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Demand Forecasting
2
OBJECTIVES
Demand Forecasting
Qualitative Forecasting Methods
Demand Forecasting
Patterns of Demand
Horizontal Trend
Year 1
Year 2 | | | | | |
1 2 3 4 5 6 years
Seasonal Cyclical
5
Forecasting as a Process
4. Revise forecasts
Based on the inputs from the consensus
meetings and collaborative sources
5. Review by operating committee
6. Finalize and communicate
7
Methods
Executive opinion
Forecasts determined by executive opinion
Salesforce estimates
Forecasts collected from salesforces
Historical analogy
Predicting demands for a new product by using
demand history of similar products
Market research
Using surveys or interviews to determine
demand forecasts
13
Panel consensus
Forecasts developed by a group of people from
a variety of positions and departments through
open meetings
Delphi method
Similar to panel consensus, but through
anonymous procedures
14
Delphi Method
950
900
850
800
750 Demand
700
650 3-Week
600 6-Week
550
500
1 2 3 4 5 6 7 8 9 10 11 12
Note how the 3-
Week
Week is smoother
than the Demand,
and the 6-Week is
even smoother.
20
Week Demand
Weights
1 820
w1 = .7
2 775
3 680
w2 = .2
4 655 w3 = .1
23
F5 = w1 D4 + w2 D3 + w3 D2
= (0.7)(655) + (0.2)(680) + (0.1)(775) = 672
24
Using 0.1
Using 0.6
850
800
750 Demand
700 0.1
650
600 0.6
550
500
1 2 3 4 5 6 7 8 9 10
Week Note how the
forecasts become
smoother as the
value of alpha
decreases.
28
i
x 2
i=1
n(x) 2
a = y bx x
n n
i=1 yi
i=1 xi y = n = number of data points
x = n
n
x x^2 y x*y
2.5 6.25 164 410
1.3 1.69 116 150.8
1.4 1.96 165 231
1.0 1 101 101
2.0 4 179 358
1.64 14.9 145 1250.8
Average Sum Average Sum
b=
x y n(y)(x)
i i
=
1250.8 5(145)(1.64) 61.8
= = 42.6
x n(x)
2
i
2
14.9 5(1.64) 2
1.45
a = y bx = 145 (42.6)(1.64) = 75.1
34
Example: Results of Simple Linear
Regression Method
y = 75.1 + 42.6x
Forecast Error
E t = D t Ft
Examples:
Ft = 200, Dt = 180 Et = 180 200 = 20
Ft = 200, Dt = 210 Et = 210 200 = 10
36
Et
2
Mean squared error (MSE)
t=1
=Average of the squared errors MSE =
n
n
Cumulative sum of forecast CFE = E t
errors (CFE) t=1
37
Et
100 CFE =
n
E 30
MAD = t=1
20 t=1
t
n 5
n
Et
2
2050
MSE = t=1
410
n 5
39
1 MAD 0.8
40
Normal distribution
with mean 0 and
standard deviation
57.048%
0.8 0 0.8
MAD MAD
41
98.334%
-3MAD 0 3MAD
43
Tracking Signal
CFE
Tracking signal =
MAD
+2.0
+1.0
0
1.0
2.0
Lower control limit
3.0
| | | | |
0 5 10 15 20 25
Observation Number
45
Et
66 CFE =
n
E 34
MAD = t=1
22 t=1
t
n 3
CFE 34
Tracking signal = 1.55
MAD 22