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Operations&ProductionManagement

2/21/2015

Operations &
Production Management
(OPM)
Dr. Muhammad Wasif
Visiting Faculty, IBA.

6 Forecasting

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2/21/2015

Section 6.1

Introduction to Forecasting

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33

Forecasting
Process of predicting a future event
Underlying

basis of all business

decisions

Production

Inventory

Personnel

Facilities

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2/21/2015

Applications of Forecasting
Accounting

Cost/profit estimates

Finance

Cash flow and funding

Human Resources

Hiring/recruiting/training

Marketing

Pricing, promotion, strategy

MIS

IT/IS systems, services

Operations

Schedules, MRP, workloads

Product/service design

New products and services

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Operations & Production Management

Forecasting Time Horizon

Short-range forecast

Up to 1 year, generally less than 3 months


Purchasing, job scheduling, workforce levels, job
assignments, production levels

Medium-range
forecasting

Medium-range forecast

Long-range
forecasting

Long-range forecast

Short-range
forecasting

3 months to 3 years
Sales and production planning, budgeting

Production/operation control

3+ years
New product planning, facility location, research and
development

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Influence of Product Life Cycle


Introduction Growth Maturity Decline

Introduction and growth require longer forecasts than maturity


and decline

As product passes through life cycle, forecasts are useful in


projecting

Staffing levels (Human Resource Requirements)

Inventory levels (Supply chain management)

Factory capacity

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Operations & Production Management

Types of Forecasts
Economic forecasts

Address business cycle inflation rate, money


supply, housing starts, etc.

Technological forecasts

Predict rate of technological progress

Impacts development of new products

Demand forecasts

Predict sales of existing products and services

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Operations & Production Management

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Operations&ProductionManagement

2/21/2015

Seven Steps in Forecasting


1

Determine the use of the forecast

Select the items to be forecasted

Determine the time horizon of the forecast

Select the forecasting model(s)

Gather the data

Make the forecast

Validate and implement results

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Forecasts Idealism & Reality


Timely

Seldom Perfect

Accurate
Meaningful
Written
Easy to use

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Based on Assumptions

Reality

Ideal

Reliable

Aggregate are more


accurate than individual
Accuracy decreases as time
horizon increases

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Operations&ProductionManagement

2/21/2015

Approaches to Forecast
Qualitative Methods

Used when situation is vague and little data exist; for example New
products, New technology

Involves intuition, experience. e.g., forecasting sales on Internet

Quantitative Methods

Used when situation is stable and historical data exist; for example Existing
products, Current technology

Involves mathematical techniques, e.g., forecasting sales of color televisions

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Operations & Production Management

Overview of Qualitative Methods


Jury of executive opinion

Involves small group of high-level experts and managers

Combines managerial experience with statistical models

Quick decisions but group think is disadvantage

Delphi method

Iterative group process, continues until consensus is


reached

3 types of participants; Decision makers, Staff,


Respondents

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2/21/2015

Overview of Qualitative Methods


Sales force composite

Each salesperson projects his or her sales

Combined at district and national levels

Tends to be overly optimistic

Consumer Market Survey

Ask customers about purchasing plans

What consumers say, and what they actually do are often different

Sometimes difficult to answer

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Operations & Production Management

Overview of Quantitative Approaches


1.

Naive approach

2.

Moving averages

3.

Exponential smoothing

4.

Trend projection

5.

Linear regression

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time-series
models

associative
model

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Section 6.2

Time Series Forecasting

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Time Series Forecasting


Set

of evenly spaced numerical data

Obtained

by observing response variable at regular

time periods
Forecast

based only on past values, no other

variables important
Assumes

that factors influencing past and present

will continue influence in future


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2/21/2015

Time Series Forecasting


Trend Component

Persistent, overall upward or downward pattern

Changes due to population, technology, age, culture, etc.

Typically several years duration

Seasonal Component

Regular pattern of up and down fluctuations

Due to weather, customs, etc.

