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Lecture 12
Outline
Today
Chapter 7
Homework 3
Online tomorrow
Due Friday February 26 before 5:00pm
Next week Thursday
Finish Chapter 7 (forecast error measures)
Start with Chapter 8
Network design simulation assignment
Announcements
What?
Tour the Staples Fulfillment Center in Brighton, CO
Informal Lunch-and-Learn
Up to 20 students with a Operations Management major
When?
Weeks of March 15 or March 29
There is a fair amount of time involved in the activity
Transit is close to an hour in each direction
Probably 2 hours onsite
Interested?
Let me know (email) by the end of this week
Time Series Forecasting
Observed demand =
Systematic component + Random component
L Level (current deseasonalized demand)
T Trend (growth or decline in demand)
S Seasonality (predictable seasonal fluctuation)
Forecast
Ft+n = Lt
3500
3000
2500
Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Simple Exponential
Smoothing Method
1. Estimate level
The initial estimate of level L0 is the average of all historical
data
L0 = (i Di)/ n
Revise the estimate of level for all periods using smoothing
constant
Lt+1 = Dt+1 + (1 )*Lt
2. Forecast
Forecast
Forecast for future periods is Ft+n = Lt
3500
Ft+n = Lt 3000
2500
Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Holts Method (Trend
Corrected Exponential Smoothing)
1. Estimate level and trend
The initial estimate of level L0 and trend T0 are obtained using
linear regression
=INTERCEPT(known_ys, known_xs)
=LINEST(known_ys, known_xs)
Revise the estimates for all periods using smoothing constants
and
Lt+1 = Dt+1 + (1 )*(Lt + Tt)
Tt+1 = (Lt+1 Lt) + (1 )*Tt
Forecast
2. Forecast Ft+n = Lt + nTt
3500
Forecast for future periods is 3000
2500
Ft+n = Lt + nTt
Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Winters Model (Trend
and Seasonality Corrected Exp.
Smoothing)
1. Estimate level, trend, and seasonality
The initial estimates of L0, T0, S1, S2, S3, and S4 are obtained from
static forecasting procedure
Revise the estimates for all periods using smoothing constants
, and
Lt+1 = (Dt+1/St+1) + (1 )*(Lt + Tt)
Tt+1 = (Lt+1 Lt) + (1 )*Tt
St+p+1 = (Dt+1/Lt+1) + (1 )St+1
Forecast
2. Forecast Ft+n = (Lt + nTt)St+n
3500
Forecast for future periods is 3000
2500
2000
1500 Forecast(F)
1000
500 Ft+n = Lt + nTt
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Forecast
Ft+n = Lt + nTt
= 0.1, = 0.2
Example: Tahoe Salt
Example: Tahoe Salt
50,000 Actual
Forecast (Holt)
40,000
Demand
30,000
20,000
10,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Components of an Observation
3500
3000 Seasonality (S)
2500
Demand
2000
1500
1000
500
Forecast(F)
0
1 2 3 4 5 6 7 8 9
Ft+n = (Lt + Tt)St+n
10 11 12 13 14 15 16
Quarter
Example: Winters Model
A theme park has seen the following attendance over the
last eight quarters (in thousands)
54, 87, 192, 130, 80, 124, 265, 171 Determine initial levels
L0 = From static forecast
T0 = From static forecast
Si,0 = From static forecast
Determine levels
Lt+1 = (Dt+1/St+1)+ (1 )*(Lt + Tt)
Tt+1 = (Lt+1 Lt) + (1 )*Tt
St+p+1 = (Dt+1/Lt+1) + (1 )*St+1
Forecast
Ft+1 = (Lt + Tt)St+1
Example: Tahoe Salt
Example: Tahoe Salt
50,000 Actual
Forecast (Winter)
40,000
Demand
30,000
20,000
10,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Static Versus Adaptive Forecasting
Methods
Static Adaptive
Dt: Actual demand Dt: Actual demand
3500
3000 Seasonality (S)
2500
Demand
2000
1500
1000
500
Forecast(F)
0
1 2 3 4 5 6 7 8 9
Ft+n = (Lt + Tt)St+n
10 11 12 13 14 15 16
Quarter
Example: Static Method
A theme park has seen the following attendance over the
last eight quarters (in thousands)
54, 87, 192, 130, 80, 124, 265, 171
Determine initial level
L = INTERCEPT(ys, xs)
T = LINEST(ys, xs)
Determine deason. demand
Dt = L + Tt
Determine seasonal factors
St = Dt / Dt
Determine seasonal factors
Si =AVG(St)
Forecast
Ft = (L + T)Si
Example: Tahoe Salt
Static Forecasting Method
45,000
40,000
35,000
30,000
Demand
Demand
25,000
20,000
15,000
10,000 Demand
Demand
Lin. Reg.
5,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Quarter
Static Forecasting Method
Deseasonalize demand
Demand that would have been observed in the
absence of seasonal fluctuations
Periodicity p
The number of periods after which the seasonal cycle
repeats itself
12 months in a year
7 days in a week
4 quarters in a year
3 months in a quarter
Deseasonalize demand
Deseasonalize demand
Periodicity p is odd Periodicity p is even
Example: Tahoe Salt
Static Forecasting Method
45,000
40,000
35,000
30,000
Demand
25,000
20,000
15,000 Demand
10,000 Demand
Deseason.
5,000 Deseason.
Deseason. Lin. Reg.
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Example: Tahoe Salt
50,000 Actual
Forecast (Static)
40,000
Demand
30,000
20,000
10,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Static Forecasting
Method
1. Estimate level and trend
Deseasonalize the demand data
Estimate level L and trend T using linear regression
Obtain deasonalized demand Dt
2. Estimate seasonal factors
Estimate seasonal factors for each period St = Dt /Dt
Obtain seasonal factors Si = AVG(St) such that t is the same
season as i Forecast
Ft+n = (L + nT)St+n
3. Forecast 3500
3000
Demand
2000
Observed demand =
Systematic component + Random component
L Level (current deseasonalized demand)
T Trend (growth or decline in demand)
S Seasonality (predictable seasonal fluctuation)
900000 9000
800000 8000
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
10000
10000
0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Measures of Forecast Error
Measure Description
Error Forecast Actual Demand