Demand Management

Demand
Planning as most important function of management Demand Management deals with both consumer needs and supplier coordination Purpose of demand management is to coordinate and control all resources to efficiently utilise systems

Demands has to be forecasted to run businesses profitably

2

Forecasting
Many business decisions depend on some sort of forecasting Forecasting is scientifically calculated guess, it forms the basis of planning Levels of forecasting - Short term (upto 1 yr) Medium term (1 to 3 yrs) and Long term (over 5 yrs) Extrinsic forecast & intrinsic forecast Elements of forecasting

Internal factors (past, present and future) External factors (controllable & uncontrollable)
3

Methods of Forecasting
Qualitative Techniques

Market research Panel Consensus History Analogy Delphi Method

Linear Regression Multiple Regression Input Output Analysis End use analysis
4

Casual Methods

Simulation Monte Carlo Simulation

Methods of Forecasting . . contd

Time Series

Extrapolation Used when past data is linear Moving Average Used when data is cyclic
o o

Simple Average of specified past period is considered Weighted different weights are assigned to past data

Exponential Smoothing weightage decreased exponentially

o o

Simple Exponential Smoothing Trend adjusted Seasonality considered

Forecasting programme for any company

Observing, listing and studying external factors (cultural, social, political, technological) nationally & internationally Gather info on internal company policies (changes in design, quality, sales) & their effect on demand Analyse data to establish various relationships and their relative effects of each factors on final demand Create various scenarios assuming certain happenings in external environment & alternative internal policies Operationally apply the forecast by breaking it down on the number of product lines. Do Break Even analysis Regularly monitor forecast errors & update method
6

Prerequisites & Pitfalls in Forecasting

Define the purpose of forecasting, this will help to decide the accuracy & type of technique to be chosen It should be combined effort organisationally Forecasting technique will vary depending on the Product Life Cycle and stage of the product

New product development stage Delphi, PDMT Steady state of PLC Time series with trend & seasonality

Quite often wrong things are forecasted People go for minute forecasting of odd products No timely tracking of forecasting
7

Range & Precision of Forecast

Forecast may be in terms of ranges

Higher range low value, low turnover items in inventory Lower range Capital intensive machineries

It will also guide the company form its strategic posture Precision in forecasting is not as important as proper use of available data It is better to use the available data according to situational demands

Technology Forecasting
It deals with estimation of future trends in technology Helps making current decisions examining future choices Guides wide range of long term planning process Forecasting tool at micro level corporate planning also Very effective for high range technology products as gestation time to become productive is quite long Exploratory technology forecasting Predicting future with present trends & capabilities Normative Forecasting Set goals & objectives of future technology and take necessary current action
9

Uses of Technology Forecasting

In planning of future discoveries & technologies

Government
Planning

Industry
Corporate Planning

Universities
Future Academic Roles

Individuals
Selection of fertile areas of research

Policy formation for the allocation of resources

Investment in production

Investment in research & development

10

Selecting a forecasting method

Choice depends on

Purpose of forecasting Type and amount of data available Time horizon of forecast Degree of accuracy required Cost involved

11

Forecast Error Monitoring - MAD

Mean Absolute Deviation (MAD)
Absolute means the positive & negative signs are ignored Deviation is difference between forecast & actuals

Period
1 2 3 4 5

Forecast Demand Actual Demand

900 1000 1050 1010 980 1000 1100 1000 960 970

Deviation
100 100 -50 -50 - 15

MAD = I Deviation I = N

315 = 63 5
12

Forecast Error Monitoring - RSFE

Running sum of forecast errors (RSFE) This is algebraic sum of forecasting errors (deviation)
Period 1 2 3 4 5 Forecast Demand 900 1000 1050 1010 980 Actual Demand 1000 1100 1000 960 970 Deviation 100 100 -50 -50 -15

RSFE = Deviation = 85
13

Forecast Error Monitoring - Formulas

Mean Square Error (MSE) = (Deviation) N Percentage Error (PE) = (Deviation / Demand) x 100 Mean Absolute Percentage Error = I PE I

