Operations Management

CHASE

For Competitive Advantage

ninth edition

AQUILANO JACOBS

Operations Management
For Competitive Advantage
Chapter 11

Forecasting

ninth edition
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Operations Management
Chapter 11

For Competitive Advantage

ninth edition

Forecasting

Demand Management

Qualitative Forecasting Methods

Simple & Weighted Moving Average Forecasts

Exponential Smoothing

Simple Linear Regression

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Demand Management
Independent Demand:
Finished Goods
Dependent Demand:
Raw Materials,
Component parts,
Sub-assemblies, etc.

C(2)

B(4)

D(2)

E(1)

D(3)

F(2)

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Independent Demand: What a firm can

do to manage it.

Can take an active role to influence demand.

Can take a passive role and simply respond

to demand.

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Types of Forecasts

Qualitative (Judgmental)

Quantitative

Time Series Analysis

Causal Relationships
Simulation

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Components of Demand

Average demand for a period of time

Trend
Seasonal element
Cyclical elements
Random variation
Autocorrelation

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Finding Components of Demand

Seasonal variation

Sales

x
x x

xx
x
x xx
x
x x
x
x
x
x
x
x
x
x
x
x
x
x
xxxx

x x

x
x

x
x

x
x x
x
x

Linear
x

Trend
x

Year

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Qualitative Methods
Executive Judgment

Historical analogy

Grass Roots

Qualitative

Market Research

Methods

Delphi Method

Panel Consensus

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Delphi Method

l. Choose the experts to participate. There should be

a variety of knowledgeable people in different
areas.
2. Through a questionnaire (or E-mail), obtain
forecasts (and any premises or qualifications for
the forecasts) from all participants.
3. Summarize the results and redistribute them to the
participants along with appropriate new questions.
4. Summarize again, refining forecasts and
conditions, and again develop new questions.
5. Repeat Step 4 if necessary. Distribute the final
results to all participants.

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Time Series Analysis

Time series forecasting models try to predict

the future based on past data.
You can pick models based on:
1. Time horizon to forecast
2. Data availability
3. Accuracy required
4. Size of forecasting budget
5. Availability of qualified personnel

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Simple Moving Average Formula

The simple moving average model assumes

an average is a good estimator of future
behavior.
The formula for the simple moving average is:

A t-1 + A t-2 + A t-3 +...+A t- n

Ft =
n
Ft = Forecast for the coming period
N = Number of periods to be averaged
A t-1 = Actual occurrence in the past period for
up to n periods

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Simple Moving Average Problem (1)

Week
1
2
3
4
5
6
7
8
9
10
11
12

Demand
650
678
720
785
859
920
850
758
892
920
789
844

A t-1 + A t-2 + A t-3 +...+A t- n

Ft =
n
Question: What are the
3-week and 6-week
moving average
forecasts for demand?
Assume you only have 3
weeks and 6 weeks of
actual demand data for
the respective forecasts

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13

Calculating the moving averages gives us:

Week
1
2
3
4
5
6
7
8
9
10
11
12

Demand 3-Week 6-Week

650 F4=(650+678+720)/3
678
=682.67
720
F7=(650+678+720
785
682.67
+785+859+920)/6
859
727.67
=768.67
920
788.00
850
854.67
768.67
758
876.33
802.00
892
842.67
815.33
920
833.33
844.00
789
856.67
866.50
844
867.00
854.83

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Plotting the moving averages and comparing them
shows how the lines smooth out to reveal the overall
upward trend in this example.

14

1000

Demand

900
Demand

800

3-Week

700

6-Week

600
500
1

9 10 11 12

Week

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Simple Moving Average Problem (2)

Data

Week
1
2
3
4
5
6
7

Demand
820
775
680
655
620
600
575

Question: What is
the 3 week moving
average forecast for
this data?
Assume you only
have 3 weeks and 5
weeks of actual
demand data for the
respective forecasts

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Simple Moving Average Problem (2)

Solution
Week
1
2
3
4
5
6
7

Demand
820
775
680
655
620
600
575

3-Week

5-Week

758.33
703.33
651.67
625.00

710.00
666.00

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Weighted Moving Average Formula

While the moving average formula implies an equal
weight being placed on each value that is being
averaged, the weighted moving average permits an
unequal weighting on prior time periods.
The formula for the moving average is:

Ft = w1A t-1 + w 2 A t-2 + w 3A t-3 +...+w n A t-n

wt = weight given to time period t
occurrence. (Weights must add to one.)

=1

i=1

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Weighted Moving Average Problem

(1) Data
Question: Given the weekly demand and weights, what is
the forecast for the 4th period or Week 4?
Week
1
2
3
4

Demand
650
678
720

Weights:
t-1 .5
t-2 .3
t-3 .2

Note that the weights place more emphasis on the

most recent data, that is time period t-1.

