MM ZG 523 / QMJ ZG 523

PROJECT MANAGEMENT
0011 0010 1010 1101 0001 0100 1011

LECTURE 3 1
2
4
Market and Demand
Analysis
 Two Approaches to Market
Research
Primary Research
- Why: tailored, customizable, expensive
- How: focus groups, surveys, field tests,
interviews or observation
Secondary Research
- Why: (relatively) cheap, quick, less targeted
- How: literature research (print and online),
Web research (organization and government
websites)
 Elements of Market Analysis
Industry: Which industry is your company
in? Climate? Status quo? Trends?
Competitors & Potential Partners: Who are
the major players? What are their market
shares? Who can you form strategic alliance
with?
Markets: What market are you targeting?
Whats the current market size? Whats the
growth potential?
Customers: Who are they? What are their
characteristics? What do they demand? How
does your product benefit them?
 Sources for Market Research
The Product
Tech websites: CNET, Red Herring
General business and tech news:
MSNBC, CNN
Business and engineering literature:
ABI/Inform, Business Source Premier,
LexisNexis, Business & Industry
 Sources for Market Research
The Industry
Identify:
- SIC/NAICS
- Special databases and directories: Wards,
OneSource, Hoovers
Overview and forecasts:
- Standard & Poors Industry Survey
- Encyclopedia of American/Emerging Industries
- OneSource
- Hoovers
- Investext
Associations and trade organizations:
Associations Unlimited
 Sources for Market Research
The Competitors & Partners
If you have the SIC:
- Wards: top companies according to
sales
- OneSource: industry => top
participants OR find companies
- Hoovers: build company list =>
SIC
If you dont have the SIC:
- OneSource: find companies =>
 Sources for Market Research
The Markets
Market research reports:
- Forrester Research
- Investext
- Faulkner Advisory for IT Studies (FAITS)
- Reuters Business Insight
- Datamonitors Business Information Center
- Global Market Information Database
- World Markets Analysis
Business articles: ABI, Business Source
Premier, LexisNexis, Business & Industry
 Sources for Market Analysis
Specialized Markets
World Markets Analysis: automotive,
telecom, health care, energy
Reuters Business Insight: finance,
technology, consumer goods, heath care,
energy
Medical and Healthcare Marketplace Guide:
medicine and biotech
Forrester: information technology and its
applications in industries
FAITS: trends on technology and their impact
on business
 Sources for Market Research
The Customers
Company or People?
- Company: industry and market research
- People: business literature, demographics
Sources for demographic research:
Commerce Library Marketing Research
Tutorial
Web sources, such as Nua Internet Surveys,
or government sources such as E-stats
Forecasting
Forecasting is the art and science of
predicting future events
Institute of business forecasting
(www.ibforecast.com)
 Why Forecast?
Lead times require that decisions be made
in advance of uncertain events.
Forecasting is an important for all strategic
and planning decisions in a supply chain.
Forecasts of product demand, materials,
labor, financing are an important inputs to
scheduling, acquiring resources, and
determining resource requirements.
 Demand Management
Demand management is the interface
between manufacturing planning and control
and the marketplace. Activities include:
Forecasting.

Order Processing.

Making delivery promises.

 Demand Management
Resource Production
Planning Planning

Marketplace Demand Mgt.

Master
Production
Planning
 Forecasting Horizons.
Short Term (0 to 3 months): for inventory
management and scheduling.
Medium Term (3 months to 2 years): for
production planning, purchasing, and
distribution.
Long Term (2 years and more): for capacity
planning, facility location, and strategic
planning.
 Principles of Forecasting
Forecasts are almost always wrong.
Every forecast should include an estimate of
the forecast error.
The greater the degree of aggregation, the
more accurate the forecast.
Long-term forecasts are usually less
accurate than short-term forecasts.
 Forecasting Methods
Qualitative methods are subjective in nature since
they rely on human judgment and opinion.
Quantitative methods use mathematical or
simulation models based on historical demand or
relationships between variables.
 Some Qualitative Methods
Jury of Executive Opinion (opinions of a
small group of high-level managers is
Sales Force Composite (aggregation of salespersons estimate
pooled).
of sales in their territory).