N
Tracking Signal = RSFE MAD

14

Forecast Error Monitoring . . contd

RSFE is calculated to determine whether or not the forecast has positive or negative bias MAD indicates the volume or amplitude of deviation from actuals Both the bias and amplitude of forecast errors are important It is important to monitor MAD & Tracking signal for any modifications to be made in original forecasting model A good forecast should have approximately as much positive as negative deviation
15

Problem
Forecast 100 Demand 110

Table shows actual & forecasted demand. Calculate: - MAD - MSE - MAPE - Tracking Signal

90
80 85 75 85 65

85
88 95 65 80 52

16

Problem
Forecast 100 Demand 110 Deviation 10

90
80 85 75 85 65

85
88 95 65 80 52

-5
8 10 -10 -5 -13
17

Problem
Forecast 100 Demand 110 Deviation 10 (Deviation) 100

90
80 85 75 85 65

85
88 95 65 80 52

-5
8 10 -10 -5 -13

25
64 100 100 25 169
18

Problem
Forecast 100 90 80 85 75 85 65 Demand 110 85 88 95 65 80 52 Deviation 10 -5 8 10 -10 -5 -13 (Deviation) 100 25 64 100 100 25 169 Percentage Error 9.09 -5.88 9.09 10.52 -15.38 -6.25 -25
19

Problem
MAD = I Deviation I N MSE = (Deviation) = 61 7 = 8.71

= 583

= 83.29

MAPE = I PE I = 81.23 = 11.6% N 7

Tracking Signal = RSFE

MAD

= -5
8.71

= -0.57

20

Practice Problem
Forecast 150 125 130 145 Demand 160 130 135 150

Table shows actual & forecasted demand. Calculate: - MAD

180
170 165 155

160
165 145 150

- MSE
- MAPE - Tracking Signal

155
150 150 160

155
160 165 160

21

Simple Moving Average - Formula

( MA ) t = Dt + Dt-1 + Dt-2 + . . . . Dt-n+1

n
( MA ) t = ( f ) t+1 Where; MA = Moving Average f = Moving Avg Forecast t = time

22

Problem Simple Moving Average Method

Month Demand (D)

Jan
Feb Mar Apr May Jun Jul Aug Sep

450
440 460 510 520 495 475 560 510

Forecast using 3 month and 6 month moving average and determine which is a better forecast

Oct
Nov Dec

520
540 550
23

Problem Simple Moving Average Method

Month Jan Feb Mar Demand (D) 450 440 460 Moving Average (3 mth) 450

Apr May
Jun Jul Aug Sep Oct Nov Dec

510 520
495 475 560 510 520 540 550

470 497
508 497 510 515 530 523 537
24

Problem Simple Moving Average Method

Month Jan Feb Mar Apr Demand (D) 450 440 460 510 Moving Average (3 mth) 450 470 Moving Average Forecast (f)(3 mth) 450

May
Jun Jul Aug Sep Oct Nov Dec

520
495 475 560 510 520 540 550

497
508 497 510 515 530 523 537

470
497 508 497 510 515 530 523
25

Problem Simple Moving Average Method

Month Demand (D) Moving Average (3 mth) 450 470 497 Moving Average Forecast (f)(3 mth) 450 470 Deviation

Jan Feb Mar Apr May

450 440 460 510 520

60 50

Jun
Jul Aug Sep Oct Nov Dec

495
475 560 510 520 540 550

508
497 510 515 530 523 537

497
508 497 510 515 530 523

-2
-33 63 0 5 10 27
26

Problem Simple Moving Average Method

Month Jan Feb Mar Apr May Jun Jul Aug Sep Demand (D) 450 440 460 510 520 495 475 560 510 MA (3 mth) 450 470 497 508 497 510 515 F (3 mth) 450 470 497 508 497 510 Deviation 60 50 -2 -33 63 0

