Forecasting

PPC Course 2

Industrial Engineering Department Sepuluh Nopember Institute of Technology Indonesia 2008

What is Forecasting ?
Y

Forecasting

n+1

n+2

Function of Time

Forecasting is an approach to estimate or deal with something that contains uncertainty and related with time in the

future

What is forecasting ?
The process of estimating future demand in terms of the quantity, timing, quality, and location for desired products and services Rely on logical methods of manipulating data that have been generated by historical events Forecasting is an essential element of capital budgeting.
Sales will be $200 Million!

why we need forecasting?

All organizations operate in an atmosphere of uncertainty and become more complex All decisions must be made for uncertainty future based on imperfect knowledge Educated guesses more valuable than uneducated guesses Not to say that intuitive forecasting is bad The quantitative forecasting technique to be the starting point in the effective forecasting and valuable supplement

Who needs forecasts?

Every organization, large and small, private and public, must plan to meet the condition of the future for which it has imperfect knowledge. Across all functional line: finance, marketing, personnel, and production areas.

Characteristics of forecasting
Forecasts are usually wrong, seldom correct, and involves error find the best method Forecast should include a measure of forecast error Forecasting methods assume there is some underlying stability in the system Family / grouped / aggregated data forecasts are usually more accurate than item forecast Short range forecasts are more accurate than long-range forecast

Forecasting in Business Marketing - sale forecast Operations - capacity, scheduling, inventory

Assumptions of Forecast

Information (data) about the past is available The pattern of the past will continue into the future (Time Series Models).

Forecast in MTO
Forecast tidak banyak dikenal dan dipergunakan di perusahaan Make To Order Overproduction di perusahaan dengan karakteristik MTO justru adalah kerugian Forecast bukan merupakan isu utama di MTO, justru isu utama adalah nervousness system, responsiveness, dan material management (Pujawan, 2000). Pada MTO, forecast tidak lagi dilakukan terhadap demand, melainkan pada penggunaan resource di masa datang. But, demand forecast is very useful in MTS

Demand Management
Independent Demand: Finished Goods

Dependent Demand: Raw Materials, Component parts, Sub-assemblies, etc.

A

B(4)

C(2)

D(2)

E(1)

D(3)

F(2)

Forecasting Steps
Decide what needs to be forecast
Level of detail, units of analysis & time horizon required

Evaluate and analyze appropriate data

Identify needed data & whether its available

Select and test the forecasting model

Cost, ease of use & accuracy

Generate the forecast Monitor forecast accuracy over time

Characteristics of a good forecast Accuracy bias (when forecast are persistently too high or too low) & consistency (concerned with the size of forecast error) Cost Response stability & responsive Simplicity easy to make, understand & use

Types of Forecasting Methods

Depend on :
TIME FRAME
Indicates how far into the future is forecast
Short- to mid-range forecast
typically encompasses the immediate future daily up to two years

Long-range forecast
usually encompasses a period of time longer than two years

DEMAND BEHAVIOR CAUSES OF BEHAVIOR

Demand Behavior
Trend
a gradual, long-term up or down movement of demand Due to population, technology etc

Random variations Cycle

movements in demand that do not follow a pattern

an up-and-down repetitive movement in demand

Non-annual; multi-year Due to interactions of factors influencing economy

Seasonal pattern

an up-and-down repetitive movement in demand occurring periodically Occurs within one year Due to weather, customs etc

Forms of Forecast Movement

Demand

Random movement Time (a) Trend Time (b) Cycle

Demand

Time (c) Seasonal pattern

Demand Time (d) Trend with seasonal pattern

Demand

Components of an Observation
Observed demand (O) = Systematic component (S) + Random component (R)
Level (current deseasonalized demand) Trend (growth or decline in demand) Seasonality (predictable seasonal fluctuation) Systematic component: Expected value of demand Random component: The part of the forecast that deviates from the systematic component Forecast error: difference between forecast and actual demand
Chopra, 2007

Forecasting Process (in general)

1. Identify the purpose of forecast 2. Collect historical data 3. Plot data and identify patterns

6. Check forecast accuracy with one or more measures 7. Is accuracy of forecast acceptable?

5. Develop/compute forecast for period of historical data

4. Select a forecast model that seems appropriate for data

No

8b. Select new forecast model or adjust parameters of existing model

Yes
8a. Forecast over planning horizon 9. Adjust forecast based on additional qualitative information and insight 10. Monitor results and measure forecast accuracy

Copyright 2006 John Wiley & Sons, Inc.

