 -
Feb 90 120
Mar 100 90
Apr 75 100
May 110 75
June 50 110
July 75 50
Aug 130 75
Sept 110 130
Oct 90 110
Nov - 90
Simple Moving Average
n
Di
i=1
MAn =
n
where
n = number of periods in
the moving average
Di = demand in period i
3-month Simple Moving Average
3
ORDERS MOVING Di
MONTH PER MONTH AVERAGE
i=1
MA3 =
Jan 120 – 3
Feb 90 –
Mar 100 – 90 + 110 + 130
Apr 75 103.3 = 3
May 110 88.3
June 50 95.0
July 75 78.3 = 110 orders
Aug 130 78.3 for Nov
Sept 110 85.0
Oct 90 105.0
Nov - 110.0
5-month Simple Moving Average
ORDERS MOVING
5
MONTH PER MONTH AVERAGE
Di
Jan 120 – i=1
Feb 90 – MA5 =
5
Mar 100 –
Apr 75 –
90 + 110 + 130+75+50
May 110 – =
June 50 99.0
5
July 75 85.0
Aug 130 82.0 = 91 orders
Sept 110 88.0 for Nov
Oct 90 95.0
Nov - 91.0
Smoothing Effects
150 –
125 – 5-month
100 –
Orders
75 –
50 – 3-month
Actual
25 –
0– | | | | | | | | | | |
Jan Feb Mar Apr May June July Aug Sept Oct Nov
Month
Weighted Moving Average
Adjusts WMAn = Wi Di
i=1
moving
average where
method to Wi = the weight for period i,
more closely between 0 and 100
percent
reflect data
fluctuations Wi = 1.00
Weighted Moving Average Example
= 103.4 orders
Exponential Smoothing
Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
Exponential Smoothing (cont.)
Ft +1 = Dt + (1 - )Ft
D
where:
Ft +1 = forecast for next period
Dt = actual demand for present period
Ft = previously determined forecast for
present period
=
= weighting factor, smoothing constant
Effect of Smoothing Constant
0.0
1.0
If = 0.20, then Ft +1 = 0.20
= 0.20Dt + 0.80 Ft
If = 0, then Ft +1 = 0
= 0Dt + 1 Ft 0 = Ft
Forecast does not reflect recent data
If = 1, then Ft +1 = 1
= 1Dt + 0 Ft =Dt
Forecast based only on most recent data
(α=0.30)
Exponential Smoothing (α
60 – Actual = 0.50
50 –
40 –
Orders
= 0.30
30 –
20 –
10 –
0– | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Month
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
Adjusted Exponential
(β=0.30)
Smoothing (β
PERIOD MONTH DEMAND T3 = (F3 - F2) + (1 - ) T2
1 Jan 37 = (0.30)(38.5 - 37.0) + (0.70)(0)
2 Feb 40 = 0.45
3 Mar 41
4 Apr 37 AF3 = F3 + T3 = 38.5 + 0.45
5 May 45 = 38.95
6 Jun 50
7 Jul 43 T13 = (F13 - F12) + (1 - ) T12
8 Aug 47 = (0.30)(53.61 - 53.21) + (0.70)(1.77)
9 Sep 56
= 1.36
10 Oct 52
11 Nov 55
12 Dec 54 AF13 = F13 + T13 = 53.61 + 1.36 = 54.96
Adjusted Exponential Smoothing:
Example
FORECAST TREND ADJUSTED
PERIOD MONTH DEMAND Ft +1 Tt +1 FORECAST AFt +1
1 Jan 37 37.00 – –
2 Feb 40 37.00 0.00 37.00
3 Mar 41 38.50 0.45 38.95
4 Apr 37 39.75 0.69 40.44
5 May 45 38.37 0.07 38.44
6 Jun 50 38.37 0.07 38.44
7 Jul 43 45.84 1.97 47.82
8 Aug 47 44.42 0.95 45.37
9 Sep 56 45.71 1.05 46.76
10 Oct 52 50.85 2.28 58.13
11 Nov 55 51.42 1.76 53.19
12 Dec 54 53.21 1.77 54.98
13 Jan – 53.61 1.36 54.96
Adjusted Exponential Smoothing
Forecasts
70 –
Adjusted forecast (
( = 0.30)
60 –
Actual
50 –
Demand
40 –
30 – Forecast (
( = 0.50)
20 –
10 –
0– | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Period
Linear Trend Line
xy - nxy
y = a + bx b =
x2 - nx2
a = y-bx
where
a = intercept where
b = slope of the line n = number of periods
x = time period
x
y = forecast for x = = mean of the x values
demand for period x n
y
y = n = mean of the y values
Least Squares Example
x(PERIOD) y(DEMAND) xy x2
1 73 37 1
2 40 80 4
3 41 123 9
4 37 148 16
5 45 225 25
6 50 300 36
7 43 301 49
8 47 376 64
9 56 504 81
10 52 520 100
11 55 605 121
12 54 648 144
78 557 3867 650
Least Squares Example (cont.)
78
x = = 6.5
12
557
y = = 46.42
12
xy - nxy 3867 - (12)(6.5)(46.42)
b = 2 2
= 2
=1.72
x - nx 650 - 12(6.5)
a = y - bx
= 46.42 - (1.72)(6.5) = 35.2
Linear trend line y = 35.2 + 1.72x
Forecast for period 13 y = 35.2 + 1.72(13) = 57.56 units
70 –
60 –
Actual
50 –
Demand
40 –
Linear trend line
30 –
20 –
10 – | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
0– Period
Seasonal Adjustments
Di
Seasonal factor = Si = D
Seasonal Adjustment (cont.)