MAD = I Deviation I

N
MAD = 250 / 9 MAD = 27.78 RSFE = Deviation RSFE = 180

Oct
Nov

520
540

530
523

515
530

5
10

Tracking Signal = RSFE / MAD

= 6.48
27

Dec

550

537

523

27

Problem Simple Moving Average Method

Month Jan Feb Mar Demand (D) 450 440 460 Moving Average (6 mth) -

Apr May
Jun Jul Aug Sep Oct Nov Dec

510 520
495 475 560 510 520 540 550

479 483 503 512 513 517 526

28

Problem Simple Moving Average Method

Month Jan Feb Mar Demand (D) 450 440 460 Moving Average (6 mth) Moving Average Forecast(6 mth) -

Apr May
Jun Jul Aug Sep Oct Nov Dec

510 520
495 475 560 510 520 540 550

479 483 503 512 513 517 526

479 483 503 512 513 517

29

Problem Simple Moving Average Method

Month Jan Feb Mar Demand (D) 450 440 460 Moving Average (6 mth) Moving Average Forecast(6 mth) Deviation -

Apr May
Jun Jul Aug Sep Oct Nov Dec

510 520
495 475 560 510 520 540 550

479 483 503 512 513 517 526

479 483 503 512 513 517

-4 77 7 8 27 33
30

Problem Simple Moving Average Method

Month Jan Feb Mar Apr Demand (D) 450 440 460 510 MA (6mth) F (6mth) Deviation -

MAD = I Deviation I N MAD = 156 / 6 MAD = 26

May
Jun Jul Aug Sep Oct Nov Dec

520
495 475 560 510 520 540 550

479 483 503 512 513 517 526

479 483 503 512 513 517

-4 77 7 8 27 33

RSFE = Deviation
RSFE = 148

Tracking Signal = RSFE / MAD = 5.7

31

Problem Simple Moving Average Method

Since Tracking Signal of 6 month moving average is more closer to zero it is a better forecasting technique

32

Weighted Moving Average - Formula

Weighted Moving Average = Ct Dt
n

t=1

Where, Ct = Fraction used as weight for period t 0 Ct 1

33

Problem Weighted Moving Average

Month Demand (D) Moving Average (3 mth) 450 Moving Average Forecast (3 mth) -

Jan Feb Mar

450 440 460

Since it is a 3 month moving average, assume values of:

Apr
May Jun Jul

510
520 495 475

470
497 508 497

450
470 497 508

C1 = 0.25
C2 = 0.25 C3 = 0.5

Aug
Sep Oct Nov Dec

560
510 520 540 550

510
515 530 523 537

497
510 515 530 523

34

Problem Weighted Moving Average

Month Demand (D) MA (3 mth) 450 MA Forecast (3 mth) 3 mnth WMA 453

Jan Feb Mar

450 440 460

Apr
May Jun Jul

510
520 495 475

470
497 508 497

450
470 497 508

480
503 505 491

Aug
Sep Oct Nov Dec

560
510 520 540 550

510
515 530 523 537

497
510 515 530 523

523
514 528 528 541
35

Problem Weighted Moving Average

Month Demand (D) MA (3 mth) 450 MA Forecast (3 mth) 3 mnth WMA 453 3 mnth WMA forecast -

Jan Feb Mar

450 440 460

Apr
May Jun Jul

510
520 495 475

470
497 508 497

450
470 497 508

480
503 505 491

453
480 503 505

Aug
Sep Oct Nov Dec

560
510 520 540 550

510
515 530 523 537

497
510 515 530 523

523
514 528 528 541

491
523 514 528 528
36

Practice Problem
Month Jan Feb Mar Apr May Jun Jul Aug Sep Demand (D) 125 135 130 120 115 140 135 110 120

Use Simple Moving Average and Weighted Moving average method for 2 months. Forecast and compare two methods. Assume appropriate values

Oct
Nov

120
140

Dec

145
37

Simple Exponential Smoothing - Formula

Ft = F t-1 + (Dt - Ft-1)

ft = Ft-1

OR

(Dt) + (1 ) Ft-1

Where, F = Simple Exponential average f = Forecast for time t D = Demand = Smoothing constant between 0 to 1
38