Occurs within a single year

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Period
Week
Month
Month
Year
Year
Year

Length
Day
Week
Day
Quarter
Month
Week

Number of
Seasons
7
4-4.5
28-31
4
12
52

Operations & Production Management

Time Series Forecasting


Cyclical Component

Repeating up and down movements

Affected by business cycle, political, and economic factors

Multiple years duration

Random Component

Erratic, unsystematic, residual fluctuations

Due to random variation or unforeseen events

Short duration and nonrepeating

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1- Naive Approach

Assumes demand in next


period is the same as demand in most recent period

e.g., If January sales were 68, then February sales will be 68

Sometimes cost effective and efficient

Can be good starting point

Simple to use, Virtually no cost

Cannot provide high accuracy

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Operations & Production Management

2- Moving Average Method

MA is a series of arithmetic means

Used if little or no trend

Used often for smoothing

Provides overall impression of data over time

Moving average =

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demand in previous n periods


n

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10

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2- Moving Average Method


Month

Actual
Shed Sales

3-Month
Moving Average

January
February
March
April
May
June
July

10
12
13
16
19
23
26

(10 + 12 + 13)/3 = 11 2/3


(12 + 13 + 16)/3 = 13 2/3
(13 + 16 + 19)/3 = 16
(16 + 19 + 23)/3 = 19 1/3

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Operations & Production Management

2- Weighted Moving Average Method

Used when some trend might be present

Older data usually less important

Weights based on experience and intuition

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2- Weighted Moving Average Method


Month

Actual
Shed Sales

January
February
March
April
May
June
July

10
12
13
16
19
23
26

3-Month Weighted
Moving Average

[(3 x 13) + (2 x 12) + (10)]/6 = 121/6


[(3 x 16) + (2 x 13) + (12)]/6 = 141/3
[(3 x 19) + (2 x 16) + (13)]/6 = 17
[(3 x 23) + (2 x 19) + (16)]/6 = 201/2
Weights Applied
3
2
1
6

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Period
Last month
Two months ago
Three months ago
Sum of weights

Operations & Production Management

Potential Problems With Moving Average

Increasing n smooths the forecast but makes it less


sensitive to changes

Do not forecast trends well

Require extensive historical data

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Operations & Production Management

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3 - Exponential Smoothing

Form of weighted moving average

Weights decline exponentially

Most recent data weighted most

Requires smoothing constant ()

Ranges from 0 to 1

Subjectively chosen

Involves little record keeping of past data

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Operations & Production Management

3 - Exponential Smoothing

Predicted demand = 142 Ford Mustangs

Actual demand = 153

Smoothing constant a = .20


Ft = Ft1 + (At1 - Ft1)
New forecast = 142 + .2(153 142) = 144.2 144 units

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Effect of Smoothing Constants

Weight Assigned to
Smoothing
Constant

Most
Recent
Period
()

2nd Most 3rd Most 4th Most 5th Most


Recent
Recent
Recent
Recent
Period
Period
Period
Period
2
3
(1 - ) (1 - )
(1 - )
(1 - )4

= .1

.1

.09

.081

.073

.066

= .5

.5

.25

.125

.063

.031

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Operations & Production Management

Effect of Smoothing Constants


Chose high values of when underlying average is likely to change
Choose low values of when underlying average is stable

Demand

225

Actual
demand

200

= .5

175

= .1
150 |
1

|
2

|
3

|
4

|
5

|
6

|
7

|
8

|
9

Quarter
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Choosing

The objective is to obtain the most accurate forecast no


matter the technique

We generally do this by selecting the model that gives


us the lowest forecast error

Forecast error = Actual demand - Forecast value


= A t - Ft

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Common Measures of Error


Mean Absolute Deviation (MAD)
MAD =

|Actual - Forecast|
n

Mean Squared Error (MSE)


MSE =

(Forecast Errors)2

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n
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Common Measures of Error

Mean Absolute Percent Error (MAPE)


n

MAPE =

100|Actuali - Forecasti|/Actuali

i=1

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Operations & Production Management

Comparison of Forecast Error

Quarter

Actual
Tonnage
Unloaded

Rounded
Forecast
with
= .10

Absolute
Deviation
for
= .10

1
2
3
4
5
6
7
8

180
168
159
175
190
205
180
182

175
175.5
174.75
173.18
173.36
175.02
178.02
178.22

5.00
7.50
15.75
1.82
16.64
29.98
1.98
3.78
82.45

Resource Person : Dr. Muhammad Wasif

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62

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Comparison of Forecast Error


MAD =
Quarter

|deviations|
Rounded

Actual
Tonnage
Unloaded

Forecast
with
= .10

Absolute
Deviation
for
= .10

For1 = .10180
175
5.00
2
168
175.5
7.50
=159
82.45/8174.75
= 10.3115.75
3
173.18
1.82
For45 = .50175
190
173.36
16.64
6
=205
98.62/8175.02
= 12.3329.98
7
8

