Et ZC342 L7 PDF

ETZC 342
MATERIALS MANAGEMENT
BITS Pilani
Pilani Campus
Anil Jindal
Department of Mechanical Engineering
BITS Pilani
Pilani Campus
CHAPTER--8
FORECASTING
LECTURE-7
Quantitative Methods
Time Series Methods
1. Simple Moving Average
2. Weighted Moving Average
3. Exponential Smoothing
Causal Methods
Linear Regression
BITS Pilani, Pilani Campus
EXPONENTIAL SMOOTHING
Exponential smoothing is actually a way of smoothing
out the data by eliminating much of the noise (random
effects).
Ft +1 = Dt + (1 - )Ft
where
Ft +1 = forecast for next period

Dt = actual demand for present period
Ft = previously determined forecast for present period
= weighting factor, smoothing constant
Ft 1 Dt (1 - )Ft Ft ( Dt Ft )
Ft Dt 1 1 Ft 1 Ft 1 Dt 1 Ft 1
Dt-1 Actual demand in period t-1
Ft-1 Forecast for period t-1
Smoothing constant >0, <1

Forecast is old forecast plus a portion of the error of the
last forecast.
IN EXPONENTIAL SMOOTHING
The idea behind smoothing the data is to get a more realistic idea
about what is really going on.
The value of the smoothing constant, , is selected by the
modeler.
Higher values of allow the time series to be swayed quickly
by the most recent observation.
Lower values keep the smoothed time series flatter as not
that much weight will be given to the most recent
observation.
Usual values of are between about .1 and .7
See graphs for = .1 and = .7 later in this module.
The value (1-) is called the damping factor.
EFFECT OF SMOOTHING CONSTANT

0.0 1.0
If = 0.20, then Ft +1 = 0.20Dt + 0.80 Ft
If = 0, then Ft +1 = 0Dt + 1 Ft 0 = Ft
Forecast does not reflect recent data
If = 1, then Ft +1 = 1Dt + 0 Ft =Dt
Forecast based only on most recent data
PERIOD
MONTH
DEMAND
1
2
3
4
5
6
7
8
9
10
11
12
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
37
40
41
37
45
50
43
47
56
52
55
54
PERIOD
MONTH
DEMAND
1
2
3
4
5
6
7
8
9
10
11
12
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
37
40
41
37
45
50
43
47
56
52
55
54
F2 = D1 + (1 - )F1
= (0.30)(37) + (0.70)(37)
= 37
F3 = D2 + (1 - )F2
= (0.30)(40) + (0.70)(37)
= 37.9
F13 = D12 + (1 )F12
= (0.30)(54) + (0.70)(50.84)
= 51.79
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
MONTH
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
13
Jan
FORECAST, Ft + 1
DEMAND
( = 0.3)
37
40
37.00
41
37.90
37
38.83
45
38.28
50
40.29
43
43.20
47
43.14
56
44.30
52
47.81
55
49.06
54
50.84
51.79
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
13
MONTH
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
DEMAND
37
40
41
37
45
50
43
47
56
52
55
54
FORECAST, Ft + 1
( = 0.3)
( = 0.5)
37.00
37.00
37.90
38.50
38.83
39.75
38.28
38.37
40.29
41.68
43.20
45.84
43.14
44.42
44.30
45.71
47.81
50.85
49.06
51.42
50.84
53.21
51.79
53.61
EXPONENTIAL SMOOTHING FORECASTS

70
60
Actual
Orders
50
40
30
20
10
|
1
|
2
|
3
|
4
|
5
|
6
Month
|
7
|
8
|
9
|
10
|
11
|
12
|
13

70
60
Actual
Orders
50
40
= 0.30
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
11
|
12
|
13
Month
Figure 8.3

