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Forecasting
Operations
Operations Management
Management -- 77thth Edition
Edition
Roberta Russell & Bernard W. Taylor, III
Lecture Outline
Strategic Role of Forecasting in Supply
Chain Management
Components of Demand Forecasting
Time Series Methods
Forecast Accuracy
Time Series Forecasting Using Excel
Regression Methods
Copyright 2012 John Wiley & Sons, Inc.
12-2
Forecasting
Predicting the future
Qualitative forecast methods
subjective
Quantitative forecast
methods
based on mathematical
formulas
12-3
quick response
JIT (just-in-time)
VMI (vendor-managed inventory)
stockless inventory
12-4
Forecasting
Quality Management
Strategic Planning
12-5
time frame
demand behavior
causes of behavior
12-6
Time Frame
Indicates how far into the future is
forecast
Long-range forecast
usually
12-7
Demand Behavior
Trend
Random variations
Cycle
Seasonal pattern
12-8
Demand
Demand
Random
movement
Time
(b) Cycle
Demand
Demand
Time
(a) Trend
Time
(c) Seasonal pattern
Time
(d) Trend with seasonal pattern
12-9
Forecasting Methods
Time series
Regression methods
Qualitative
12-10
Qualitative Methods
Management, marketing, purchasing,
and engineering are sources for internal
qualitative forecasts
Delphi method
12-11
Forecasting Process
1. Identify the
purpose of forecast
2. Collect historical
data
6. Check forecast
accuracy with one or
more measures
5. Develop/compute
forecast for period of
historical data
4. Select a forecast
model that seems
appropriate for data
7.
Is accuracy of
forecast
acceptable?
No
Yes
8a. Forecast over
planning horizon
12-12
Time Series
Assume that what has occurred in the past will
continue to occur in the future
Relate the forecast to only one factor - time
Include
moving average
exponential smoothing
linear trend line
12-13
Moving Average
Naive forecast
12-14
Moving Average:
Nave Approach
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
-
FORECAST
120
90
100
75
110
50
75
130
110
90
12-15
i = 1 Di
MAn =
where
n
Di
= number of periods
in the moving
average
= demand in period i
12-16
PER
MOVING
AVERAGE
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0
i=1
MA3 =
=
Di
3
90 + 110 + 130
3
= 110 orders
for Nov
12-17
PER
MOVING
AVERAGE
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
99.0
85.0
82.0
88.0
95.0
91.0
i=1
MA5 =
=
Di
90 + 110 + 130+75+50
5
= 91 orders
for Nov
12-18
Smoothing Effects
150
125
5-month
Orders
100
75
50
3-month
25
Actual
0
|
Jan
|
Feb
|
Mar
|
|
Apr May
|
|
June July
|
|
Aug Sept
|
Oct
|
Nov
Month
Copyright 2009 John Wiley & Sons, Inc.
12-19
Adjusts
moving
average
method to
more closely
reflect data
fluctuations
WMAn = Wi Di
i=1
i=1
where
W = 1.00
i
12-20
WEIGHT
DATA
17%
33%
50%
130
110
90
August
September
October
November Forecast
WMA3 = i
= 1 Wi Di
12-21
Exponential Smoothing
Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
12-22
12-23
12-24
MONTH
Jan
37
Feb
40
Mar
41
Apr
37
May
45
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
Jun
50
7
43 Inc.
Copyright
2009Jul
John Wiley & Sons,
12-25
MONTH
DEMAND
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
FORECAST, Ft + 1
( = 0.3)
( = 0.5)
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
51.79
37.00
38.50
39.75
38.37
41.68
45.84
44.42
45.71
50.85
51.42
53.21
53.61
12-26
= 0.50
Actual
50
Orders
40
30
= 0.30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
11
|
12
|
13
Month
Copyright 2009 John Wiley & Sons, Inc.