180
182

178.02
178.22

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1.98
3.78
82.45

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62

Operations & Production Management

Comparison of Forecast Error


MSE =

(forecastRounded
errors)2Absolute

Quarter

Actual
Tonnage
Unloaded

Forecast
with
= .10

Deviation
for
= .10

For1 = .10180
175
5.00
2
168
175.5
7.50
= 1,526.54/8
= 190.82
3
159
174.75
15.75
173.18
1.82
For45 = .50175
190
173.36
16.64
6 = 1,561.91/8
205
175.02
29.98
= 195.24
7
8

180
182

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178.02
178.22

1.98
3.78
82.45

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62

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Comparison of Forecast Error


n

100|deviation
Rounded i|/actual
Absolutei

1
Actual
MAPE = i =Tonnage
Quarter Unloaded

Forecast
with
n
= .10

Deviation
for
= .10

For
1 = .10
180
175
5.00
2
168
175.5
7.50
= 44.75/8
= 5.59%
3
159
174.75
15.75
4
175
173.18
1.82
For
= .50
5
190
173.36
16.64
6
205
175.02
29.98
= 54.05/8
= 6.76%
7
8

180
182

178.02
178.22

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1.98
3.78
82.45

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62

Operations & Production Management

Comparison of Forecast Error


Quarter

Actual
Tonnage
Unloaded

Rounded
Forecast
with
= .10

1
2
3
4
5
6
7
8

180
168
159
175
190
205
180
182

175
175.5
174.75
173.18
173.36
175.02
178.02
178.22
MAD
MSE
MAPE

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Absolute
Deviation
for
= .10

5.00
7.50
15.75
1.82
16.64
29.98
1.98
3.78
82.45
10.31
190.82
5.59%

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33
195.24
6.76%

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Comparison of Forecast Error


0.1
1
2
3
4
5
6
7
8

Actial
180
168
159
175
190
205
180
182
MAD
MAPE

Dev.

175
175.5
174.75
173.18
173.36
175.05
178.02
178.22

5
7.5
15.75
1.82
16.64
29.95
1.98
3.78
82.42
10.3025
5.591537

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0.3
0.4
0.2
F
Dev.
F
Dev.
F
Dev.
175
5
175
5
175
5
176
8
176.5
8.5
177
9
174.4
15.4
173.95
14.95
173.4
14.4
171.32
3.68 169.465
5.535
167.64
7.36
172.056
17.944 171.1255 18.8745 170.584
19.416
175.6448 29.3552 176.7879 28.21215 178.3504 26.6496
181.5158 1.51584 185.2515 5.251495 189.0102 9.01024
181.2127 0.787328 183.676 1.676047 185.4061 3.406144
81.68237
87.99919
94.24198
10.2103
10.9999
11.78025
5.545828
5.992131
6.436648

0.5
F
175
177.5
172.75
165.88
170.44
180.22
192.61
186.3

Dev.
5
9.5
13.75
9.12
19.56
24.78
12.61
4.3
98.62
12.3275
6.755313

Operations & Production Management

Exponential Smoothing with Trend Adjustment


When a trend is present, exponential
smoothing must be modified
Forecast
Exponentially
Exponentially
including (FITt) = smoothed (Ft) + smoothed
(Tt)
trend
forecast
trend

Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1)
Tt = (Ft - Ft - 1) + (1 - )Tt - 1
Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
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Exponential Smoothing with Trend Adjustment


Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)
12
17
20
19
24
21
31
28
36

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Smoothed
Forecast, Ft
11

Smoothed
Trend, Tt
2

Forecast
Including
Trend, FITt
13.00

Operations & Production Management

Exponential Smoothing with Trend Adjustment


Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)
12
17
20
19
24
21
31
28
36

Resource Person : Dr. Muhammad Wasif

Smoothed
Forecast, Ft
11

Smoothed
Trend, Tt
2

Forecast
Including
Trend, FITt
13.00

Step 1: Forecast for Month 2


F2 = A1 + (1 - )(F1 + T1)
F2 = (.2)(12) + (1 - .2)(11 + 2)
= 2.4 + 10.4 = 12.8 units

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Exponential Smoothing with Trend Adjustment


Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Forecast
Actual
Smoothed
Smoothed
Including
Trend, Tt
Trend, FITt
Demand (At) Forecast, Ft
12
11
2
13.00
17
12.80
20
19
Step 2: Trend for Month 2
24
21
T2 = (F2 - F1) + (1 - )T1
31
28
T2 = (.4)(12.8 - 11) + (1 - .4)(2)
36

= .72 + 1.2 = 1.92 units

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Operations & Production Management

Exponential Smoothing with Trend Adjustment


Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Forecast
Actual
Smoothed
Smoothed
Including
Trend, Tt
Trend, FITt
Demand (At) Forecast, Ft
12
11
2
13.00
17
12.80
1.92
20
19
Step 3: Calculate FIT for Month 2
24
21
FIT2 = F2 + T2
31
28
FIT2 = 12.8 + 1.92
36

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= 14.72 units

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Exponential Smoothing with Trend Adjustment


Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)
12
17
20
19
24
21
31
28
36

Smoothed
Forecast, Ft
11
12.80
15.18
17.82
19.91
22.51
24.11
27.14
29.28
32.48

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Smoothed
Trend, Tt
2
1.92
2.10
2.32
2.23
2.38
2.07
2.45
2.32
2.68

Forecast
Including
Trend, FITt
13.00
14.72
17.28
20.14
22.14
24.89
26.18
29.59
31.60
35.16

Operations & Production Management

Exponential Smoothing with Trend Adjustment


Example
35

Product demand

30

Actual demand (At)

25
20
15

Forecast including trend (FITt)


with = .2 and = .4

10
5
0 |
1

|
2

|
3

|
4

|
5

|
6

|
7

|
8

|
9

Time (month)
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4 - Trend Projections

Fitting a trend line to historical data points to project


into the medium to long-range

Linear trends can be found using the least squares


technique

y^ = a + bx
^ = computed value of the variable to
where y
be predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
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Linear Regression Method


Values of Dependent Variable

Least squares method minimizes the sum of the squared errors (deviations)

Actual observation
(y-value)

Deviation7

Deviation5

Deviation6

Deviation3
Deviation4
Deviation1
(error)

Deviation2

Trend line, y^ = a + bx

Time period
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Linear Regression Method


Equations to calculate the regression variables
y^ = a + bx

b=

xy - nxy
x2 - nx2

a = y - bx

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Linear Regression Method - Example


Year
2003
2004
2005
2006
2007
2008
2009

Time
Period (x)

Electrical Power
Demand

1
2
3
4
5
6
7
x = 28
x=4
b=

74
79
80
90
105
142
122
y = 692
y = 98.86

x2

xy

1
4
9
16
25
36
49
x2 = 140

74
158
240
360
525
852
854
xy = 3,063

3,063 - (7)(4)(98.86)
xy - nxy
=
= 10.54
2
2
140 - (7)(42)
x - nx

a = y - bx = 98.86 - 10.54(4) = 56.70


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Linear Regression Method - Example


Year

Time
Period (x)

2003
1
2004
2
2005
3
The
trend line
2006
4
2007^
5
2008y = 56.70
6
2009
7
x = 28
x=4
b=

Electrical Power
Demand

74
79
80
is
90
105
142
+ 10.54x
122
y = 692
y = 98.86

x2

xy

1
4
9
16
25
36
49
2
x = 140

74
158
240
360
525
852
854
xy = 3,063

3,063 - (7)(4)(98.86)
xy - nxy
=
= 10.54
2
2
140 - (7)(42)
x - nx

a = y - bx = 98.86 - 10.54(4) = 56.70


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Operations & Production Management

Power demand

Linear Regression Method - Example


160
150
140
130
120
110
100
90
80
70
60
50

Trend line,
y^ = 56.70 + 10.54x

|
2003

|
2004

|
2005

Resource Person : Dr. Muhammad Wasif

|
2006

|
2007
Year

|
2008

|
2009

|
2010

|
2011

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5 - Seasonal Variations In Data


The multiplicative seasonal model can adjust trend
data for seasonal variations in demand

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

5 - Seasonal Variations In Data


Steps in the process:
1.

Find average historical demand for each season

2.

Compute the average demand over all seasons

3.

Compute a seasonal index for each season

4.

Estimate next years total demand

5.