Market Research Method (solicit input from customers or

potential customers regarding future purchasing plans).
Delphi Method (a forecasting group uses a staff to prepare,
distribute, collect, and summarize a series of questionnaires
and survey results from geographically dispersed
respondents, whose judgements are valued).
 Quantitative Forecast
Methods
Time Series Methods use historical data
extrapolated into the future. They are best
suited for stable environments. Moving
averages, exponential smoothing methods,
time series decomposition, and Box-Jenkins
Methods.
Causal Methods assume demand is highly
correlated with certain environmental
factors (indicators). Correlation methods,
 Time Series Demand Model
Observed Demand = Systematic Component +
Random Component.
Systematic Component measures the expected value of
demand and consists of:
Level: the current deseasonalized demand.
Trend: the rate of growth or decline in demand.
Seasonality: the regular periodic oscillation in demand.

Random Component is that part of demand that follows no

discernable or predictable pattern.The random component is
estimated by the forecast error (forecast actual demand).
 Basic Forecasting Approach
Understand the forecasting objective.
What decisions will be made from the
forecasts? What parties in the supply chain
will be affected by the decision.
Integrate demand planning and
forecasting. All planning activities within
the supply chain that will use the forecast or
influence demand should be linked.
Identify factors that influence the demand
 Forecasting Approach (cont.)
Understand and Identify customer
segments. Customer demand can be
separately forecast for different segments
based on service requirements, volume,
order frequency, volatility, etc.
Determine the appropriate forecasting
technique. Typically, using a combination
of the different techniques is of the the most
effective approach.
 Time Series Forecasting
Static
Assume estimates of level, trend, and
seasonality do not vary as new data is observed.
Adaptive
Update forecast as new data becomes available
 Time Series Forecasting
Static
Adaptive
Moving average
Single exponential smoothing
Trend-adjusted exponential smoothing (Holts)
Trend & Seasonal adjusted exponential
smoothing (Winters)
 Static Forecasting (steps)
1. Determine periodicity (even or odd?)
2. Deseasonalize data
3. Find the equation of the trend line
a. Simple linear regression
b. Independent variable (period)
c. Dependent variable (deseasonalized data)
4. Estimate seasonalized factors
a. Per period
b. Index (Averages)
5. Forecast
 Find the equation of the line
Use simple regression
Excel: (Tools/Data Analysis/Regression)
Dependent variable (y) is deseasonalized
demand
Independent variable (x) is period t
y= intercept + slope * x = demand
Other Excel Analysis Functions
Demand Forecasting:
Time Series Models
 Forecasting Horizons
Long Term
5+ years into the future
R&D, plant location, product planning
Principally judgement-based
Medium Term
1 season to 2 years
Aggregate planning, capacity planning, sales forecasts
Mixture of quantitative methods and judgement
Short Term
1 day to 1 year, less than 1 season
Demand forecasting, staffing levels, purchasing, inventory levels
Quantitative methods
 Short Term Forecasting:
Needs and Uses
Scheduling existing resources
How many employees do we need and when?
How much product should we make in anticipation of demand?
Acquiring additional resources
When are we going to run out of capacity?
How many more people will we need?
How large will our back-orders be?
Determining what resources are needed
What kind of machines will we require?
Which services are growing in demand? declining?
What kind of people should we be hiring?
 Types of Forecasting Models
Types of Forecasts
Qualitative --- based on experience, judgement, knowledge;
Quantitative --- based on data, statistics;

Methods of Forecasting
Naive Methods --- eye-balling the numbers;
Formal Methods --- systematically reduce forecasting errors;
time series models (e.g. exponential smoothing);
causal models (e.g. regression).
Focus here on Time Series Models

Assumptions of Time Series Models

There is information about the past;
This information can be quantified in the form of data;
The pattern of the past will continue into the future.
 Forecasting Examples
Examples from student projects:
Demand for tellers in a bank;
Traffic on major communication switch;
Demand for liquor in bar;
Demand for frozen foods in local grocery warehouse.

