Topic 6 - Forecasting

Operations
Management
Forecasting
Prof. Upendra Kachru

Prediction
Prediction
Reflects judgment after taking all

considerations into account
Based on intuition
Involves anticipated changes in

future that may or may not happen
Based on unique representations
It can be biased
No error analysis
Prof. Upendra Kachru Operations Management

Forecasting
Forecasting
Involves the projection of the past

into the future
Estimating the demand on the basis

of factors that generated the
demand
Based on theoretical model
It is objective
Error Analysis is possible
Results are replicable

A forecast is an estimate of
a future event achieved by
systematically combining DEFINING
and casting forward , in a FORECASTING
predetermined way, data
about the past.

Forecasting vs. Prediction
Forecasting Prediction
Involves the projection of the past into Reflects management’s judgment after
the future taking all considerations into account
Estimating the demand on the basis of Involves anticipated changes in future

factors that generated the demand that may or may not generate the
demand
Based on theoretical model Based on intuition
It is objective It can be biased
Error Analysis is possible No error analysis
Results are replicable Based on unique representations

Forecasting is the start
of any planning activity.
The main purpose of
forecasting is to estimate
WHY
the occurrence, timing or FORECASTING?
magnitude of future
events.

The Decision making Cycle
The decision making cycle reflects how organizations use
forecasting to reduce the impact of market forces on a
business.
Forecasts help management take into account external

factors that impact operations and reduce the uncertainty.
Decision Types requiring Forecasting
Types of Decision
Short term Specific demand
Medium Aggregate
term demand
Long term
Strategies &
Planning facilities
Forecasting horizon in years

Demand Forecasting
Demand Forecasting is the
activity of estimating the quantity
of a product or service that
consumers will purchase.
Demand forecasting involves
techniques including both formal
and informal methods.
Demand forecasting may be used
in making scheduling decisions, in
assessing future capacity
requirements, or in making
decisions on whether to enter
a new market.
9
Types of Demand
Aggregate Planning is concerned with aggregate demand
i.e. the amount of a particular economic good
or service that a consumer or group of consumers
will want to purchase (at a given price).
Independent Demand:
Finished Goods
A Dependent Demand:
Raw Materials,
Component parts,
B(4) C(2) Sub-assemblies, etc.
D(2) E(1) D(3) F(2)

10
Demand and Costs
The firm should be able to
forecast ideal levels of
inventory.
The relative cost of holding
either too much or too little
inventory might be different
from the ideal levels because
of poor forecasts of demand.
 If demand were less than
expected, the firm would incur
extra inventories and the cost of
holding them.
 If demand were greater than
expected, the firm would incur
back-order or shortage cost and
the possible opportunity costs of
lost sales or a lower volume of
activity.

Demand Management
Do I manage demand ?
Do I live with it?
Demand management describes the process of
influencing the volume of consumption of the
product or service through management decision
so that firms can use their resources and
production capacity more effectively.

Independent Demand
 Can take an active role to
influence demand. For example,
air conditioner manufactures
offer discounts for their
products in winter , when
demand for the products falls.
 Demand management is also
used to spread demand more
evenly. Telephone companies,
world over, offer discounts for
calls made during late hours or
at night.
 Can take a passive role and
What to do? simply respond to demand
13
Eight Steps to
Forecasting
 Determining the use of the
forecast--what are the
objectives?
 Select the items to be forecast
 Determine the time horizon of
the forecast
 Select the forecasting model(s)
 Collect the data
 Validate the forecasting model
 Make the forecast
 Implement the results

Types of Forecasts
 Quantitative
 Time Series Analysis
 Exponential Method
 Regression Analysis
 Simulation/ Scenario Planning
 Qualitative (Judgmental)
15
Time Series
1. Extrapolation
2. Moving average Method
Exponential Method
1. Simple Exponential Method
Quantitative
2. Double Exponential Method Approach
3. Triple Exponential Method
Regression Analysis
1. Simple Regression Analysis
2. Multiple Regression Analysis

Time Series
There are five basic patterns in which demand varies

with time that have been identified:
 Horizontal
 Trend
 Seasonal
 Cyclical
 Random

Graphical Representation
Demand
(units)
Constant
Time

Moving Average Method
The general formula for moving average is:
Ft+1 = (At + At-1 + At-2 + At-3 +