Forecasting Technique
Forecasting Models

Qualitative

Quantitative

Sales force composite

Consum er survey

Jury of executive

Delphi method

Tim e series

Causal

M oving average

Exponential sm oothing

Decomposition

ARIMA

Neural networks

Regression

Econometrics

Forecasting
Predicting the Future Qualitative forecast methods
Subjective (uses experience and judgment to establish future behaviours)

Quantitative forecast methods

based on mathematical formulas uses historical data to establish relationships and trends which can be projected into the future

Types of Forecasts
Qualitative (Extrinsic) :
requiring no manipulation of data, used only judgment of the forecaster, Evaluating factors other than historical data concern with identifying various factors that can influence demand suitable for long term forecasting no input of judgment, mechanical procedure that produce quantitative result, Rely on historical information using statistical techniques suitable for short term forecasting

Quantitative (Intrinsic) :

Demand Forecast Applications

Time Horizon
Application Forecast Quality Decision Area Short Term
(03 months)

Medium Term

Long Term

Individual

products or services

(more than 2 years) (3 months 2 Total years) sales Total sales Groups or families of products or services

Inventory management Final assembly scheduling Workforce scheduling Master production scheduling

Staff planning Production planning Master production scheduling Purchasing Distribution Causal Judgment

Facility location Capacity planning Process management

Forecasting Time series Technique Causal

Judgment

Causal Judgment

Detail steps in choosing forecast method

1. Qualitative Methods (Extrinsic)

The keys to employing qualitative forecasting are:

Data as an historical series is not available,or is not relevant to future needs.

An unusual product or a

unique project is being contemplated.

1. Qualitative Methods (Extrinsic)

Applications: New product Development, new technology Technique :
Management Decision Jury of executive opinion Delphi Technique Sales Force Composite Growth curve Scenario writing Market Research Historical Analogies Life Cycle Curves Focus groups

1. Qualitative Methods
Type Executive opinion Characteristics Strengths Weaknesses A group of managers Good for strategic or One person's opinion meet & come up with new-product can dominate the a forecast forecasting forecast Uses surveys & Good determinant of It can be difficult to interviews to identify customer preferences develop a good customer preferences questionnaire Seeks to develop a consensus among a group of experts Excellent for Time consuming to forecasting long-term develop product demand, technological changes, and

Market research

Delphi method

1. Qualitative Methods
-in general -

Kelebihan : Mampu melakukan prediksi walaupun tidak ada dukungan data historis Umumnya cukup valid karena melibatkan para expert yang kompeten dengan permasalahan yang terjadi, sehingga model dan metode yang dipergunakan cukup akurat

Kelemahan : Cost nya sangat tinggi karena melibatkan expert terkait dengan labour time Memakan waktu yang cenderung lama apalagi Building Models & Methods memerlukan validasi guna hasil yang relevan

2. Quantitative methods (Intrinsic)

Used when sufficient historical data are available and when these data values are judged to be representative of the unknown future Assumption : the past can be extended into the future in some meaningful manner
Future pattern following past pattern

Can be categorized : Time series methods : focus entirely on pattern, pattern change, disturbance caused by random influence causal methods : identification and determination of relationship between the variable to be forecast and other influencing variable
Regression Moving average, exponential smoothing, Holts, winter

2.1 Time series methods

Time series consist of data that are collected / observed over successive increment of time Assumption : What happen in the past will continued and occurs in the future with special pattern followed. Future pattern following past pattern Exploring the data pattern Display data time series graph Autocorrelation test Understanding what the data are suggesting

Exploring data pattern using Time series graph

Component of time series

Trend (T) Cycle (C) Seasonal (S) Random (irregular variation, noise)

Note : Cyclical (fluctuations > a year) are difficult to identify, hence are often regarded as part of the trend ( trend-cycle component)