Example from Industry: American Hospital Supply Corp.

70,000 items;
25 stocking locations;
Store 3 years of data (63 million data points);
Update forecasts monthly;
21 million forecast updates per year.
 Simple Moving Average
Forecast Ft is average of n previous observations or
actuals Dt :
1
Ft 1 ( Dt Dt 1 Dt 1n )
n
1 t
Ft 1 Di
n i t 1n
Note that the n past observations are equally weighted.
Issues with moving average forecasts:
All n past observations treated equally;
Observations older than n are not included at all;
Requires that n past observations be retained;
Problem when 1000's of items are being forecast.
 Simple Moving Average
Include n most recent observations
Weight equally
Ignore older observations

weight

1/n

n ... 3 2 1
today
 Moving Average

Internet Unicycle Sales

n=3
450

400

350

300

250
Units

200

150

100

50

0
Apr-01 Sep-02 Jan-04 May-05 Oct-06 Feb-08 Jul-09 Nov-10 Apr-12 Aug-13
Month
 Example:

Moving Average
Forecasting
 Exponential Smoothing I
Include all past observations
Weight recent observations much more heavily
than very old observations:

weight
Decreasing weight given
to older observations

today
 Exponential Smoothing I
Include all past observations
Weight recent observations much more heavily
than very old observations:

0 1
weight
Decreasing weight given
to older observations

today
 Exponential Smoothing I
Include all past observations
Weight recent observations much more heavily
than very old observations:

0 1
weight
Decreasing weight given
to older observations
(1 )

today
 Exponential Smoothing I
Include all past observations
Weight recent observations much more heavily
than very old observations:

0 1
weight
Decreasing weight given
to older observations
(1 )
(1 ) 2

today
 Exponential Smoothing: Concept
Include all past observations
Weight recent observations much more heavily
than very old observations:

0 1
weight
Decreasing weight given
to older observations
(1 )
(1 ) 2
(1 ) 3

today

 Exponential Smoothing: Math
Ft Dt (1 ) Dt 1 (1 ) 2 Dt 2
Ft Dt (1 )Dt 1 (1 a ) Dt 2
 Exponential Smoothing: Math
Ft Dt (1 ) Dt 1 (1 ) 2 Dt 2
Ft Dt (1 )Dt 1 (1 a ) Dt 2

Ft aDt (1 a ) Ft 1
 Exponential Smoothing: Math
Ft aDt a (1 a ) Dt 1 a (1 a ) 2 Dt 2
Ft aDt (1 a ) Ft 1
Thus, new forecast is weighted sum of old forecast and actual
demand
Notes:
Only 2 values (Dt and Ft-1 ) are required, compared with n for moving
average
Parameter a determined empirically (whatever works best)
Rule of thumb: < 0.5
Typically, = 0.2 or = 0.3 work well
Forecast for k periods into future is:

Ft k Ft
 Exponential Smoothing

Internet Unicycle Sales (1000's)

450

400
= 0.2
350

300

250
Units

200

150

100

50

0
Jan-03 May-04 Sep-05 Feb-07 Jun-08 Nov-09 Mar-11 Aug-12
Month
 Example:

Exponential Smoothing
 Complicating Factors

Simple Exponential Smoothing works well

with data that is moving sideways
(stationary)
Must be adapted for data series which
exhibit a definite trend
Must be further adapted for data series
which exhibit seasonal patterns
 Holts Method:
Double Exponential Smoothing
What happens when there is a definite 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
550 Actual
540
Demand530 Forecast
520
510
500
490
480
1 2 3 4 5 6 7 8 9 10
Month
 Holts Method:
Double Exponential Smoothing
Ideas behind smoothing with trend:
``De-trend'' time-series by separating base from trend effects
Smooth base in usual manner using
Smooth trend forecasts in usual manner using
Smooth the base forecast Bt
Bt Dt (1 )( Bt 1 Tt 1 )
Smooth the trend forecast Tt
Tt ( Bt Bt 1 ) (1 )Tt 1
Forecast k periods into future Ft+k with base and trend