70
Actual
= 0.50
60
Orders
50
= 0.30
40
30
20
10
|
1
|
2
|
3
|
4
|
5
|
6
Month
|
7
|
8
|
9
|
10
|
11
|
12
|
13
Smoothing Constant between 0.1-0.3
Easier to compute than moving average
Most widely used forecasting method, because of its
easy use
If no trend, all do equally well
With trend, all do equally poorly
Per Dem Simple3MA WMA Exp Sm
1 10
10.0
2 12
10
10.0
3 14
11
10.6
4 15
12 12.0 12.4
11.6
5 16 12.8 13.7 14.0
12.6
6 17 13.4
15 15.2
13.6
7 19
14
16 16.2
14.7
8 21 14.7 17.3 17.7
16.0
9 23 15.5
19 19.4
17.5
22
20
18
16
14
12
10
0
2
Dem
WMA
4
6
Simple
ES
8
3MA
10
=0.3
Per Dem SimpleMov Wtd Exp Sm
1 10
10.0
2 12
10
10.0
3 14
11
11.0
4 15
12 12.0 12.4
12.5
5 16 12.8 13.7 14.0
13.8
6 17 13.4
15 15.2
14.9
7 19
14
16 16.2
15.9
8 21 14.7 17.3 17.7
17.5
9 23 15.5
19 19.4
19.2
22
20
18
16
14
12
10
0
Dem
2
4
Simple
6
Mov
8
Wtd
10
ES
=0.5
ADJUSTED EXPONENTIAL SMOOTHING EXAMPLE

PERIOD
MONTH
DEMAND
1
2
3
4
5
6
7
8
9
10
11
12
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
37
40
41
37
45
50
43
47
56
52
55
54
ADJUSTED EXPONENTIAL SMOOTHING EXAMPLE

PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
MONTH
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
DEMAND
37
40
41
37
45
50
43
47
56
52
55
54
T3
= (F3 - F2) + (1 - ) T2
= (0.30)(38.5 - 37.0) + (0.70)(0)
= 0.45
AF3 = F3 + T3 = 38.5 + 0.45

= 38.95
ADJUSTED EXPONENTIAL SMOOTHING

EXAMPLE
PERIOD
MONTH
DEMAND
FORECAST
Ft +1
1
2
3
4
5
6
7
8
9
10
11
12
13
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
38.50
39.75
38.37
38.37
45.84
44.42
45.71
50.85
51.42
53.21
53.61
TREND
Tt +1
ADJUSTED
FORECAST AFt +1
0.00
0.45
0.69
0.07
0.07
1.97
0.95
1.05
2.28
1.76
1.77
1.36
37.00
38.95
40.44
38.44
38.44
47.82
45.37
46.76
58.13
53.19
54.98
54.96

FORECASTS
70
60
Actual
Demand
50
40
Forecast ( = 0.50)
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13

FORECASTS
70
Adjusted forecast ( = 0.30)
60
Actual
Demand
50
40
Forecast ( = 0.50)
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
EVALUATING FORECASTS
How far off is the forecast?
Forecasts
Demands
What do we do with this information?

LINEAR TREND LINE

y = a + bx
where
a
b
x
y
=
=
=
=
intercept (at period 0)

slope of the line
the time period
forecast for demand for period x
CALCULATIONS
Least squares Method
xy - nxy
b = x2nx2
a = y-bx
where
n = number of periods
x
x = n = mean of the x values
y
y = n = mean of the y values
LEAST SQUARES EXAMPLE

x(PERIOD)
y(DEMAND)
1
2
3
4
5
6
7
8
9
10
11
12
73
40
41
37
45
50
43
47
56
52
55
54
78
557
Example 8.5
LEAST SQUARES EXAMPLE

x(PERIOD)
y(DEMAND)
xy
x2
1
2
3
4
5
6
7
8
9
10
11
12
37
40
41
37
45
50
43
47
56
52
55
54
37
80
123
148
225
300
301
376
504
520
605
648
1
4
9
16
25
36
49
64
81
100
121
144
78
557
3867
650
LINEAR TREND LINE

70
60
Actual
Demand
50
40
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
LINEAR TREND LINE

70
60
Actual
Demand
50
40
Linear trend line
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
SEASONAL ADJUSTMENTS
Repetitive increase/ decrease in demand
Use seasonal factor to adjust forecast
Seasonal factor = Si =
Di
D
SEASONAL ADJUSTMENT
DEMAND (1000S PER QUARTER)