Divide this estimate of total demand by the number of


seasons, then multiply it by the seasonal index for that
season

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5 - Seasonal Variations In Data


San Diego Hospital

Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec

Demand
2007 2008 2009
80
70
80
90
113
110
100
88
85
77
75
82

85
85
93
95
125
115
102
102
90
78
72
78

105
85
82
115
131
120
113
110
95
85
83
80

Resource Person : Dr. Muhammad Wasif

Average
2007-2009

Average
Monthly

90
80
85
100
123
115
105
100
90
80
80
80

94
94
94
94
94
94
94
94
94
94
94
94

Seasonal
Index

Operations & Production Management

5 - Seasonal Variations In Data


San Diego Hospital

Month

Demand
2007 2008 2009

Average
2007-2009

Average
Monthly

Seasonal
Index

Jan
80
85 105
90
94
Feb
70
85
85
80
94
Mar
80
93 Average
82
85 monthly 94
2007-2009
demand
Seasonal90index95= 115 Average monthly
Apr
100
94
demand
May
113 125 131
123
94
= 90/94 = .957
Jun
110 115 120
115
94
Jul
100 102 113
105
94
Aug
88 102 110
100
94
Sept
85
90
95
90
94
Oct
77
78
85
80
94
Nov
75
72
83
80
94
Dec
82
78
80
80
94
Resource Person : Dr. Muhammad Wasif

0.957

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5 - Seasonal Variations In Data


San Diego Hospital

Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec

Demand
2007 2008 2009
80
70
80
90
113
110
100
88
85
77
75
82

85
85
93
95
125
115
102
102
90
78
72
78

105
85
82
115
131
120
113
110
95
85
83
80

Resource Person : Dr. Muhammad Wasif

Average
2007-2009

Average
Monthly

Seasonal
Index

90
80
85
100
123
115
105
100
90
80
80
80

94
94
94
94
94
94
94
94
94
94
94
94

0.957
0.851
0.904
1.064
1.309
1.223
1.117
1.064
0.957
0.851
0.851
0.851

Operations & Production Management

5 - Seasonal Variations In Data


San Diego Hospital

Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec

Demand
2007 2008 2009

Average
2007-2009

Average
Monthly

80
85 105
90
94
70
85Forecast
85
80
94
for 2010
80
93
82
85
94
90
95
115
100
94
Expected annual demand = 1,200
113 125 131
123
94
110 115 120
115
94
1,200
100 Jan
102 113
105 = 96
94
x .957
12
88 102 110
100
94
1,200
85
90
95
90
94
Feb
x .851 = 85
77
78
8512
80
94
75
72
83
80
94
82
78
80
80
94

Resource Person : Dr. Muhammad Wasif

Seasonal
Index
0.957
0.851
0.904
1.064
1.309
1.223
1.117
1.064
0.957
0.851
0.851
0.851

Operations & Production Management

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5 - Seasonal Variations In Data


2010 Forecast
2009 Demand
2008 Demand
2007 Demand

San Diego Hospital

140
130
Demand

120
110
100
90
80
70
|
J

|
F

|
M

|
A

|
M

|
J

|
J

|
A

|
S

|
O

|
N

|
D

Time
Resource Person : Dr. Muhammad Wasif

Operations & Production Management

San Diego Hospital

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

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Section 6.3

Associative Forecasting

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

33

Associative Forecasting
Forecasting an outcome based on predictor variables
using the least squares technique

bx

where
computed value of the variable to be predicted
(dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable though to predict the value of
the dependent variable
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Associative Forecasting - Example


Local Payroll
($ billions), x
1
3
4
2
1
7

4.0
Sales

Sales
($ millions), y
2.0
3.0
2.5
2.0
2.0
3.5

3.0
2.0
1.0
0

Resource Person : Dr. Muhammad Wasif

|
1

|
2

|
|
|
3 4
5
Area payroll

|
6

|
7

Operations & Production Management

Associative Forecasting - Example


Sales, y
2.0
3.0
2.5
2.0
2.0
3.5
y = 15.0

Payroll, x
1
3
4
2
1
7
x = 18

Resource Person : Dr. Muhammad Wasif

x2
1
9
16
4
1
49
x2 = 80

xy
2.0
9.0
10.0
4.0
2.0
24.5
xy = 51.5

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Associative Forecasting - Example


^

y = 1.75 + .25x

Sales = 1.75 + .25(payroll)

If payroll next year


is estimated to be
$6 billion, then:

4.0

Sales = 1.75 + .25(6)