Types of Time Series Models

Nonseasonal Model
Trend, Nave Moving average Weighted moving average Exponential Smoothing
Moving Average Model Capture Trend & Seasonal Exponential Smoothing Model Trend and sometimes Seasonal (Holt and Winter Model) Decomposition Almost all, except Cycle (Can decompose but the value for recompose need judgment from the user)

Seasonal Model

Seasonal & Trend

Winter

Time Series Decomposition ARIMA Artificial Neural Network (ANN)

Trend Model
Holts Model

(Trend & Seasonality Corrected Exponential Smoothing) Not discussed

(Trend corrected Exponential Smoothing)

Trend Model
Trend Model sangat tepat dipergunakan apabila karakteristik data cenderung jelas bersifat trend. Prinsip Trend adalah mencoba melakukan Curve Fitting berdasarkan suatu model persamaan tertentu untuk mendapatkan persamaan garis yang merefleksikan kondisi data aktual dengan menjadikan nilai t (waktu) sebagai variabel independen Beberapa model persamaan garis yang dipergunakan :

Linear Simple Linear Regression sebagai fungsi t y = ax + b + e Kuadratik Yt = a + bt + ct2 Power Yt = atb Model persamaan garis lainnya S Curve, Eksponential, dll
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

00 00 00 00 00 00 00 00 00 00 00 0 0 0 0 0 0 0 0 0 0 00 0

Power

Quadratic

Application of Trend using Software

Using Minitab SPPS 10.0 for Windows Minitab pada perhitungan Trend SPSS menggunakan 11 Persamaan mempergunakan 4 persamaan garis, yaitu garis
Linear Kuadratik Eksponential S Curve Linear Kubik Compound Logistics Eksponential - Logaritma - Power - S Curve - Growth Inverse - Kuadratik

Klik Analyze Time Series Trend Analysis

Klik Analyze Regression Curve Estimation

MINITAB.lnk

EXAMPLE (Trend Projection)

Periods Sales
January February March April May June July August September October November December 185 174 200 210 205 245 234
Sales Sales 00 0 00 0 00 0 00 0 00 0 0 0 0
a ry u n

PT Makmur Jaya mempunyai data sales selama 2003 sebagaimana data disamping. Anda sebagai Planner perusahaan ditugaskan untuk membuat estimasi sales Januari Februari 2004. Berdasarkan hasil plotting, anda melihat kecenderungan data yang menaik tanpa adanya efek seasonal, sehingga anda memutuskan akan menggunakan trend projection, dengan 4 pers. Garis, linear, kuadratik, power, dan kubik. Setelah diperhitungkan, mana yang akan anda pilih sebagai rumusan anda ???

250 264 245 235 242

00 0

11 1

00 0

00 0

00 0

00 0

11 1

00 0

11 1

00 0

0 00 00 0

e r

a ry

rc h

p ri l

ly

m b

e m b

ru

J u

e p te

O ct o

J a

e b

M oths

ce

m b

g u

EXAMPLE (Trend Projection) Contd

Power
184,00 178,26 164,40 139,51 100,90 46,05 27,43 121,83 239,39 382,25 552,49 752,17 1,00 6,74 20,60 45,49 84,10 138,95 212,43 306,83 424,39 567,25 737,49 937,17

Kubik
93,85 27,36 18,07 46,01 60,06 63,80 60,83 54,72 49,08 47,48 53,52 70,78 91,15 157,64 203,07 231,01 245,06 248,80 245,83 239,72 234,08 232,48 238,52 255,78

Kuadratik
121,56 66,52 19,88 18,37 48,22 69,68 82,74 87,40 83,66 71,53 51,00 22,08 63,44 118,48 165,12 203,37 233,22 254,68 267,74 272,40 268,66 256,53 236,00 207,08

Linear
156,66 128,32 99,98 71,64 43,30 14,96 13,38 41,72 70,06 98,40 126,74 155,08 28,34 56,68 85,02 113,36 141,70 170,04 198,38 226,72 255,06 283,40 311,74 340,08

History
Sales Periods 185 174 200 210 205 245 234 250 264 245 235 242 January February March April May June July August SEPT. October NOV DECEM