Ft k Bt kTt
 ES with Trend

Internet Unicycle Sales (1000's)

450

400 = 0.2, = 0.4

350

300

250
Units

200

150

100

50

0
Jan-03 May-04 Sep-05 Feb-07 Jun-08 Nov-09 Mar-11 Aug-12
Month
 Example:

Exponential Smoothing
with Trend
 Winters Method:
Exponential Smoothing
w/ Trend and Seasonality
Ideas behind smoothing with trend and seasonality:
De-trend: and de-seasonalizetime-series by separating base from
trend and seasonality effects
Smooth base in usual manner using
Smooth trend forecasts in usual manner using
Smooth seasonality forecasts using g

Assume m seasons in a cycle

12 months in a year
4 quarters in a month
3 months in a quarter
et cetera
 Winters Method:
Exponential Smoothing
w/ Trend and Seasonality
Smooth the base forecast Bt
Dt
Bt (1 )( Bt 1 Tt 1 )
St m
Smooth the trend forecast Tt

Tt ( Bt Bt 1 ) (1 )Tt 1
Smooth the seasonality forecast St
Dt
St g (1 g ) St m
Bt
 Winters Method:
Exponential Smoothing
w/ Trend and Seasonality
Forecast Ft with trend and seasonality

Ft k ( Bt 1 kTt 1 ) St k m
Smooth the trend forecast Tt

Tt ( Bt Bt 1 ) (1 )Tt 1
Smooth the seasonality forecast St

Dt
St g (1 g ) St m
Bt
 ES with Trend and Seasonality

Internet Unicycle Sales (1000's)

500

450
= 0.2, = 0.4, g = 0.6
400

350

300
Units

250

200

150

100

50

0
Jan-03 May-04 Sep-05 Feb-07 Jun-08 Nov-09 Mar-11 Aug-12
Month
 Example:

Exponential Smoothing
with
Trend and Seasonality
 Forecasting Performance
How good is the forecast?
Mean Forecast Error (MFE or Bias): Measures
average deviation of forecast from actuals.

Mean Absolute Deviation (MAD): Measures

average absolute deviation of forecast from
actuals.

Mean Absolute Percentage Error (MAPE):

Measures absolute error as a percentage of the
forecast.

Standard Squared Error (MSE): Measures

variance of forecast error
Forecasting Performance Measures
n
1
MFE ( Dt Ft )
n t 1
1 n
MAD Dt Ft
n t 1
100 n Dt Ft
MAPE
n t 1 Dt
1 n
MSE ( Dt Ft ) 2

n t 1
 Mean Forecast Error (MFE or Bias)
n
1
MFE ( Dt Ft )
n t 1

Want MFE to be as close to zero as possible --

minimum bias
A large positive (negative) MFE means that the forecast
is undershooting (overshooting) the actual observations
Note that zero MFE does not imply that forecasts are
perfect (no error) -- only that mean is on target
Also called forecast BIAS
 Mean Absolute Deviation (MAD)

1 n
MAD Dt Ft
n t 1

Measures absolute error

Positive and negative errors thus do not cancel out (as
with MFE)
Want MAD to be as small as possible
No way to know if MAD error is large or small in
relation to the actual data
 Mean Absolute Percentage Error
(MAPE)

100 n Dt Ft
MAPE
n t 1 Dt

Same as MAD, except ...

Measures deviation as a percentage of actual data
 Mean Squared Error (MSE)

n
1
MSE ( Dt Ft ) 2

n t 1

Measures squared forecast error -- error variance

Recognizes that large errors are disproportionately more
expensive than small errors
But is not as easily interpreted as MAD, MAPE -- not as
intuitive
Fortunately, there is software...
 Wrap-up
0011 0010 1010 1101 0001 0100 1011

Questions ???
1
2
4