12-27
12-28
Adjusted Exponential
Smoothing (=0.30)
T3
PERIOD
DEMAND
MONTH
Jan
37
Feb
40
Mar
41
= (F3 - F2) + (1 - ) T2
= (0.30)(38.5 - 37.0) + (0.70)(0)
= 0.45
Apr
37
May
45
= 1.36
Jun
50
12-29
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
12-30
60
Actual
50
Demand
40
30
Forecast ( = 0.50)
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
12-31
xy - nxy
b = x2 - nx2
a = y-bx
where
n = number of periods
x
x = n = mean of the x values
y
y = n = mean of the y values
12-32
y(DEMAND)
xy
x2
1
2
3
4
5
6
7
8
9
10
11
12
73
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
12-33
a = y - bx
= 46.42 - (1.72)(6.5) = 35.2
12-34
50
40
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
12-35
Seasonal Adjustments
Repetitive increase/ decrease in demand
Use seasonal factor to adjust forecast
Seasonal factor = Si =
Di
D
12-36
8.6
10.3
10.6
29.5
D1
42.0
S1 =
=
= 0.28
D 148.7
D2
29.5
S2 =
=
= 0.20
148.7
D
Copyright 2009 John Wiley & Sons, Inc.
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
45.0
50.1
53.6
148.7
D3
21.9
S3 =
=
= 0.15
D 148.7
D4
55.3
S4 =
=
= 0.37
148.7
D
12-37
12-38
Forecast Accuracy
Forecast error
MAPD
Cumulative error
Average error or bias
12-39
t = period number
Dt = demand in period t
Ft = forecast for period t
n = total number of periods
= absolute value
12-40
MAD Example
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
DEMAND, Dt
37
40
41
37
MAD
45
50
43
47
56
52
55
54
=
=
=
Ft ( =0.3)
( Dt - F t )
|Dt - Ft|
37.00
37.00
3.00
37.90
3.10
D
t - Ft -1.83
38.83
38.28
6.72
n
40.29
9.69
53.39
43.20
-0.20
43.14
3.86
11
44.30
11.70
4.19
4.8547.81
49.06
5.94
50.84
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
557
12-41
|Dt - Ft|
Dt
Cumulative error
E = et
Average error
et
E= n
12-42
Comparison of Forecasts
FORECAST
MAD
MAPD
(E)
4.85
4.04
3.81
9.6%
8.5%
7.5%
49.31
33.21
21.14
4.48
3.02
1.92
2.29
4.9%
12-43
Forecast Control
Tracking signal
12-44
DEMAND
Dt
1
2
3
4
5
6
7
8
9
10
11
12
37
40
41
37
45
50
43
47
56
52
55
54
FORECAST,
Ft
ERROR
Dt - Ft
E =
(Dt - Ft)
37.00
37.00
3.00
3.00
37.90
3.10
6.10
38.83
-1.83
4.27
38.28
6.72 for period
10.99 3
Tracking
signal
40.29
9.69
20.68
43.20
-0.20
6.10 20.48
43.14
TS3 = 3.86 =24.34
2.00
3.05
44.30
11.70
36.04
47.81
4.19
40.23
49.06
5.94
46.17
50.84
3.15
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
12-45
3
2
1
0
-1
-2
-3
|
0
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
12-46
(Dt - Ft)2
n-1
12-47
UCL = +3
Errors
6.12
0
-6.12
-12.24
-18.39
LCL = -3
|
0
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
12-48
Moving average
Exponential smoothing
Adjusted exponential smoothing
Linear trend line
12-49
12-50
12-51
12-52
12-53
OM Tools
12-54
Regression Methods
Linear regression
Correlation
12-55
Linear Regression
y = a + bx
a = y-bx
xy - nxy
b = x2 - nx2
where
a = intercept
b = slope of the line
x
x = n = mean of the x data
y
y = n = mean of the y data
12-56
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
12-57
xy - nxy2
b=
x2 - nx2
(2,167.7) - (8)(6.125)(43.36)
=
(311) - (8)(6.125)2
= 4.06
a = y - bx
= 43.36 - (4.06)(6.125)
= 18.46
Copyright 2009 John Wiley & Sons, Inc.
12-58
y = 18.46 + 4.06x
y = 18.46 + 4.06(7)
= 46.88, or 46,880
60,000
50,000
Attendance, y
40,000
30,000
20,000
10,000
|
0
|
1
|
2
|
3
|
4
|
5
Wins, x
|
6
|
7
|
8
|
9
|
10
12-59
Coefficient of determination, r2
Percentage of variation in dependent
variable resulting from changes in the
independent variable
Copyright 2009 John Wiley & Sons, Inc.
12-60
Computing Correlation
r=
n xy - x y
[n x2 - ( x)2] [n y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
r=
12-61
12-62
12-63
12-64
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
Copyright 2009 John Wiley & Sons, Inc.
12-65
12-66