Chapter 17

Forecasting Demand for Services

Learning Objectives
Demand characteristics
Overview of forecasting models
Common demand pattern for services
Linear regression to account for trend
Seasonality indices for seasonal demand
Combination of trend and seasonality

17-1
Demand Characteristics

Demand
Demand

Random
movemen
t
Time Time
(a) Trend (b) Cycle

Demand
Demand

Time Time
(c) Seasonal pattern (d) Trend with seasonal pattern
Forecasting Models
Subjective Models
Delphi Methods
Causal Models
Regression Models
Time Series Models
Moving Averages
Exponential Smoothing

17-3
 Using Linear Regression to
account for trend
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 37 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 = = =1.72
x - nx
2 2
650 - 12(6.5) 2

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

Repetitive increase/ decrease in demand

Use seasonal factor to adjust forecast
Si = seasonality index of period i
Ai(j) = demand in season i (in year j)
Note: The method used here is different from
the book
Ai
Seasonal factor = Si = A
ij
 Seasonal Adjustment (cont.)
DEMAND (1000S PER QUARTER)
YEAR 1 2 3 4 Total
2005 12.6 8.6 6.3 17.5 45.0
2006 14.1 10.3 7.5 18.2 50.1
2007 15.3 10.6 8.1 19.6 53.6
Total 42.0 29.5 21.9 55.3 148.7

A1 42.0
A3 21.9
S1 = = = 0.28 S3 = = = 0.15
Aij 148.7 Aij 148.7

A2 29.5
A4 55.3
S2 = = = 0.20 S4 = = = 0.37
Aij 148.7 Aij 148.7
Forecast to account for both
Trend and Seasonality
Step 1: Calculate the seasonal index for each season.
Step 2: Use linear regression to forecast the total demand for the
following year to account for trend. (In the previous slide
example, use the year as dependent variable, and yearly
demand as independent variable)

a = 40.97, b = 4.30 (Note: 2005/6/7 are years 1/2/3)

F(2008) = 40.97 + 4.30(4) = 58.17

Step 3: Use the forecast total demand (obtained in Step 2) and

multiply by the seasonal index to determine the forecast
seasonal demand.
SF1 = (S1) (F2008) = (0.28)(58.17) = 16.28
SF2 = (S2) (F2008) = (0.20)(58.17) = 11.63
SF3 = (S3) (F2008) = (0.15)(58.17) = 8.73
SF4 = (S4) (F2008) = (0.37)(58.17) = 21.53