Problem Simple Exponential Smoothing

Month Demand

Jan
Feb Mar Apr

97
93 110 98

A firm uses exponential smoothing method for forecasting. Try = 0.1 & F0 = 100

May
Jun Jul Aug Sep Oct Nov Dec

104
103 99 108 106 94 109 95
39

Problem Simple Exponential Smoothing

Month Demand Exponential Avg (Ft) 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 97 93 110 98 104 103 99 108 106 94 109 99.7 99.03 100.73 99.91 100.32 100.60 100.44 101.20 101.68 82.11 84.8

Dec

95

85.82

40

Problem Simple Exponential Smoothing

Month Demand Exponential Avg (Ft) 100 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 97 93 110 98 104 103 99 108 106 94 109 99.7 99.03 100.73 99.91 100.32 100.60 100.44 101.20 101.68 82.11 84.8 100 99.7 99.03 100.73 99.91 100.32 100.60 100.44 101.20 101.68 82.11 Forecast (ft)

Dec

95

85.82

84.8

41

Practice Problem
A firm uses exponential smoothing method for forecasting, with = 0.2 The forecast for month of March was 500 units but actual demand turned out to be 460. Forecast demand in April. ft = F t-1 i.e f APR = F MAR Ft = (Dt) + (1 ) Ft-1 FMAR = (DMAR) + (1 ) FFEB F MAR = 0.2 (460) + (1-0.2) 500 F MAR = 492
42

Practice Problem
Month Jan Feb Mar Apr May Demand 122 127 125 126 139

Given in table is the data for 1994. F0 = 150. Try = 0.1 and 0.3, which is a better value?

Jun
Jul Aug Sep Oct Nov Dec

127
134 128 134 136 132 131

43

Exponential Smoothing with Trend (Winters)

Ft = (Dt) + (1 ) (Ft-1 + Tt-1) Tt = (Ft Ft-1) + (1 ) Tt-1 ft = Ft-1 + Tt-1

Where, F = Winters Exponential average f = Forecast for time t D = Demand = Smoothing constant between 0 to 1 T = Trend estimate at time t = Averaging fraction
44

Problem Exponential smoothing with trend

Month Jan Feb Mar Apr May Demand 460 510 520 495 475

Calculate forecast with: = 0.2 = 0.2 F0 = 480 T0 = 9

Jun
Jul Aug Sep Oct Nov Dec

560
510 520 540 550 555 569

45

Problem Exponential smoothing with trend

Month Demand Winters exp avg (Ft) Trend (Tt)

480
Jan Feb Mar 460 510 520 483.20 494.83 506.74

9
7.84 8.60 9.26

Apr
May Jun Jul Aug Sep Oct Nov Dec

495
475 560 510 520 540 550 555 569

511.80
511.18 526.23 529.62 533.55 540.16 547.43 554.35 562.72

8.42
6.61 8.30 7.32 6.64 6.63 6.76 6.79 7.11
46

Problem Exponential smoothing with trend

Month Demand Winters exp avg (Ft) Trend (Tt) Winters Forecast (ft) 489.00 491.04 503.43

480
Jan Feb Mar 460 510 520 483.20 494.83 506.74

9
7.84 8.60 9.26

Apr
May Jun Jul Aug Sep Oct Nov Dec

495
475 560 510 520 540 550 555 569

511.80
511.18 526.23 529.62 533.55 540.16 547.43 554.35 562.72

8.42
6.61 8.30 7.32 6.64 6.63 6.76 6.79 7.11

516.00
520.22 517.79 534.53 536.94 540.20 546.79 554.19 561.15
47

Practice problem
Month Demand

Jan
Feb Mar Apr May Jun Jul Aug Sep

128
136 137 141 157 148 158 155 164

Given data is for year 1994. Calculate forecast with: = 0.2 = 0.05 F0 = 130 T0 = 0

Oct
Nov Dec

169
168 160
48

Exponential smoothing with seasonality

Ft = It = Dt It-m Dt Ft + (1-) Ft-1 + (1-) It-m

ft+1 = Ft x It+1-m Where; It-m = Index calculated m=12 months ago for monthly forecast, m=4 quarters ago for quarterly forecast = smoothing constant, normally 0.05
49

