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Demand forecasting
A demand forecast is the prediction of what will happen to your company's existing product sales. It would be best to determine the demand forecast using a multifunctional approach. The inputs from sales and marketing, finance, and production should be considered. The final demand forecast is the consensus of all participating managers. You may also want to put up a Sales and Operations Planning group composed of representatives from the different departments that will be tasked to prepare the demand forecast.
Demand Management
Independent Demand: Finished Goods
A
B(4)
C(2)
D(2)
E(1)
D(3)
F(2)
Types of Forecasts
Qualitative (Judgmental) Quantitative Time Series Analysis Causal Relationships Simulation
Qualitative Methods
Executive Judgment
Grass Roots
Historical analogy
Qualitative Methods
Market Research
Delphi Method
Panel Consensus
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
The simple moving average model assumes an average is a good estimator of future behavior The formula for the simple moving average is:
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
W eek 1 2 3 4 5 6 7 8 9 10 11 12
Demand 3-W eek 6-Week 650 F4=(650+678+720)/3 678 =682.67 720 F7=(650+678+720 +785+859+920)/6 785 682.67 859 727.67 =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
The McGraw-Hill Companies, Inc., 2004
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Plotting the moving averages and comparing Plotting the moving averages and comparing them shows how the lines smooth out to reveal them shows how the lines smooth out to reveal the overall upward trend in this example the overall upward trend in this example
10 00 9 00 Demand 8 00 7 00 6 00 5 00 1 2 3 4 5 6 7 8 9 10 11 1 2 We e k Dema nd 3 -W e ek 6 -W e ek
Note how the Note how the 3-Week is 3-Week is smoother than smoother than the Demand, the Demand, and 6-Week is and 6-Week is even smoother even smoother
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w
i=1
=1
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Note that the weights place more emphasis on the Note that the weights place more emphasis on the most recent data, that is time period t-1 most recent data, that is time period t-1
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Week 1 2 3 4
F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
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F5 = (0.1)(775)+(0.2)(680)+(0.7)(655)= 672
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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 Question: Given the weekly demand data, what are the exponential smoothing forecasts for periods 2-10 using =0.10 and =0.60? Assume F =D 1 1
Week 1 2 3 4 5 6 7 8 9 10
Demand 820 775 680 655 750 802 798 689 775
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Answer: The respective alphas columns denote the forecast values. Note Answer: The respective alphas columns denote the forecast values. Note that you can only forecast one time period into the future. 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
0.6 820.00 820.00 793.00 725.20 683.08 723.23 770.49 787.00 728.20 756.28
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Week
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A
t=1
- Ft
The ideal MAD is zero which would mean there is no forecasting error The larger the MAD, the less the accurate the resulting model
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MAD Problem Data Question: What is the MAD value given Question: What is the MAD value given the forecast values in the table below? 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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40
MAD =
A
t=1
- Ft
40 = = 10 4
Note that by itself, the MAD Note that by itself, the MAD only lets us know the mean only lets us know the mean error in a set of forecasts error in a set of forecasts
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a
0 1 2 3 4 5 x (Time)
Yt = a + bx
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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a = y - bx
xy - n(y)(x) x - n(x )
2 2
b=
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Week 1 2 3 4 5
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Answer: First, using the linear regression formulas, we Answer: First, using the linear regression formulas, we can compute a and b can compute a and 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 xy - n( y)(x) = 2499 - 5(162.4)(3) = 63 = 6.3 b= 55 5(9 ) 10 x 2 - n(x )2
a = y - bx = 162.4 - (6.3)(3) = 143.5
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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 Sales 160 155 Forecast 150 145 140 135 1 2 3 4 5 Period
Sales
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Collaborative Planning, Forecasting, and Replenishment (CPFR) a Web-based tool used to coordinate demand forecasting, production and purchase planning, and inventory replenishment between supply chain trading partners. Used to integrate the multi-tier or n-Tier supply chain, including manufacturers, distributors and retailers. CPFRs objective is to exchange selected internal information to provide for a reliable, longer term future views of demand in the supply chain. CPFR uses a cyclic and iterative approach to derive consensus forecasts.
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1. Creation of a front-end partnership agreement 2. Joint business planning 3. Development of demand forecasts 4. Sharing forecasts 5. Inventory replenishment
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Thank you