Sales = $3,250,000

Sales

3.25
3.0
2.0
1.0
0

Resource Person : Dr. Muhammad Wasif

|
1

|
2

|
|
|
3 4
5
Area payroll

|
6

|
7

Operations & Production Management

Standard Error of the Estimate

A forecast is just a point estimate of a future value

This point is actually the mean


of a probability distribution

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Standard Error of the Estimate

Sy,x = .306
The standard
error of the
estimate is
$306,000 in sales

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Monitoring and Controlling Forecasts


Tracking

Measures how well the forecast is predicting actual


values

Ratio of running sum of forecast errors (RSFE) to mean


absolute deviation (MAD)

Good tracking signal has low values

If forecasts are continually high or low, the forecast has


a bias error

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Monitoring and Controlling Forecasts


Tracking
RSFE
=
signal
MAD
(Actual demand in
period i Forecast demand
in period i)

Tracking
=
signal
|Actual - Forecast|/n)

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Operations & Production Management

Tracking Signal
Signal exceeding limit
Tracking signal
+

Upper control limit


Acceptable
range

0 MADs

Lower control limit


Time

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Tracking Signal - Example


Qtr

Actual
Demand
(AD)

1
2
3
4
5
6

90
95
115
100
125
140

Forecast
Demand
(FD)

100
100
100
110
110
110

Error
RSFE
(AD-FD)

-10
-5
+15
-10
+15
+30

-10
-15
0
-10
+5
+35

Resource Person : Dr. Muhammad Wasif

Absolute
Forecast
Error
|RSFE|

10
5
15
10
15
30

Cumulative
Absolute
Forecast
Error
MAD
(CAF)
CAF/Qtr

10
15
30
40
55
85

10.0
7.5
10.0
10.0
11.0
14.2

Operations & Production Management

Tracking Signal - Example

Qtr

1
2
3
4
5
6

Tracking
Actual
Forecast
Signal
Demand Demand
(RSFE/MAD)

90 =100
-10/10
-1
-15/7.5
-2
95 =100
0/10 = 0
115 100
-10/10 = -1
100
110
+5/11 = +0.5
+35/14.2
+2.5
125 =110
140

110

Error

RSFE

Absolute
Forecast
Error

-10
-5
+15
-10
+15
+30

-10
-15
0
-10
+5
+35

10
5
15
10
15
30

Cumulative
Absolute
Forecast
Error

MAD

10
15
30
40
55
85

10.0
7.5
10.0
10.0
11.0
14.2

The variation of the tracking signal between -2.0 and


+2.5 is within acceptable limits
Resource Person : Dr. Muhammad Wasif

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Section 6.4

Miscellaneous Forecasting

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

33

Adaptive Forecasting

Its possible to use the computer to continually


monitor forecast error and adjust the values of the a
and b coefficients used in exponential smoothing to
continually minimize forecast error

This technique is called adaptive smoothing

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Focus Forecasting

Developed at American Hardware Supply, focus forecasting is


based on two principles:

1.

Sophisticated forecasting models are not always better than


simple ones

2.

There is no single technique that should be used for all


products or services

This approach uses historical data to test multiple


forecasting models for individual items

The forecasting model with the lowest error is then used to


forecast the next demand

Resource Person : Dr. Muhammad Wasif

Operations & Production Management

Forecasting in the Service Sector

Presents unusual challenges

Special need for short term records

Needs differ greatly as function of industry and


product

Holidays and other calendar events

Unusual events

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Fast Food Restaurant Forecast


Percentage of sales

20%
15%
10%
5%

11-12

1-2
12-1
(Lunchtime)

2-3

3-4

7-8
6-7
(Dinnertime)
Hour of day
4-5

Resource Person : Dr. Muhammad Wasif

5-6

8-9

9-10

10-11

Operations & Production Management

FedEx Call Center Forecast


12%
10%
8%
6%
4%
2%
0%

6
8
A.M.

Resource Person : Dr. Muhammad Wasif

10

12

Hour of day

6
8
P.M.

10

12

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References

Operations Management, 10th Ed., by J. Heizer &


B. Render

Operations Management, William J. Stevenson.

Operations Management, 7th Ed., N. Slack, A.B.


Jones, R. Johnston.

Cases in Operations Management, S. Chambers, C.


Harland, A. Harison, N. Slack.

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ResourcePerson:Dr.MuhammadWasif

39