Prob - Exponential smoothing with seasonality

Demand Month 1993 1994

Jan
Feb Mar Apr May Jun Jul Aug Sep

80
75 80 90 115 110 100 90 85

100
85 90 110 131 120 110 110 95

The table shows demand data of 1993 & 1994. Forecast for the year 1995. Other data: = 0.1 , = 0.05 , FDEC94 = 94 Next Step: Calculate average demand of 1993 & 1994 and average monthly demand

Oct
Nov Dec

75
75 80

85
85 80
50

Prob - Exponential smoothing with seasonality

Demand Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1993 80 75 80 90 115 110 100 90 85 75 75 80 1994 100 85 90 110 131 120 110 110 95 85 85 80 Average Demand 90 80 85 100 123 115 105 100 90 80 80 80
51

Avg Monthly Demand = 1128 / 12 = 94

Next Step: Calculate Seasonal Index It = Dt / Ft

Prob - Exponential smoothing with seasonality

Demand Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1993 80 75 80 90 115 110 100 90 85 75 75 80 1994 100 85 90 110 131 120 110 110 95 85 85 80 Average Demand 90 80 85 100 123 115 105 100 90 80 80 80 Seasonality Index (It) 0.957 0.851 0.904 1.064 1.309 1.223 1.117 1.064 0.957 0.851 0.851 0.851
52

The demand for 1995 is given as:

Prob - Exponential smoothing with seasonality

Month Jan Feb Mar Seasonality Index (It-m) 0.957 0.851 0.904 Demand (Dt) 1995 95 75 90

Next Step: Calculate Ft for 1995 using formula Ft = Dt It-m + (1-) Ft-1

Apr
May Jun Jul Aug Sep Oct Nov Dec

1.064
1.309 1.223 1.117 1.064 0.957 0.851 0.851 0.851

105
120 117 102 98 95 75 85 75
53

Prob - Exponential smoothing with seasonality

Month Jan Feb Mar Seasonality Index (It-m) 0.957 0.851 0.904 Demand (Dt) 1995 95 75 90 Average (Ft) 94.50 93.86 94.43

Next Step: Calculate Forecast values for 1995 using formula: ft+1 = Ft x It+1-m

Apr
May Jun Jul Aug Sep Oct Nov Dec

1.064
1.309 1.223 1.117 1.064 0.957 0.851 0.851 0.851

105
120 117 102 98 95 75 85 75

94.86
94.54 94.65 94.32 94.10 94.62 93.37 94.56 93.91
54

Prob - Exponential smoothing with seasonality

Month Jan Feb Mar Seasonality Index (It-m) 0.957 0.851 0.904 Demand (Dt) 1995 95 75 90 Average (Ft) 94.50 93.86 94.43 Forecast (ft) 89.96 80.42 84.45

Next Step: Calculate It using formula It = Dt + (1-) It-m Ft

Apr
May Jun Jul Aug Sep Oct Nov Dec

1.064
1.309 1.223 1.117 1.064 0.957 0.851 0.851 0.851

105
120 117 102 98 95 75 85 75

94.86
94.54 94.65 94.32 94.10 94.62 93.37 94.56 93.91

100.47
124.17 115.62 105.72 100.36 90.05 80.52 79.97 80.47
55

Prob - Exponential smoothing with seasonality

Month Jan Feb Mar Seasonality Index (It-m) 0.957 0.851 0.904 Demand (Dt) 1995 95 75 90 Average (Ft) 94.50 93.86 94.43 Forecast (ft) 89.96 80.42 84.45 New Seasonality Index (It) 0.959 0.848 0.906

Apr
May Jun Jul Aug Sep Oct Nov Dec

1.064
1.309 1.223 1.117 1.064 0.957 0.851 0.851 0.851

105
120 117 102 98 95 75 85 75

94.86
94.54 94.65 94.32 94.10 94.62 93.37 94.56 93.91

100.47
124.17 115.62 105.72 100.36 90.05 80.52 79.97 80.47

1.066
1.307 1.224 1.115 1.063 0.959 0.849 0.853 0.848
56

Practice Problem
Demand Month 2003 2004 2005

Jan
Feb Mar Apr May Jun Jul Aug Sep

120
115 117 122 125 127 125 122 120

130
121 125 122 122 120 125 130 133

145
127 132 127 118 115 128 135 140

The table shows demand data of 2003, 2004 & 2005. Forecast for the year 2005. Other data: = 0.2 , = 0.05 , F0 = 130