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Weighted Moving Average Problem (1)

Solution

Week
1
2
3
4

Demand Forecast
650
678
720
693.4

F4 = 0.5(720)+0.3(678)+0.2(650)=693.4

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Weighted Moving Average Problem (2)

Data
Question: Given the weekly demand information and
weights, what is the weighted moving average
forecast of the 5th period or week?
Week
1
2
3
4

Demand
820
775
680
655

Weights:
t-1 .7
t-2 .2
t-3 .1

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Weighted Moving Average Problem (2)

Solution
Week
1
2
3
4
5

Demand Forecast
820
775
680
655
672

F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672

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Exponential Smoothing Model

Ft = Ft-1 + (At-1 - Ft-1)

= smoothing constant

Premise: The most recent observations might

have the highest predictive value.
Therefore, we should give more weight to the
more recent time periods when forecasting.

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Exponential Smoothing Problem (1)

Data
Week
1
2
3
4
5
6
7
8
9
10

Demand
820
775
680
655
750
802
798
689
775

Question: Given the

weekly demand data,
what are the exponential
smoothing forecasts for
periods 2-10 using
=0.10 and =0.60?
Assume F1=D1

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Answer: The respective alphas columns denote the forecast

values. Note that you can only forecast one time period into the
future.

Week
1
2
3
4
5
6
7
8
9
10

Demand
820
775
680
655
750
802
798
689
775

0.1
820.00
820.00
815.50
801.95
787.26
783.53
785.38
786.64
776.88
776.69

0.6
820.00
820.00
820.00
817.30
808.09
795.59
788.35
786.57
786.61
780.77

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Exponential Smoothing Problem (1)

Plotting
Note how that the smaller alpha the smoother the
line in this example.

Demand

900
800

Demand

700

0.1

600

0.6

500
1

10

Week

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Exponential Smoothing Problem (2)

Data
Week
1
2
3
4
5

Question: What are the

Demand
exponential smoothing
820
forecasts for periods 2-5
775 using a =0.5?
680
655
Assume F1=D1

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Exponential Smoothing Problem (2)

Solution
F1=820+(0.5)(820-820)=820

Week
1
2
3
4
5

Demand
820
775
680
655

F3=820+(0.5)(775-820)=797.75

0.5
820.00
820.00
797.50
738.75
696.88

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The MAD Statistic to Determine

Forecasting
Error
n
MAD =

t=1

- Ft

1 MAD 0.8 standard deviation

1 standard deviation 1.25 MAD

The ideal MAD is zero. That would mean there is no forecasting

error.

The larger the MAD, the less the desirable the resulting model.

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MAD Problem Data

Question: What is the MAD value given
the forecast values in the table below?
Month
1
2
3
4
5

Sales Forecast
220
n/a
250
255
210
205
300
320
325
315

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MAD Problem Solution

Month
1
2
3
4
5

Sales
220
250
210
300
325

Forecast Abs Error

n/a
255
5
205
5
320
20
315
10

40
n

MAD =

t=1

- Ft

40
=
= 10
4

Note that by itself, the MAD

only lets us know the mean
error in a set of forecasts.

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Tracking Signal Formula

The TS is a measure that indicates whether the

forecast average is keeping pace with any
genuine upward or downward changes in demand.
Depending on the number of MADs selected, the
TS can be used like a quality control chart
indicating when the model is generating too much
error in its forecasts.
The TS formula is:

RSFE Running sum of forecast errors

TS =
=
MAD
Mean absolute deviation

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Simple Linear Regression Model

The simple linear regression
model seeks to fit a line through
various data over time.

a
0 1 2 3 4 5

Yt = a + bx

(Time)

Is the linear regression model.

Yt is the regressed forecast value or dependent

variable in the model, a is the intercept value of the the
regression line, and b is similar to the slope of the
regression line. However, since it is calculated with
the variability of the data in mind, its formulation is not
as straight forward as our usual notion of slope.

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Simple Linear Regression Formulas for

Calculating a and b

a = y - bx

b=

xy - n(y)(x)
2

x - n(x )

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Simple Linear Regression Problem

Data
Question: Given the data below, what is the simple linear
regression model that can be used to predict sales?

Week
1
2
3
4
5

Sales
150
157
162
166
177

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Answer: First, using the linear regression formulas, we can

compute a and b.

35

Week Week*Week
Sales Week*Sales
1
1
150
150
2
4
157
314
3
9
162
486
4
16
166
664
5
25
177
885
3
55
162.4
2499
Average
Sum Average
Sum
xy - n(y)(x) 2499 - 5(162.4)(3) 63

b=
=

= 6.3
2
2
55 5(9)
10
x - n(x )
a = y - bx = 162.4 - (6.3)(3) = 143.5

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The resulting regression model is:

Yt = 143.5 + 6.3x

36

Sales

Now if we plot the regression generated forecasts against the

actual sales we obtain the following chart:
180
175
170
165
160
155
150
145
140
135

Sales
Forecast

3
Period

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