……+ At-n+1 ) / n
Where:
 Ft+1 is the moving average for the period t+1,
 At, At-1, At-2, At-3 etc. are actual values for the corresponding
period, and ‘n’ is the total number of periods in the
average
Or it can be written as:
A t-1 + A t-2 + A t-3 +...+A t- n

Ft =
n
Simple Moving Average Problem
A t-1 + A t-2 + A t-3 +...+A t- n
Ft =
Week Demand n
1 650 Question:
Question: What
What are
are the
the 3-
3-
2 678 week
3 720
week and
and 6-week
6-week moving
moving
4 785
average
average forecasts
forecasts forfor
5 859 demand?
demand?
6 920 Assuming
Assuming you
you only
only have
have 33
7 850 weeks
weeks and
and 66 weeks
weeks of of actual
actual
8 758 demand
9 892 demand data
data for
for the
the
10 920
respective
respective forecasts
forecasts
11 789
12 844
Calculating the moving averages gives us:
W eek Demand 3-W eek 6-W eek
1 650 F4=(650+678+720)/3
2 678
=682.67
3 720 F7=(650+678+720
4 785 682.67 +785+859+920)/6
5 859 727.67 =768.67
6 920 788.00
7 850 854.67 768.67
8 758 876.33 802.00
9 892 842.67 815.33
10 920 833.33 844.00
11 789 856.67 866.50
12 844 867.00 854.83
©The McGraw-Hill Companies, Inc.,
Problem (2) Data
Question:
Question: What
What isisthe
the 33
week
weekmoving
movingaverage
average
Week Demand forecast
forecast for
for this
thisdata?
data?
1 820 Assume
Assume youyouonly
onlyhave
have33
2 775 weeks
weeksand
and55 weeks
weeksofof
3 680 actual
actualdemand
demanddata datafor
forthe
the
4 655 respective
respectiveforecasts
forecasts
5 620
6 600
7 575

Problem (2) Solution
Week Demand 3-Week 5-Week

1 820 F4=(820+775+680)/3
2 775 =758.33
3 680 F6=(820+775+680
+655+620)/5
4 655 758.33 =710.00
5 620 703.33
6 600 651.67 710.00
7 575 625.00 666.00

Weighted Moving Average
While
While thethemoving
movingaverage
averageformula
formula implies
impliesan
an equal
equalweight
weight
being
beingplaced
placedon
on each
each value
valuethat
that isisbeing
beingaveraged,
averaged, the
the
weighted
weighted moving
moving average
averagepermits
permits an anunequal
unequalweighting
weightingon
on
prior
prior time
timeperiods
periods
The general formula for the weighted moving average then

changes to:
Ft+1 = wtAt + wt-1 At-1 + wt-2 At-2 + wt-3 At-3 +
……+ wt-n+1 At-n+1
Where:
Ft+1 is the weighted moving average for the period t+1,
wt is the weighing factor, and ∑wt = 1

The
Theformula
formulafor
forthe
themoving
movingaverage
averagecan
canalso
alsobe
bewritten
writtenas:
as:
Ft = w 1A t-1 + w 2 A t-2 + w 3A t-3 +. ..+w n A t-n
n
wwt ==weight
t weightgiven
occurrence
givento
occurrence(weights
totime
timeperiod
(weightsmust
period“t”
mustadd
addto
“t”
toone)
one)
∑w
i=1
i =1
Question:
Question: Given
Giventhe
theweekly
weekly demand
demandand andweights,
weights,
what
whatis
isthe
theforecast
forecast for
for the
the44th period
th
period or
or Week
Week4?
4?
Week Demand Weights:
1 650 t-1 .5
2 678 t-2 .3
3 720 t-3 .2
4
Note
Note that
thatthe
theweights
weights place
placemore
moreemphasis
emphasis on on
the
themost
most recent
recent data,
data, that
thatis
istime
timeperiod
period “t-1”
“t-1”
25
Problem Solution
Week Demand Forecast

1 650
2 678
3 720
4 693.4
F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
26
Problem (2) Data
Question:
Question: Given
Giventhe
the weekly
weeklydemand
demandinformation
information
and
and weights,
weights, what
what is
isthe
the weighted
weightedmoving
moving
average
averageforecast
forecast of
of the
the55th period
th
period or
or week?
week?
Week Demand Weights:

1 820 t-1 .7
2 775 t-2 .2
3 680
t-3 .1
4 655
27
W eek Demand Forecast

1 820
2 775
3 680
4 655
5 672
F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
28
Exponential method is a
technique that is applied to time
series data, either to produce
smoothed data for presentation,
or to make forecasts.
Premise: The most recent
observations might have the Exponential
highest predictive value.
Therefore, we should give more
Method
weight to the more recent time
periods when forecasting

Exponential Smoothing Model
The exponential relationship be written as:

Ft+1 = α Dt + (1 - α) Ft
Where:
Dt is the actual value
Ft is the forecasted value
α is the weighting factor, which ranges from 0 to 1
t is the current time period.
The variance is given by:
(Dt - Ft+1 )2 / n = Variance
30
Problem (1) Data
Question:
Question:Given
Giventhe
theweekly
weekly
Week Demand demand
demanddata,
data,what
whatare
arethe
the
1 820 exponential
exponentialsmoothing
smoothingforecasts
forecasts
2 775 for
forperiods
periods2-10 usingαα =0.10
2-10using =0.10
3 680 andαα =0.60?
and =0.60?
4 655 Assume
AssumeFF11=D
=D11
5 750
6 802 Which
Whichis
isaabetter
betterchoice?
choice?
7 798
8 689
9 775
10
31
Answer:
Answer:The
Therespective
respectivealphas
alphascolumns
columnsdenote
denotethe
theforecast
forecast
values.
values. Note
Notethat
thatyou
youcan
canonly
onlyforecast
forecastone
onetime
timeperiod
periodinto
intothe
the
future.
future.
Week Demand 0.1
F3=775x0.1 + (1-
0.6
1 820 820.00
0.1)x820 =815.50820.00
2 775 820.00 820.00
3 680 815.50 793.00
4 655 801.95 725.20
5 750 787.26 683.08
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28
32
Which one?
Demand 0.1 D-W (D-W)2 0.6 D-W (D-W)2
820 820.00 0.00 0.00 820.00 0.00 0
775 820.00 -45.00 2025.00 820.00 -45.00 2025
680 815.50 -135.50 18360.25 793.00 -113.00 12769
655 801.95 -146.95 21594.30 725.20 -70.20 4928.04
750 787.26 -37.26 1387.94 683.08 66.92 4478.286
802 783.53 18.47 341.16 723.23 78.77 6204.398
798 785.38 12.62 159.35 770.49 27.51 756.6461
689 786.64 -97.64 9533.35 787.00 -98.00 9603.436
775 776.88 -1.88 3.52 728.20 46.80 2190.348
53404.87 42955.15
Answer:
Answer:Variance
Variance0.30.3 ==6675.61
6675.61and
andVariance
Variance0.60.6 ==5369.39.
5369.39. Therefore
Therefore
alpha
alphaas
as0.6
0.6is
isaabetter
betterchoice
choice
33
Plotting the Solution
Note
Note how
how that
thatthe
the smaller
smaller alpha
alpharesults
resultsin
in aa smoother
smoother
line
linein
inthis
thisexample
example
900
800 Demand
Demand
700 0 .1
600 0 .6
500
1 2 3 4 5 6 7 8 9 10
Week
34
Problem (2) Data
Week Demand Question:

Question: What
What are
arethe
the
exponential
exponential smoothing
smoothing
1 820 forecasts
forecastsfor
for periods
periods2-5
2-5
2 775 using
using aa=0.5?
=0.5?
3 680
4 655 Assume
Assume FF11=D
=D11
5
35
F1=820x0.5 + (1.0-0.5)x820 = F3=775x0.5 + (1.0-0.5)x820

820 =797.75
Week Demand 0.5

1 820 820.00
2 775 820.00
3 680 797.50
4 655 738.75
5 696.88
Exponential Smoothing & Simple
Moving Average
An exponentially weighted moving average with

a smoothing constant a, corresponds roughly to
a simple moving average of length (i.e., period)
n, where α and n are related by:
α = 2/(n+1) OR n = (2 - α)/ α.

Double and Triple Smoothing
An exponential smoothing over an already
smoothed time series is called double-
exponential smoothing. It applies the process of
exponential smoothing to a time series that is
already exponentially smoothened.
This is used when trends are not stationary.
In the case of nonlinear trends it might be
necessary to extend it even to a triple-
exponential smoothing. Triple Exponential
Smoothing is better at handling parabola trends
and is normally used for such data.