DEMAND (1000’S PER QUARTER)
YEAR 1 2 3 4 Total
2002 12.6 8.6 6.3 17.5 45.0
2003 14.1 10.3 7.5 18.2 50.1
2004 15.3 10.6 8.1 19.6 53.6
Total 42.0 29.5 21.9 55.3 148.7
D1 42.0 D3 21.9
S1 = = = 0.28 S3 = = = 0.15
D 148.7 D 148.7
D2 29.5 D4 55.3
S2 = = = 0.20 S4 = = = 0.37
D 148.7 D 148.7
Seasonal Adjustment (cont.)
For 2005
y = 40.97 + 4.30x
4.30x = 40.97 + 4.30(4) = 58.17
SF1 = (S
(S1) (F
(F5) = (0.28)(58.17) = 16.28
SF2 = (S
(S2) (F
(F5) = (0.20)(58.17) = 11.63
SF3 = (S
(S3) (F
(F5) = (0.15)(58.17) = 8.73
SF4 = (S
(S4) (F
(F5) = (0.37)(58.17) = 21.53
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
Mean Absolute Deviation
(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
MAD Example
PERIOD DEMAND, Dt Ft ( =0.3) (Dt - Ft) |Dt - Ft|
1 37 37.00 – –
2 40 37.00 3.00 3.00
3 41 37.90 3.10 3.10
4 37 D38.83
t - Ft -1.83 1.83
5 MAD
45 = n38.28 6.72 6.72
6 50 40.29 9.69 9.69
7 43 53.3943.20 -0.20 0.20
=
8 47 1143.14 3.86 3.86
9 56 44.30 11.70 11.70
10 52 = 4.8547.81 4.19 4.19
11 55 49.06 5.94 5.94
12 54 50.84 3.15 3.15
557 49.31 53.39
Other Accuracy Measures
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
Control limits of 2 to 5 MADs are used most
frequently
Tracking Signal Values
DEMAND FORECAST, ERROR E = TRACKING
PERIOD Dt Ft Dt - Ft (Dt - Ft) MAD SIGNAL
1 37 37.00 – – – –
2 40 37.00 3.00 3.00 3.00 1.00
3 41 37.90 3.10 6.10 3.05 2.00
4 37 38.83 -1.83 4.27 2.64 1.62
5 45 38.28
Tracking 6.72 for period
signal 10.99 3 3.66 3.00
6 50 40.29 9.69 20.68 4.87 4.25
7 43 43.20 -0.20
6.10 20.48 4.09 5.01
8 47 43.14
TS3 = 3.86 =24.34 2.00 4.06 6.00
9 56 44.30 3.05 36.04
11.70 5.01 7.19
10 52 47.81 4.19 40.23 4.92 8.18
11 55 49.06 5.94 46.17 5.02 9.20
12 54 50.84 3.15 49.32 4.85 10.17
Tracking Signal Plot
3 –
Tracking signal (MAD)
2 –
Exponential smoothing ( = 0.30)
1 –
0 –
-1 –
-3 –
| | | | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10 11 12
Period
Statistical Control Charts
(Dt - Ft)2
= n-1
6.12 –
Errors
0–
-6.12 –
-12.24 –
LCL = -3
-18.39 –
| | | | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10 11 12
Period
Regression Methods
Linear regression
a 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
Linear Regression
y = a + bx a = y-bx
xy - nxy
xy
b =
xx2 - nx2
where
a = intercept
b = slope of the line
x
x
x = = mean of the x data
n
yy
y = n = mean of the y data
xy - nxy
b =
x2 - nx2
a = y-bx
where
n = number of periods
x
x = = mean of the x values
n
y
y = n = mean of the y values
Linear Regression Example
x y
(Money spent on R & D) (Sales) xy x2
4 36.3 145.2 16
6 40.1 240.6 36
6 41.2 247.2 36
8 53.0 424.0 64
6 44.0 264.0 36
7 45.6 319.2 49
5 39.0 195.0 25
7 47.5 332.5 49
49 346.7 2167.7 311
Linear Regression Example (cont.)
49
x= = 6.125
8
346.9
y= = 43.36
8
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
Linear Regression Example (cont.)
Regression equation forecast for x = 7
y = 18.46 + 4.06x y = 18.46 + 4.06(7)
60,000 – = 46.88, or 46,880
50,000 –
40,000 –
Attendance, y
30,000 –
10,000 –
| | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10
Wins, x
Correlation and Coefficient of
Determination
Correlation, r
Measure of strength of relationship
Varies between -1.00 and +1.00
Coefficient of determination, r2
Percentage of variation in dependent
variable resulting from changes in the
independent variable
Computing Correlation
n xy - x y
r=
[n x2 - ( x)2] [n
[n y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
r=
[(8)(311) - (49)2] [(8)(15,224.7) - (346.9)2]
r = 0.947
Coefficient of determination
r2 = (0.947)2 = 0.897
Environ Inc. produces and installs solar panels. During the past
ten years, the sales revenue has increased from Rs. 25000000/-
25000000/-
to Rs. 65000000/-
65000000/-
Calculate the company’s growth rate in sales using the constant
growth model with annual compounding. You can use the
following formula for the constant growth model with annual
compounding:
St = S0(1+g)t, where
St = Sales at time t; S0 = Initial sales; g = growth rate.
Derive a five-
five-year and ten-
ten-year sales forecast.