15/09/2011

MGTS352 OperationsManagement
Module#2

Forecasting
TetsuNakashimaPaniagua SchoolofBusiness GrantMacEwan University
(SomematerialpresentedherehasbeenpreparedbyDr.JohnDoucettesomeotherbyRyanOrchard.This materialisbeingusedwiththeirpermission)

Definitions
Aforecast isanestimateofthelevelofdemand expectedinthefuture. IndependentDemand: FinishedGoods Twotypesofdemand:
Independentdemand Dependentdemand
Dependent Demand: RawMaterials, Componentparts, Subassemblies,etc. A

B(4)

C(2)

D(2)
2

E(1)

D(3)

F(2)
MGTS352 Module#2 TetsuNakashimaPaniagua SchoolofBusiness

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Selectaforecastingtechnique
ProblemDefinition No Quantitative Data? Yes Qualitativeapproach Selectamethod Validation Selectamodel Estimateparameters Modelvalidation
3 MGTS352 Module#2 TetsuNakashimaPaniagua SchoolofBusiness

Causalfactors? Yes Causalapproach

No

Timeseriesapproach Selectamodel Estimateparameters Modelvalidation

QualitativeForecastingTechniques

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TimeSeriesAnalysisTechniques

CausalForecastingTechniques

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CostofForecastingvs.Costof Inaccuracies
High

Cost
Low

High

ForecastAccuracy
Basedon:Silver,Pyke,Peterson.InventoryManagementandProductionPlanningandScheduling,3rd Edition.Hoboken: JohnWiley&Sons,1998.p77.

CostofForecastingvs.Costof Inaccuracies
High
Modelsthat naivelyproject thepast Operatein thisregion Butwhere? Forecastingmodelsthatseek underlyingcauses

TotalCost

Cost

Costofforecasting

Costsduetoforecasterror

Low

High

ForecastAccuracy
Basedon:Silver,Pyke,Peterson.InventoryManagementandProductionPlanningandScheduling,3rd Edition.Hoboken: JohnWiley&Sons,1998.p77.

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Whereis......?
High

TotalCost

Cost

Costofforecasting

Costsduetoforecasterror

Low

High

ForecastAccuracy
Basedon:Silver,Pyke,Peterson.InventoryManagementandProductionPlanningandScheduling,3rd Edition.Hoboken: JohnWiley&Sons,1998.p77.

Insummary
Thesecostsarenotperfectlyknown,though,and someguidanceisneededonhowmuchtoinvest inforecasting. Whatshoulddeterminetheoperationaldecision ofhowaccuratetoforecast?
Itshouldbedeterminedsuchthattheoperations strategyalignswiththegreatercorporatestrategyand thuspromotesthecompanyscompetitivepositionin termsoftheperformancedimensionsthatarethe prioritiesoftheircustomers.

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ComponentsofDemand
Averagedemandforaperiodoftime Trend Seasonalelement Cyclicalelements Randomvariation Autocorrelation

ComponentsofDemand(2)

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ComponentsofDemand(3)
LinearTrend SCurveTrend

AsymptoticTrend

ExponentialTrend

TimeSeriesAnalysis
Timeseriesforecastingmodelstrytopredictthefuture basedonpastdata
Atimeseries issimplyatimeorderedlistofhistorical data

Timeseriesanalysismethods:
Simplemovingaverage Weightedmovingaverage Exponentialsmoothing Meanabsolutedeviation Simplelinearregression Multiplefactorlinearregression

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SimpleMovingAverage(SMA)
Thesimplemovingaveragemodelassumesanaverageisa goodestimatoroffuturebehaviour Theformulaforthesimplemovingaverageis: Ft = At -1 + At -2 + At -3 + ... + At - n n
i {1..n}

At i

Ft =Forecastforthecomingperiod n =Numberofperiodstobeaveraged At1 =Actualdemandinthepastperiodforupton periods

SMAExample
Question:
Whatisthe3periodmovingaverageforecastforperiod6 ifyouhavethefollowingdemands?
Period 1 2 3 4 5 Demand 42 40 43 40 41