Double Exponential Smoothing
What happens when there is a definite
non-stationary trend?
A trendy clothing boutique has had the following sales
over the past 6 months:
1 2 3 4 5 6
510 512 528 530 542 552
560 Actual
550
540
Demand 530 Forecast
520
510
500
490
480
1 2 3 4 5 6 7 8 9 10
Month
Deseasoning Demand: Seasonal Index
Seasonal index represents the extent of seasonal
influence for a particular segment of the year. The
calculation involves a comparison of the expected
values of that period to the grand mean.
The formula for computing seasonal factors is:
Si = Di/D,
where:
Si = the seasonal index for ‘i’ th period,
Di = the average values of ‘i’ th period,
D = grand average,
i = the ith seasonal period of the cycle
40
ProblemStep 4: Divide Actual Step 2: Add data in Col. 2
sales (Col. 2) with the and 5. Then divide by ‘2’
seasonal
The sales data for factor
two years are(Col. 7) with the sales data aggregated in periods of
given
two months.
Month, 2003 Sales Deseasoned Month, 2004 Sales Average Seasonal Deseasoned
Demand factor Demand
Jan – Feb 109.0 125.29 Jan – Feb 115.0 112.0 0.87 132.18
Mar – Apr 104.0 125.30 Mar – Apr 112.0 108.0 0.83 130.12
May – June 150.0 126.05 May – June 159.0 154.5 1.19 133.61
Step 3: Divide Col. 6
112/129.42 = 0.87
Jul – Aug 170.0 125.00 Jul – Aug 182.0 176.0 1.36 133.82
Sept – Oct 120.0 126.32 Sept – Oct 126.0 123.0 0.95 132.63
Nov – Dec 100.0 125.00 Nov – Dec 106.0 103.0 0.80 132.50
Total 753 800
Step 1: Add data in Col. 2 and divide by ‘n’. Then add data in Col. 2 and divide by
‘n’. Determine the average. (753/6 + 800/6)/2 = (125.5 + 133.33)/2 = 129.42

Regression Analysis is a
method of predicting the value
of one variable based on the
Regression value of other variables.
Analysis It reflects the casual
relationship underlying the
demand being forecast and an
independent variable.

Regression analysis is of two
types:
(a)Simple Linear Regression: A
regression using only one predictor is
called a simple regression, and
(b)Multiple Regressions: Where there
are two or more predictors, multiple
Regression regression analysis is employed.
There are two types of variables,
Analysis one that is being forecasted and
one from which the forecast is
made.
The first one is known as the
dependent variable, the latter as
the independent variable.

Simple Regression Analysis
The functional relationship between the two can
be visualized within a system of coordinates
where the dependent variable is shown on the y
and independent variable on the x-axis.
yt=f(x) or yt = a + bx
Where:
‘yt’ is the dependent variable
‘a’ is the Y intercept
‘b’ is the slope of the line, and
‘x’ is the time period

Y
The
Thesimple
simplelinear
linearregression
regression
model
modelseeks
seeksto
tofit
fitaaline
line
through
throughvarious
variousdata
dataover
over a
time
time 0 1 2 3 4 5 x (Time)
yt = a + bx
Is
Isthe
thelinear
linearregression
regressionmodel
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.
45
Simple Linear Regression Formulas
For Calculating “a” and “b”
a = y - bx
∑ xy - n(y)(x)
b= 2 2
∑ x - n(x )
46
Problem
Question:
Question: Given
Given the
thedata
data below,
below, what
what isis the
the simple
simple linear
linear
regression
regressionmodel
model that
that can
can be
be used
used to
to predict
predict sales
salesin
in
future
futureweeks?
weeks?
Week Sales
1 150
2 157
3 162
4 166
5 177
47
48
Answer:
Answer: First,
First,using
using the
thelinear
linear regression
regressionformulas,
formulas, we
we
can
can compute
compute“a” “a”and
and“b”
“b”
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
b=
∑ xy - n( y)( x) 2499 - 5(162.4)(3
=
)
=
63
= 6.3
∑x - n( x )
2 2
55 − 5(9 ) 10
a = y - bx = 162.4 - (6.3)(3) = 143.5