Error Powe Fit Powe Error Cubic Fit Cubic Error Kuadrat Fit Kuadrat Error Linear Fit Linear

240,72 101204,41

53,80 3242,43

61,89 4733,66

85,02 9571,56

MAD MSD

Moving Average Naive forecast

demand the current period is used as next periods forecast

Simple moving average

stable demand with no pronounced behavioral patterns

Weighted moving average

weights are assigned to most recent data

Moving Average: Nave Approach

MONTH Jan Feb Mar Apr May June July Aug Sept Oct Nov ORDERS PER MONTH 120 90 100 75 110 50 75 130 110 90 FORECAST 120 90 100 75 110 50 75 130 110 90

Simple Moving Average

i = 1 Di

MAn =
where n Di

= number of periods in the moving average = demand in period i

3-month Simple Moving Average

ORDERS MONTH Jan MONTH Feb Mar Apr May June July PER 120 90 100 75 110 50 75 MOVING AVERAGE 103.3 88.3 95.0 78.3 78.3 85.0 105.0 110.0

i=1

Di

MA3 = =

3 90 + 110 + 130 3

= 110 orders for Nov

5-month Simple Moving Average

ORDERS MONTH Jan MONTH Feb Mar Apr May June July Aug PER 120 90 100 75 110 50 75 130 MOVING AVERAGE 99.0 85.0 82.0 88.0 95.0 91.0
i=1

Di

MA5 = =

90 + 110 + 130+75+50 5 = 91 orders for Nov

Smoothing Effects
150 125 100 Orders 75 50 25 0 | Jan | Feb | Mar Actual | | | | Apr May June July Month | | Aug Sept | Oct | Nov 3-month 5-month

Weighted Moving Average

Adjusts moving average method to more closely reflect data fluctuations
WMAn = Wi Di i=1
i=1

where

Wi = the weight for period i,

between 0 and 100 percent

W = 1.00
i

Weighted Moving Average Example

MONTH August September October

WEIGHT 17% 33% 50%

DATA 130 110 90

November Forecast

WMA3 = i 1 Wi Di =

= (0.50)(90) + (0.33)(110) + (0.17)(130) = 103.4 orders

Disadvantages of M.A. Methods

Increasing n makes forecast less sensitive to changes Do not forecast trends well Require sufficient historical data

Exponential Smoothing

Averaging method Weights most recent data more strongly Reacts more to recent changes Widely used, accurate method

Exponential Smoothing: Notation

Level of the time series at time t: Lt Trend in the time series at time t: Tt Seasonal index in the the time series at time t: S t Level smoothing parameter:0 0 Trend smoothing parameter: 0 0 Seasonal index smoothing parameter:

0 0
Number of seasons: M

Exponential Smoothing (cont.)

Level smoothing parameter

Ft +1 = Dt + (1 - )Ft
where: Ft +1 = forecast for next period Dt = actual demand for present period Ft = previously determined forecast for present period = weighting factor, smoothing constant

Effect of Smoothing Constant

Ft +1 = Dt + (1 - )Ft 0.0 1.0 If = 0.20, then Ft +1 = 0.20 Dt + 0.80 Ft If = 0, then Ft +1 = 0 Dt + 1 Ft 0 = Ft

Forecast does not reflect recent data

If = 1, then Ft +1 = 1 Dt + 0 Ft = Dt
Forecast based only on most recent data

Exponential Smoothing (=0.30)

Ft +1 = Dt + (1 - )Ft
PERIOD DEMAND 1 2 3 4 5 6 7 MONTH Jan Feb Mar Apr May Jun Jul 37 40 41 37 45 50 43 F2 = D1 + (1 - )F1 = (0.30)(37) + (0.70)(37) = 37 F3 = D2 + (1 - )F2 = (0.30)(40) + (0.70)(37) = 37.9 F13 = D12 + (1 - )F12 = (0.30)(54) + (0.70)(50.84) = 51.79

Exponential Smoothing (cont.)