F6 =

A6-1 + A6-2 + A6-3 3 3 A5 + A4 + A3 41 + 40 + 43 = = = 41.333 3 3

i {1..3}

A6 i

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SMAInClassProblem
Question:
Whatarethe3weekand6weekmovingaverage forecastsforthefollowingdemand?
Week 1 2 3 4 5 6 Demand 650 678 720 785 859 920 Week 7 8 9 10 11 12 Demand 850 758 892 920 789 844

SimpleMovingAverageCurves

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SimpleMovingAverageCurves

WeightedMovingAverage(WMA)
Whilethesimplemovingaverageformulaimpliesan equalweightbeingplacedoneachvaluethatisbeing averaged,theweightedmovingaverage permitsan unequalweightingonpriortimeperiods. Theformulaforthemovingaverageis:
Ft = w1 At -1 + w 2 At -2 + w 3 At -3 + ... + w n At - n
=
i {1..n}

w i At i

wt =weightgiventotimeperiodt data,where

w
i =1

=1

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WMAExample
Question
Whatisthe4periodweightedmovingaverageforecast forperiod6ifyouhavethefollowingdemands?
Period 1 2 3 4 5
F6 =
i {1..3}

Demand 42 40 43 40 41

Weights: w1 =0.4 w2 =0.3 w3 =0.2 w4 =0.1

w i A6 i = w1 A6-1 + w 2 A6-2 + w 3 A6-3 + w 4 A6-4

= w1 A5 + w 2 A4 + w 3 A3 + w 4 A2 = 0.4 41 + 0.3 40 + 0.2 43 + 0.1 40 = 41

WMAInClassProblem
Question
Giventhefollowingweeklydemandandweights, calculatethe3weekmovingaverageforecasts?
Week 1 2 3 4 5 6 Demand 650 678 720 785 859 920 Week 7 8 9 10 11 12 Demand 850 758 892 920 789 844

Weights: w1 =0.5 w2 =0.3 w3 =0.2

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ExponentialSmoothing
Basedonthepremisethatthemostrecentobservations mighthavethehighestpredictivevalue
Therefore,weshouldgivemoreweighttothemorerecent timeperiodswhenforecasting

Theformulaforexponentialsmoothingis:
Ft = Ft -1 + ( At -1 Ft -1 )

Ft =Forecastforthecomingperiod Ft1 =Forecastfortheprevioustimeperiod At1 =Actualoccurrenceinthepasttimeperiod =exponentialsmoothingconstant(avaluebetween0 and1)

ExponentialSmoothing(2)
Choosingappropriatevaluesfor
Ifactualdemandsarestable,useasmall tolessen effectsofshorttermchangesindemand Ifactualdemandsrapidlyincreaseordecrease,usealarge soforecastskeeppacewiththechangesindemand isusuallydeterminedbytrialanderror,withseveral valuestestedonexistingdataoraportionofdata
Wanttominimizetheaverageforecastingerror

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ExponentialSmoothingExample
Question
Giventhefollowingdemands,whataretheexponential smoothingforecastsforallperiodsusinganexponential smoothingfactorof =0.10?Assumethatforperiod1:F1 Period Demand Forecast Error Ft = Ft -1 + ( At -1 Ft -1 ) =A1 1 42
2 3 4 5 6 7 8 9 10 11 12 40 43 40 41 39 46 44 45 38 40 42.00 41.80 41.92 41.73 41.66 41.39 41.85 42.07 42.36 41.92 41.73 -2.00 1.20 -1.92 -0.73 -2.66 4.61 2.15 2.93 -4.36 -1.92

F2 = F1 + ( A1 F1 ) = 42 + 0.1 ( 42 42 )

F3 = F2 + ( A2 F2 ) = 42 + 0.1 ( 40 42 ) F4 = F3 + ( A3 F3 ) = 41.8 + 0.1 ( 43 41.8 )

ExponentialSmoothingInClassPr.
QuProbestion
Giventhefollowingdemanddata,whatarethe exponentialsmoothingforecastsforperiods2through10 usingexponentialsmoothingfactorsof =0.10and = Week Demand 0.60?
1 2 3 4 5 6 7 8 9 10 820 775 680 655 750 802 798 689 775

Assumethatforperiod1: F1 =A1

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ExponentialSmoothingCurves

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