48
49
The resulting regression

model is: yt = 143.5 + 6.3x
Now if we plot the regression generated forecasts
against the actual sales we obtain the following chart:
180
175
170
165
160 Sales
Sales
155 Forecast
150
145
140
135
1 2 3 4 5
Period
49
Correlation Analysis
Correlation analysis measures the degree of relationship
between normally distributed dependent and
independent variables and is signified by the correlation
coefficient ‘r’.
Mathematically, correlation coefficient is defined by:
2
Sxy
r = 1- 2
Sy
Where:
•Syx 2 is the standard error of the estimated regression
equation of the ‘y’ values on ‘x’, and
•Sy2 is the standard error for the ‘y’ values
Multiple Regression
With multiple regressions, we can use more than one
predictor.
The forecast takes the form:

Y = β0 + β1 X1 + β2 X2 + . . .+ βn Xn,
Where:
β0 is the intercept, and
β1, β2, . . . βn are coefficients
representing the contribution
of the independent variables
X1, X2,..., Xn.

All forecasts have errors.
However, the ‘error’ in a
forecast should be within
confidence limits. Forecasting
The error can be measured Errors
by or described by the
standard error, the mean
absolute deviation, or the
variance.

Source of forecast errors: Forecasting
Forecast
Model may be Accuracy
inadequate
 Irregular variations Errors
 Incorrect use of forecasting
technique
 Random variation
Key to validity is randomness
 Accurate models: random
errors
 Invalid models: nonrandom
errors
Key question: How to determine if
forecasting errors are random?

Error measures Error
Error - difference between actual Measurements
value and predicted value
• Mean Absolute Deviation

(MAD) - Average absolute
error
• Mean Squared Error (MSE) -
Average of squared error
• Mean Absolute Percent
Error (MAPE) - Average
absolute percent error

Forecasting Error Formulae
∑ Actual − forecast
MAD =
n
2
∑ ( Actual − forecast)
MSE =
n -1
Actual − Forecast
∑ Actual
× 100
MAPE =
n
MAD Characteristics
1 M A D≈ 0.8 standard deviat
ion
1 standarddeviation≈ 1.25 M AD
 The ideal MAD is zero which would mean there is no

forecasting error
 When the error is less than three standard deviations, it

is considered as an acceptable forecast.
σ = √ (π/2) x MAD ≈ 1.25 MAD
Where ‘σ’ is the standard deviation
 The larger the MAD, the less the accurate the resulting
model
56
MAD Problem (1)
Question:
Question: What
What is
isthe
theMAD
MADvalue
valuegiven
given the
the
forecast
forecast values
valuesin
inthe
thetable
tablebelow?
below?
Month Sales Forecast

1 220 n/a
2 250 255
3 210 205
4 300 320
5 325 315
57
Solution σ = 1.25 MAD = 12.5; 3 σ =37.5
All readings are within limits
Month Sales Forecast Abs Error
1 220 n/a
2 250 255 5
3 210 205 5
4 300 320 20
5 325 315 10
40
n
Note
Notethat
thatby
byitself,
itself,the
theMAD
∑A
t=1
t - Ft
40 only
onlylets
letsus
usknow
knowthe
MAD
themean
mean
MAD = = = 10 error
errorininaaset
setofofforecasts
forecasts
n 4

Example (2)
Period Actual Fore cast (A-F) |A-F| (A-F)^2 (|A-F|/Actual)*1

1 217 215 2 2 4 0.9
2 213 216 -3 3 9 1.4
3 216 215 1 1 1 0.4
4 210 214 -4 4 16 1.9
5 213
MAD = 22/8 = 211
2.75 2 2 4 0.9
6 219 214 5 5 25 2.2
7 216 217 -1 1 1 0.4
8 212 216 -4 4 16 1.8
-2 22 76 10.2
MSE = 76/7 = 10.86
MAD= 2.75 MAPE = 10.26/8 =
MSE= 10.86 10.86
MAPE= 1.28
Tracking Signals
The Tracking Signal or 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 MAD’s 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:
∑ (Actual demand - Forecast demand)

i =1
i
MAD
60
Control Charts
A control chart is:

 A visual tool for monitoring forecast errors
 Used to detect non-randomness in errors
 Forecasting errors are in control if

 All errors are within the control limits
 No patterns, such as trends or cycles, are present

Controlling the forecast

Control charts
Control charts are based on the following assumptions:
 when errors are random, they are Normally distributed
around a mean of zero.
 Standard deviation of error is
 95.5% of data in a normal distribution is within 2 standard
deviation of the mean MSE
 99.7% of data in a normal distribution is within 3 standard
deviation of the mean
 Upper and lower control limits are often determine via
0 ±2 MSE or±
0 3 MSE