Oct
Nov Dec

115
117 120

130
127 127

140
135 130
57

Exponential smoothing with seasonality & trend (Winters complete model)

Ft = Dt It-m + (1-) (Ft-1 + Tt-1)

Tt = (Ft Ft-1) + (1 ) Tt-1 It = Dt Ft + (1-) It-m

ft+1 = (Ft + Tt) x It+1-m

Consider values of = 0.2, = 0.05 and = 0.01
58

Prob Smoothing with trend & seasonality

Demand 95 95 75 90 105 Seasonality Index 95 0.959 0.848 0.906 1.066 Demand 96 80 85 90 95

Month Jan Feb Mar Apr

Forecast the demand for 1996 where: F0 = 80 T0 = 4.5 = 0.2 = 0.05 = 0.01 Step 1: Calculate smoothing average and trend for each month of 1996
59

May
Jun Jul Aug

120
117 102 98

1.307
1.224 1.115 1.063

100
100 95 95

Sep
Oct Nov Dec

95
75 85 75

0.959
0.849 0.853 0.848

90
95 85 80

Prob Smoothing with trend & seasonality

Month Demand 95 95 75 90 105 120 117 102 It-m Demand 96 80 85 90 95 100 100 95 Average Ft 80 Jan Feb Mar Apr May Jun Jul 0.959 0.848 0.906 1.066 1.307 1.224 1.115 84.284 91.066 96.403 98.659 97.846 98.020 98.697 Trend Tt 4.5 4.489 4.604 4.641 4.521 4.255 4.051 3.882

Now do forecasting for 1996 and calculate new seasonal index

Aug
Sep Oct Nov Dec

98
95 75 85 75

1.063
0.959 0.849 0.853 0.848

95
90 95 85 80

99.937
101.719 106.676 108.243 108.350

3.750
3.651 3.717 3.609 3.434
60

Prob Smoothing with trend & seasonality

Month Demand 95 95 75 90 105 120 117 102 It-m Demand 96 80 85 90 95 100 100 95 Average Ft 80 Jan Feb Mar Apr May Jun Jul 0.959 0.848 0.906 1.066 1.307 1.224 1.115 84.284 91.066 96.403 98.659 97.846 98.020 98.697 Trend Tt 4.5 4.489 4.604 4.641 4.521 4.255 4.051 3.882 81.036 75.280 86.677 107.713 134.856 124.971 113.809 0.959 0.849 0.906 1.065 1.304 1.222 1.113 Forecast 96 (ft) New Index (It)

Aug
Sep Oct Nov Dec

98
95 75 85 75

1.063
0.959 0.849 0.853 0.848

95
90 95 85 80

99.937
101.719 106.676 108.243 108.350

3.750
3.651 3.717 3.609 3.434

109.041
99.436 89.460 94.165 94.851

1.062
0.958 0.849 0.852
61 0.847

Problem Smoothing with trend & seasonality

1992 1993 1994

Quarter 1
Quarter 2 Quarter 3 Quarter 4

146
96 59 133

192
127 79 186

272
155 98 219

Estimate forecast for 1995 using winters complete model with = 0.2 , = 0.1 and = 0.05

62

Problem Smoothing with trend & seasonality

Ft = Dt It-m + (1-) (Ft-1 + Tt-1)

Tt = (Ft Ft-1) + (1 ) Tt-1 It = Dt Ft + (1-) It-m

ft+1 = (Ft + Tt) x It+1-m

Here, F0, T0 and It-m (i.e I -3) are unknown. Lets calculate it first.
63

Problem Smoothing with trend & seasonality

F0 = D T0 (2.5) And F0 = D T0 (6.5) for quarterly data for monthly data

Lets Calculate D for year 1992 and 1993 D1992 = 108.5 and D1993 = 146 Here we see the upward trend movement from 1992 to 1993 is = 146 108.5 = 37.5, hence quarterly movement (T0) = 9.38 So, F0 = 108.5 9.38 (2.5) = 85.05
64