FORECAST, Ft + 1 ( = 0.3) ( = 0.5) 37.00 37.90 38.83 38.28 40.29 43.20 43.14 44.30 47.81 49.06 50.84 51.79 37.00 38.50 39.75 38.37 41.68 45.84 44.42 45.71 50.85 51.42 53.21 53.61

PERIOD 1 2 3 4 5 6 7 8 9 10 11 12 13

MONTH Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

DEMAND 37 40 41 37 45 50 43 47 56 52 55 54

Exponential Smoothing (cont.)

70 60 50 40 Orders 30 20 10 0 | 1 | 2 = 0.30 Actual = 0.50

Larger , more responsive forecast; Smaller , smoother forecast Best can be found by Solver Suitable for relatively stable time series
| 3 | 4 | 5 | 6 Month | 7 | 8 | 9 | 10 | 11 | 12 | 13

Simple Exponential Smoothing

A special type of weighted moving average
Include all past observations Use a unique set of weights that weight recent observations much more heavily than very old observations

weight
Decreasing weights given to older observations

0 <0 <
(0 ) (0 ) 0 (0 ) 0

Toda

Comparison of Exponential Smoothing and Simple Moving Average

Both Methods Are designed for stationary demand Require a single parameter Lag behind a trend, if one exists Have the same distribution of forecast error if = 0 N +0 /( ) Moving average uses only the last N periods data, exponential smoothing uses all data Exponential smoothing uses less memory and requires fewer steps of computation; store only the most recent forecast!

Trend-Corrected Exponential Smoothing (Holts Model)

Appropriate when the demand is assumed to have a level and trend in the systematic component of demand but no seasonality Obtain initial estimate of level and trend by running a linear regression of the following form: Demand & time D t = at + b correlation is linear T0 = a L0 = b In period t, the forecast for future periods is expressed as follows: Ft+1 = Lt + Tt Ft+n = Lt + nTt

Trend-Corrected Exponential Smoothing (Holts Model)

After observing demand for period t, revise the estimates for level and trend as follows: Lt+1 = Dt+1 + (1-)(Lt + Tt) Tt+1 = (Lt+1 - Lt) + (1-)Tt = smoothing constant for level = smoothing constant for trend Example 7.3, p. 188: Tahoe Salt demand data. Forecast demand for period 1 using Holts model (trend corrected exponential smoothing) Using linear regression, L0 = 12015 (linear intercept) T0 = 1549 (linear slope)

Quarterly Demand for Tahoe Salt Table 7.1 (Chopra, p. 180)

Quarter Demand Dt II, 0000 11 11 III, 0000 111 11 IV, 0000 000 00 I, 0000 111 11 II, 0000 000 00 III, 0000 000 00 IV, 0000 000 00 I, 0000 000 00 II, 0000 000 00 III, 0000 000 00 IV, 0000 000 00 I, 0000 000 00

Forecast demand for the next four quarters.

Holts Model Example (continued)

Forecast for period 1: F1 = L0 + T0 = 12015 + 1549 = 13564 Observed demand for period 1 = D1 = 8000 E1 = F1 - D1 = 13564 - 8000 = 5564 Assume = 0.1, = 0.2 L1 = D1 + (1-)(L0+T0) = (0.1)(8000) + (0.9) (13564) = 13008 T1 = (L1 - L0) + (1-)T0 = (0.2)(13008 - 12015) + (0.8)(1549) = 1438 F2 = L1 + T1 = 13008 + 1438 = 14446 F5 = L1 + 4T1 = 13008 + (4)(1438) = 18760

Trend- and Seasonality-Corrected Exponential Smoothing

Appropriate when the systematic component of demand is assumed to have a level, trend, and seasonal factor (Winters model) Systematic component = (level+trend)(seasonal factor) Assume periodicity p Obtain initial estimates of level (L0), trend (T0), seasonal factors (S1,,Sp) using procedure for static forecasting In period t, the forecast for future periods is given by: Ft+1 = (Lt+Tt)(St+1) and Ft+n = (Lt + nTt)St+n

Trend- and Seasonality-Corrected Exponential Smoothing (continued)

