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POM/sem2/divB/AA/Ch15
Chapter 15
Demand Management
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2006
OBJECTIVES
Demand Management Qualitative Forecasting Methods Simple & Weighted Moving Average Forecasts Exponential Smoothing Simple Linear Regression Web-Based Forecasting
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Demand Management
Independent Demand: Finished Goods
C(2)
F(2)
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Independent Demand: What a firm can do to manage it? Can take an active role to influence demand
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Types of Forecasts
Qualitative (Judgmental) Quantitative Time Series Analysis Causal Relationships Simulation
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Components of Demand Average demand for a period of time Trend Seasonal element Cyclical elements Random variation Autocorrelation
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Linear
x x x
Sales
x x x
xx x x xx x x x x x x x xxx x x x x x xxxx
x x
x
x x
x x
Trend
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8
Year
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Qualitative Methods
Executive Judgment
Grass Roots
Historical analogy
Qualitative
Methods
Market Research
Delphi Method
Panel Consensus
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Delphi Method
l. Choose the experts to participate
representing a variety of knowledgeable people in different areas 2. Through a questionnaire (or E-mail), obtain forecasts (and any premises or qualifications for the forecasts) from all participants 3. Summarize the results and redistribute them to the participants along with appropriate new questions 4. Summarize again, refining forecasts and conditions, and again develop new questions 5. Repeat Step 4 as necessary and distribute the final results to all participants
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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
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Week 1 2 3 4 5 6 7 8 9 10 11 12
Demand 3-Week 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 them shows how the lines smooth out to reveal the overall upward trend in this example
1000 900
Demand
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Note how the 3-Week is smoother than the Demand, and 6-Week is even smoother 15
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Simple Moving Average Problem (2) Data Question: What is the 3 week moving average forecast for this data? Assume you only have 3 weeks and 5 weeks of actual demand data for the respective forecasts
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Week 1 2 3 4 5 6 7
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5-Week
F4=(820+775+680)/3
710.00 666.00
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w
i=1
=1
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Note that the weights place more emphasis on the 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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Week 1 2 3 4
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F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
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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 a=0.10 and a=0.60? Assume F1=D1
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 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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Demand
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Week 1 2 3 4 5
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A
MAD =
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 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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A
MAD =
t=1
- Ft
40 = = 10 4
Note that by itself, the MAD only lets us know the mean 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 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 Perio d Sales
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End of Chapter 15
McGraw-Hill/Irwin