Problem Smoothing with trend & seasonality

Now, lets calculate the trend line sales estimate for 1992 & 1993 1992 Q1 = F0 + T0(1) = 85.05 + 9.38 = 94.43 1992 Q2 = F0 + T0(2) = 85.05 + 9.38 (2) = 103.81 and so on
1992
Quarter 1 Quarter 2 Quarter 3 Quarter 4 94.43 103.81 113.19 122.57

1993
131.95 141.33

From these trend estimates (table) we can develop initial seasonal indices as:
Index = Demand / Estimate

150.71 160.09

65

Problem Smoothing with trend & seasonality

Index for Q1 of 1992 = 146 / 94.43 = 1.55

Q2 of 1992 = 96 / 103.81 = 0.92 and so on

1992 Quarter 1 Quarter 2 Quarter 3 Quarter 4 1.55 0.92 0.52 1.09 1993 1.46 0.90 0.52 1.13

Lets check our indices are correct or not

To check, take average of indices for 1992 and 1993 and calculate average
66

Problem Smoothing with trend & seasonality

1992 Quarter 1 Quarter 2 Quarter 3 1.55 0.92 0.52 1993 1.46 0.90 0.52 Average 1.51 0.91 0.52

Quarter 4

1.09

1.13 Average

1.13 4.07

Average = 4.07. It should have been 4, so there is a mistake in calculated indices. Lets introduce a correction factor and recalculate the indices

67

Problem Smoothing with trend & seasonality

Correction factor = (4 / 4.07) = 0.983. Now recalculate the indices
1992 Quarter 1 Quarter 2 1.55 0.92 1993 1.46 0.90 Average 1.51 0.91 I t-m 1.51 x 0.983 = 1.48 0.91 x 0.983 = 0.89

Quarter 3
Quarter 4

0.52
1.09

0.52
1.13

0.52
1.13

0.52 x 0.983 = 0.51

1.13 x 0.983 = 1.11

Now we have values of all the unknowns F0, T0 and It-m (i.e I-3) and we can calculate Ft, Tt, It and also forecast for 1995

68

Problem Smoothing with trend & seasonality

F1 = 0.2 (146 / 1.48) + (1 0.8)(85.05 + 9.38) = 95.27 T1 = 0.1 (95.27 85.05) + (1 0.1) 9.38 = 9.46

I1 = 0.05 (146 / 95.27) + (1 0.05) 1.48 = 1.48

. . . And so on till the value of F12, T12 and I12

69

Problem Smoothing with trend & seasonality

Ft Tt It

0
1 2 3 4 5 6 7 8

85.05
95.27 105.36 115.05 123.64 132.37 141.90 152.01 162.74

9.38
9.46 9.53 9.54 9.45 9.38 9.39 9.46 9.59

1.11
1.48 0.89 0.51 1.11 1.48 0.89 0.51 1.11

9
10 11 12

174.60
182.31 191.92 199.92

9.82
9.61 9.61 9.48

1.48
0.90 0.52 1.11

Lets forecast for 1995

70

Problem Smoothing with trend & seasonality

Forecast for Q1 of 1995 = f13 = (199.92 + 9.48) * 1.49 = 312 Forecast for Q2 of 1995 = f14 = (199.92 + (2 x 9.48)) * 0.90 = 197 Forecast for Q3 of 1995 = f15 = (199.92 + (3 x 9.48)) * 0.52 = 119 Forecast for Q4 of 1995 = f16 = (199.92 + (4 x 9.48)) * 1.11 = 264
71

Practice Problem
Month Demand 93 Forecast 93 Demand 94

Jan
Feb Mar Apr May Jun Jul Aug Sep

97
93 110 98 130 133 129 138 136

100
100 100 100 102 104 106 108 110

78
0 55 75 87 0 73 0 0

Calculate Winters trend ratio and seasonality index. What is the forecast for Q1 of 1995?

Oct
Nov Dec

124
139 125

112
114 116

0
0 53
72