Example
Compute 2s control limits for s = MSE 3.295
=
forecast errors to determine if
the forecast is accurate. 2s = 6.59
Errors are all

5.41
between -6.59 and
+6.59
3.41 No pattern is
observed
1.41
Therefore,
-0.59 0 according to
10
control chart
-2.59 criterion, forecast
is reliable
-4.59
(Refer Slide 42)
-6.59
CPFR is forecasting based on
the concept of supply chain
management. It is a business
Collaborative model that takes a holistic
Planning approach to supply chain
management and information
Forecasting and exchange among trading
Replenishment partners.
It uses common metrics,
(CPFR) standard language, and firm
agreements to improve supply
chain efficiencies for all
participants.

In other words, CPFR is
based on considering the
entire supply chain or
partnerships as a single unit
Collaborative and the sharing of information
between the links in the chain.
Planning
The objective is to
Forecasting and collectively, as members of
the supply chain, meet the
Replenishment needs of the final consumer.
(CPFR) This is accomplished by
supplying the right product at
the right place, right time and
right price to the customer.

CPFR usually begins with identifying a ‘forecasting
champion’. The forecasting champion can be it a single
person, a department, or a firm.
A forecast collaboration group is formed with each organization

choosing its member in this group. Group members should
represent a variety of functional areas including sales,
marketing, logistics/operations, finance, and information
systems.
The driving premise of CPFR is
that all supply chain participants
develop a synchronized forecast.
A company can collaborate with
Collaborative numerous other supply network
Planning members both upstream and
downstream in the supply
Forecasting and network.
Replenishment Every participant in a CPFR
process — supplier,
(CPFR) manufacturer, distributor, retailer
— can view and amend forecast
data to optimize the process from
end to end.

1.Special Long-Term
Identify and analyze the Forecast
Methodologies
organizational issues that
will provide the decision
focus
2. Specify the key decision
factors
Scenario
3. Identify and analyze the key
environmental forces Planning
4. Establish the scenario logics
5. Select and elaborate the
scenario
6. Interpret the scenario for
their decision implications

Qualitative
approach –
(Judgmental)
 Historical Analogy
Method
 Executive Opinion
Method
 Survey Methods
 The Delphi Method

Qualitative Approaches
 Usually based on judgments
about causal factors that
underlie the demand of
particular products or services
 Do not require a demand
history for the product or
service, therefore are useful
for new products/services
 Approaches vary in
sophistication from
scientifically conducted
surveys to intuitive hunches
about future events
Operations Management
Executive Opinion Method
Technique Low Sales High Sales
Manager’s 40.7% 39.6%
Opinion
Executive’s 40.7% 41.6%
Opinion
Sales Force 29.6% 35.4%
Composite
Number in 27 48
Sample

How to choose the right Tool

Operations
Management
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Operations

Prof. Upendra Kachru

Reflects judgment after taking all

Involves anticipated changes in

Based on unique representations

Prof. Upendra Kachru Operations Management

Involves the projection of the past

Estimating the demand on the basis

Based on theoretical model

Error Analysis is possible

Results are replicable

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Estimating the demand on the basis of Involves anticipated changes in future

Based on theoretical model Based on intuition

It is objective It can be biased

Error Analysis is possible No error analysis

Results are replicable Based on unique representations

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Forecasts help management take into account external

Short term Specific demand

Forecasting horizon in years

Prof. Upendra Kachru Operations Management

D(2) E(1) D(3) F(2)

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

There are five basic patterns in which demand varies

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Ft+1 = (At + At-1 + At-2 + At-3 +

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

Prof. Upendra Kachru Operations Management

Week Demand 3-Week 5-Week

Prof. Upendra Kachru Operations Management

The general formula for the weighted moving average then

Prof. Upendra Kachru Operations Management

Week Demand Forecast

Week Demand Weights:

W eek Demand Forecast

Prof. Upendra Kachru Operations Management

The exponential relationship be written as:

Week Demand Question:

F1=820x0.5 + (1.0-0.5)x820 = F3=775x0.5 + (1.0-0.5)x820

Week Demand 0.5

An exponentially weighted moving average with

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Yt is the regressed forecast value or dependent variable in

a = y - bx = 162.4 - (6.3)(3) = 143.5

The resulting regression

The forecast takes the form:

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

Prof. Upendra Kachru Operations Management

• Mean Absolute Deviation