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Forecasting
Operations Management
William J. Stevenson
8th edition
3-2
Forecasting
Forecasting methods Statistical Judgemental Basic assumption is that actual pattern will follow seasonality, trend, causal relation ship plus some random influences. Actual outcome = Pattern + Randomness Actual out come = Model + Error Thus there is some deviation between forecast and Actual demand
3-3
Forecasting
Objective is to reduce this error. It is called accurate point estimate. Qualitative or Judgmental subjective Independent judgment , Committee judgment, Sales force estimate and juries of executive opinion Quantitative or Mathematical objective Time series one dimensional reactive method
3-4
Forecasting
Causal or multidimensional proactive method Time series Premise the future sales will mimic the pattern of past sales it means identification of pattern is essential( Cyclic, seasonal, trend)
Moving average also called smoothening model Level out small random fluctuations Exponential smoothening has premise that most recent sales pattern has more impact on forecast
3-5
Forecasting
Incomplete
Robust regression
complete
Un Stable
3-6
Forecasting
3-7
Forecasting
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Forecasting
3-9
Forecasting
Time series based on four elements Trend , Cyclical, seasonal and random influences Time series methods work well for large number of products Stable product families Short term forecast Systematized require little storage and little data
3-10 Forecasting
Forecast is essential step in business plan. To plan future for Distribution, Production, Procurement( These are three distinct stages in Supply chain management
3-11 Forecasting
3-12 Forecasting
3-13 Forecasting
3-14 Forecasting
Uses of Forecasts
Cost/profit estimates Cash flow and funding
Accounting Finance
3-15 Forecasting
Assumes causal system past ==> future Forecasts rarely perfect because of randomness
3-16 Forecasting
Timely
Reliable
Accurate
Written
3-17 Forecasting
The forecast
Step 5 Prepare the forecast Step 4 Gather and analyze data Step 3 Select a forecasting technique
Step 2 Establish a time horizon Step 1 Determine purpose of forecast
3-18 Forecasting
Types of Forecasts
Judgmental - uses subjective inputs Time series - uses historical data assuming the future will be like the past Associative models - uses explanatory variables to predict the future
3-19 Forecasting
Judgmental Forecasts
Executive opinions
Sales force opinions Consumer surveys Outside opinion method
Delphi
3-20 Forecasting
Trend - long-term movement in data Seasonality - short-term regular variations in data Cycle wavelike variations of more than one years duration Irregular variations - caused by unusual circumstances Random variations - caused by chance
3-21 Forecasting
Forecast Variations
Irregular variatio n
Figure 3.1
Trend
Cycles
90 89 88 Seasonal variations
3-22 Forecasting
Naive Forecasts
Uh, give me a minute.... We sold 250 wheels last week.... Now, next week we should sell....
The forecast for any period equals the previous periods actual value.
3-23 Forecasting
Nave Forecasts
Simple to use Virtually no cost Quick and easy to prepare Data analysis is nonexistent Easily understandable Cannot provide high accuracy Can be a standard for accuracy
3-24 Forecasting
Seasonal variations
3-25 Forecasting
3-26 Forecasting
Moving Averages
Moving average A technique that averages a number of recent actual values, updated as new values become available.
MAn =
Ai i=1 n
Weighted moving average More recent values in a series are given more weight in computing the forecast.
3-27 Forecasting
MA5
47 45 43 41 39 37 35 1 2 3 4 5 6 7
n
MA3
8 9 10 11 12
MAn =
Ai i=1 n
3-28 Forecasting
Exponential Smoothing
Therefore, we should give more weight to the more recent time periods when forecasting.
3-29 Forecasting
Exponential Smoothing
Weighted averaging method based on previous forecast plus a percentage of the forecast error A-F is the error term, is the % feedback
3-30 Forecasting
3-31 Forecasting
50
Demand
.4
45 40 35 1 2 3 4 5 6 7 8
.1
9 10 11 12
Period
3-32 Forecasting
Figure 3.5
Parabolic
Exponential
Growth
3-33 Forecasting
Ft = a + bt
0 1 2 Ft = Forecast for period t t = Specified number of time periods a = Value of Ft at t = 0 b = Slope of the line 3 4 5 t
3-34 Forecasting
Calculating a and b
n (ty) - t y b = 2 2 n t - ( t)
y - b t a = n
3-35 Forecasting
t = 15 t2 = 55 2 ( t) = 225
y = 812 ty = 2499
3-36 Forecasting
b =
y = 143.5 + 6.3t
3-37 Forecasting
Associative Forecasting
3-38 Forecasting
Computed relationship
50 40 30 20 10 0 0 5 10 15 20 25
3-39 Forecasting
Forecast Accuracy
3-40 Forecasting
MAD
n
MSE = ( Actual forecast)
2
n -1
( Actual forecas t n
MAPE =
/ Actual*100)
3-41 Forecasting
Example 10
Forecast 215 216 215 214 211 214 217 216 (A-F) 2 -3 1 -4 2 5 -1 -4 -2 |A-F| 2 3 1 4 2 5 1 4 22 (A-F)^2 4 9 1 16 4 25 1 16 76 (|A-F|/Actual)*100 0.92 1.41 0.46 1.90 0.94 2.28 0.46 1.89 10.26
Period 1 2 3 4 5 6 7 8
3-42 Forecasting
Control chart
A visual tool for monitoring forecast errors Used to detect non-randomness in errors
All errors are within the control limits No patterns, such as trends or cycles, are present
3-43 Forecasting
3-44 Forecasting
Tracking Signal
Tracking signal
Ratio of cumulative error to MAD
3-45 Forecasting
Cost Accuracy
Historical data Computers Time needed to gather and analyze the data Forecast horizon
3-46 Forecasting
Exponential Smoothing
3-47 Forecasting
3-48 Forecasting
3-49 Forecasting
Forecasting methods Statistical Judgemental Basic assumption is that actual pattern will follow seasonality, trend, causal relation ship plus some random influences. Actual outcome = Pattern + Randomness Actual out come = Model + Error Thus there is some deviation between forecast and Actual demand