YEAR
1
2
3
4
Total
1999
2000
2001
Total
12.6 8.6
14.1 10.3
15.3 10.6
42.0 29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
45.0
50.1
53.6
148.7
SEASONAL ADJUSTMENT
YEAR
1999
2000
2001
Total

1
2
3
4
Total
12.6
14.1
15.3
42.0
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
D1
42.0
S1 =
=
= 0.28
D
148.7
S2
D2
29.5
=
=
= 0.20
D
148.7
17.5
18.2
19.6
55.3
45.0
50.1
53.6
148.7
S3
D3
21.9
=
=
= 0.15
D
148.7
S4
D4
55.3
=
=
= 0.37
D
148.7
SEASONAL ADJUSTMENT
YEAR
1999
2000
2001
Total
Si

1
2
3
4
Total
12.6
14.1
15.3
42.0
0.28
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
0.20
0.15
0.37
45.0
50.1
53.6
148.7
SEASONAL ADJUSTMENT
YEAR
1999
2000
2001
Total
Si

1
2
3
4
Total
12.6
14.1
15.3
42.0
0.28
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
0.20
0.15
0.37
45.0
50.1
53.6
148.7
For 2002
y = 40.97 + 4.30x
= 40.97 + 4.30(4)
= 58.17
SEASONAL ADJUSTMENT
YEAR
1999
2000
2001
Total
Si

1
2
3
4
Total
12.6
14.1
15.3
42.0
0.28
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
0.20
0.15
0.37
45.0
50.1
53.6
148.7
For 2002
y = 40.97 + 4.30x
= 40.97 + 4.30(4)
= 58.17
SF1 = (S1) (F5)

= (0.28)(58.17) = 16.28
SF3 = (S3) (F5)

= (0.15)(58.17) = 8.73
SF2 = (S2) (F5)

= (0.20)(58.17) = 11.63
SF4 = (S4) (F5)

= (0.37)(58.17) = 21.53
FORECAST ACCURACY
Error = Actual - Forecast
Find a method which minimizes error
Mean Absolute
Deviation (MAD)
Mean Absolute
Percent Deviation (MAPD)
Cumulative Error (E)
MEAN ABSOLUTE DEVIATION (MAD)

Dt - Ft
MAD =
n
where
t = the period number
Dt = demand in period t
Ft = the forecast for period t
n = the total number of periods
= the absolute value
MAD EXAMPLE
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
DEMAND, Dt
37
40
41
37
45
50
43
47
56
52
55
54
Ft ( =0.3)
37.00
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
557
MAD EXAMPLE
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
DEMAND, Dt
37
40
41
37
45
50
43
47
56
52
55
54
557
Ft ( =0.3)
37.00
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
(Dt - Ft)
|Dt - Ft|
3.00
3.10
-1.83
6.72
9.69
-0.20
3.86
11.70
4.19
5.94
3.15
3.00
3.10
1.83
6.72
9.69
0.20
3.86
11.70
4.19
5.94
3.15
49.31
53.39
MAD EXAMPLE
TRACKING SIGNAL
Compute each period
Compare to control limits
Forecast is in control if within limits
Tracking signal =
(Dt - Ft)
E
=
MAD
MAD
Use control limits of +/- 2 to +/- 5 MAD

TRACKING SIGNAL VALUES

PERIOD
DEMAND
Dt
FORECAST,
Ft
1
2
3
4
5
6
7
8
9
10
11
12
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
ERROR
Dt - Ft
3.00
3.10
-1.83
6.72
9.69
-0.20
3.86
11.70
4.19
5.94
3.15
E =
(Dt - Ft)
3.00
6.10
4.27
10.99
20.68
20.48
24.34
36.04
40.23
46.17
49.32
MAD
3.00
3.05
2.64
3.66
4.87
4.09
4.06
5.01
4.92
5.02
4.85
TRACKING
SIGNAL
1.00
2.00
1.62
3.00
4.25
5.01
6.00
7.19
8.18
9.20
10.17
CAUSAL MODELING WITH LINEAR