After observing demand for period t+1, revise estimates for level, trend, and seasonal factors as follows (Eq 7.18-7.20, p. 189): Lt+1 = (Dt+1/St+1) + (1-)(Lt+Tt) Tt+1 = (Lt+1 - Lt) + (1-)Tt St+p+1 = (Dt+1/Lt+1) + (1-)St+1 = smoothing constant for level = smoothing constant for trend = smoothing constant for seasonal factor Example 7.4, p. 189: Tahoe Salt data. Forecast demand for period 1 using Winters model. Initial estimates of level, trend, and seasonal factors are obtained as in the static forecasting case

Trend- and Seasonality-Corrected Exponential Smoothing Example (continued)

L0 = 18439 T0 = 524 S1=0.47, S2=0.68, S3=1.17, S4=1.67 F1 = (L0 + T0)S1 = (18439+524)(0.47) = 8913 The observed demand for period 1 = D1 = 8000 Forecast error for period 1 = E1 = F1-D1 = 8913 - 8000 = 913 Assume = 0.1, =0.2, =0.1; revise estimates for level and trend for period 1 and for seasonal factor for period 5 L1 = (D1/S1)+(1-)(L0+T0) = (0.1)(8000/0.47)+(0.9) (18439+524)=18769 T1 = (L1-L0)+(1-)T0 = (0.2)(18769-18439)+(0.8)(524) = 485 S5 = (D1/L1)+(1-)S1 = (0.1)(8000/18769)+(0.9)(0.47) = 0.47 F2 = (L1+T1)S2 = (18769 + 485)(0.68) = 13093

Evaluation Non Seasonal Models

Nave cenderung harus dihindari MA akan cenderung bisa dipergunakan untuk estimate sales harian, dimana efek trend ataupun seasonal tidak terlalu nampak Sales / Produksi Harian E.S memiliki hasil yang responsive atau smoothing terhadap actual data. Tapi masalahnya adalah : Hanya tepat untuk one periods ahead Asumsi bahwa data mengikuti kecenderungan eksponensial, sehingga seharusnya nilai foracast adalah nilai tertinggi dari nilai nialai aktual sebelumnya Holt dan Winter memiliki output yang baik, tapi kurang aplikatif karena kesulitan dalam mengkonversikan nilai aktual dari alpha, beta, dan gamma dalam kondisi aktual Trend hanya tepat dipergunakan apabila tidak terlihat adanya seasonal dan data aktual jelas terlihat pola nail turunnya

Evaluation of Forecasting Model

Mean Square Error MSE / MSD

n n Excel: =SUMSQ(error range)/COUNT(error range) Mean Absolute Percentage Error - MAPE

(Actual - Forecast) MSE =

(Error) =

| Actual - Forecast | *00 0% Actual MAPE = n

R2 - only for curve fitting model such as regression In general, the lower the error measure (BIAS, MAD, MSE) or the higher the R2, the better the forecasting model

Measuring Accuracy, Forecast Errors

To compare different time series techniques or to select the best set of initial values for the parameters, use a combination of the the following four metrics: n Mean Absolute Deviation A i Fi

Most popular but

MD = A

i= 1

Mean Absolut Percent Error

Should be used in tandem with MAD

n

100 MAPE = n
n

i =1

A i Fi Ai

Mean Square Error

M SE =

( A i Fi ) 2
i= 1

Root Mean Square Error

RMSE = MSE

R2 - only for curve fitting model such as regression In general, the lower the error measure (MAD, MAPE, MSE, RMSE) or the higher the R2, the better the forecasting model

MAD Problem Data

Question: What is the MAD value given the forecast values in the table below?
Month
1 2 3 4 5

Sales
220 250 210 300 325

Forecast
n/a 255 205 320 315

MAD Problem Solution

Month 1 2 3 4 5 Sales 220 250 210 300 325 Forecast Abs Error n/a 255 5 205 5 320 20 315 10

40

MAD =

A
t=0

- Ft

0 0 = =0 0 0

Note that by itself, the MAD only lets us know the mean error in a set of forecasts.