REGRESSION
Study relationship between two or
more variables
Dependent variable y depends on
independent variable x
y = a + bx
LINEAR REGRESSION FORMULAS

a = y-bx
xy - nxy
b =
x2 - nx2
where
a = intercept (at period 0)
b = slope of the line
x
x =
= mean of the x data
n
y
y = n = mean of the y data
LINEAR REGRESSION EXAMPLE

x
(WINS)
y
(ATTENDANCE)
xy
x2
4
6
6
8
6
7
5
7
36.3
40.1
41.2
53.0
44.0
45.6
39.0
47.5
145.2
240.6
247.2
424.0
264.0
319.2
195.0
332.5
16
36
36
64
36
49
25
49
49
346.7
2167.7
311
LINEAR REGRESSION LINE

60,000
50,000
Attendance, y
40,000
30,000
20,000
10,000
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
Wins, x
LINEAR REGRESSION LINE

60,000
50,000
Attendance, y
40,000
30,000
Linear regression line, y

= 18.46 + 4.06x
20,000
10,000
|
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
Wins, x
CORRELATION AND COEFFICIENT OF

DETERMINATION
Correlation, r
Measure of strength of relationship
Varies between -1.00 and +1.00
Coefficient of determination, r2
Percentage of variation in dependent variable
resulting from changes in the independent variable
COMPUTING CORRELATION
r=
r=
n xy - x y
[n x2 - ( x)2] [n y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
[(8)(311) - (49)2] [(8)(15,224.7) - (346.9)2]

r = 0.947
Coefficient of determination
r2 = (0.947)2 = 0.897
MULTIPLE REGRESSION
Study the relationship of demand to two or more
independent variables
y = 0+ 1x1 + 2x2 + kxk
where
0 = the intercept
1,,k = parameters for the
independent variables
x1, , xk = independent variables
END OF LECTURE 7

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ETZC 342

BITS Pilani, Pilani Campus

Ft +1 = forecast for next period

= weighting factor, smoothing constant

BITS Pilani, Pilani Campus

Smoothing constant >0, <1

BITS Pilani, Pilani Campus

EFFECT OF SMOOTHING CONSTANT

BITS Pilani, Pilani Campus

EXPONENTIAL SMOOTHING FORECASTS

BITS Pilani, Pilani Campus

EXPONENTIAL SMOOTHING FORECASTS

BITS Pilani, Pilani Campus

EXPONENTIAL SMOOTHING FORECASTS

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus

ADJUSTED EXPONENTIAL SMOOTHING EXAMPLE

ADJUSTED EXPONENTIAL SMOOTHING EXAMPLE

AF3 = F3 + T3 = 38.5 + 0.45

BITS Pilani, Pilani Campus

ADJUSTED EXPONENTIAL SMOOTHING

ADJUSTED EXPONENTIAL SMOOTHING

BITS Pilani, Pilani Campus

ADJUSTED EXPONENTIAL SMOOTHING

Adjusted forecast ( = 0.30)

BITS Pilani, Pilani Campus

What do we do with this information?

LINEAR TREND LINE

intercept (at period 0)

BITS Pilani, Pilani Campus

LEAST SQUARES EXAMPLE

LEAST SQUARES EXAMPLE

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus

LINEAR TREND LINE

BITS Pilani, Pilani Campus

LINEAR TREND LINE

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus

DEMAND (1000S PER QUARTER)

BITS Pilani, Pilani Campus

DEMAND (1000S PER QUARTER)

DEMAND (1000S PER QUARTER)

BITS Pilani, Pilani Campus

DEMAND (1000S PER QUARTER)

BITS Pilani, Pilani Campus

DEMAND (1000S PER QUARTER)

SF1 = (S1) (F5)

SF3 = (S3) (F5)

SF2 = (S2) (F5)

SF4 = (S4) (F5)

BITS Pilani, Pilani Campus

MEAN ABSOLUTE DEVIATION (MAD)

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus

BITS Pilani, Pilani Campus

Use control limits of +/- 2 to +/- 5 MAD

TRACKING SIGNAL VALUES

BITS Pilani, Pilani Campus

CAUSAL MODELING WITH LINEAR

BITS Pilani, Pilani Campus

LINEAR REGRESSION FORMULAS