Tracking Signal
The Tracking Signal or TS is a measure that indicates whether the forecast average is keeping pace with any genuine upward or downward changes in demand. Depending on the number of MADs selected, the TS can be used like a quality control chart indicating when the model is generating too much error in its forecasts. TS is a monitoring system. The TS formula is: Sum of Forecast Errors Running TS = Mean Absolute Deviation

Confidence Interval for Forecast If normal, the error can provide a confidence interval for the forecast.
The % confidence interval for the forecast -Using the standard deviation of the forecast:

Y = Forecast Z (%) S F
SF = ( At Ft ) 0
t

n 0

Example of Forecast Confidence Interval

Using exponential smoothing in the previous example, what is a 95% confidence interval for the forecast for month 9?
alpha= beta= 00 . 11 . Excel exp Text exp. smooth Smooth (A-F)^0 #N/A #N/A 0. 0 00 0. 0 00 0. 0 00 1. 1 11 0 0 0. 0 00 1. 1 11 0 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 0. 0 00 sum= 0 00 0. 0 n= 00 . 0 n-0 = 00 . 0 Sf= 00 . 0 Start in month three to more accurately reflect the exponential smoothing.

Month 0 0 0 0 0 0 0 0 0

Demand 0 0 1 1 0 0 1 1 0 0 0 0 0 0 0 0 0 0

What is the interval within which we are 95% confident that the demand will be?? 30.53+-1.96*5.11

HOT ISSUE IN FORECASTING

Agrregate Forecasting is more accurate than single forecast For MTS, Colllaboration idea has been developed to minimizing error and uncertainty Watch out with Bullwhip phenomenon, when all part in your Supply Chain doing a forecast with same purposes ! Forecasting can become an operational activity, or just can become a strategic activity ! Clearly your forecasting goals ! Combination of subjective and objective methods is the most methods that implement by many company nowadays Forecasting not just a software !!!!!

Final Thoughts- Big Picture Time is the enemy of the logistics planner because time means uncertainty. Forecasting is often essential but think in terms of reducing the importance / impact of the forecast. How ? Remember reduction in the cycle time, demand management, Information systems, and JIT ideas.

Types of Causal Forecasting

Regression Econometric models Input-Output Models:

Causal Methods Linear Regression

Causal methods are used when historical data are available and the relationship between the factor to be forecasted and other external or internal factors can be identified. Linear regression: A causal method in which one variable (the dependent variable) is related to one or more independent variables by a linear equation. Dependent variable: The variable that one wants to forecast. Independent variables: Variables that are assumed to affect the dependent variable and thereby cause the results observed in the past.

Linear Regression Model

Yi = a + b X i + Error
Error Regression line

Yi = a + b X i

X
Observed value

Correlation

Answers how strong is the linear relationship between 2 variables? Coefficient of correlation used

Used mainly for understanding

Coefficient of Correlation Values Perfect Negative Correlation Perfect Positive Correlation

No Correlation

-1.0

-.5

+.5

+1.0

Increasing degree of negative correlation

Increasing degree of positive correlation

Linear Regression Line Formula y = a + bx y = the dependent variable a = the intercept b = the slope of the line x = the independent variable

Linear Regression Formulas

a = intercept b = slope of the line X = x = mean of x n the x data Y = y = mean of y n the y data n = number of periods

a = Y bX b = xy nXY x - nX

Correlation Measures the strength of the relationship between the dependent and independent variable

Correlation Coefficient Formula

r= ______nxy - xy______

[nx - (x)][ny - (y)] ______________________________________ r = correlation coefficient n = number of periods x = the independent variable y = the dependent variable

Coefficient of Determination Another measure of the relationship between the dependant and independent variable Measures the percentage of variation in the dependent (y) variable that is attributed to the independent (x) variable r = r

 Causal forecasting is accurate and efficient When strong correlation exists the model is very effective No forecasting method is 100% effective

Other Forecasting Methods

Collaborative Planning Forecasting and Replenishment (CPFR)

Establish collaborative relationships between buyers and sellers Create a joint business plan Create a sales forecast Identify exceptions for sales forecast Resolve/collaborate on exception items Create order forecast Identify exceptions for order forecast Resolve/collaborate on exception items Generate order

Forecasting as a Process
The forecast process itself, typically done on a monthly basis, consists of structured steps. They often are facilitated by someone who might be called a demand manager, forecast analyst, or demand/supply planner.

Assignment Look at Chopra, chapter 7 page 203.