Introduction To Materials Management: Forecasting

Arnold, Chapman, & Clive: Intro Materials
Management, 6
th
ed.
2008 Pearson Education, Upper Saddle River, NJ 07458.
All Rights Reserved.
Introduction to Materials
Management
Forecasting
Management, 6
th
ed.
Introduction
(What, why and how DF?)
Before making plans, an estimate must be made of
what conditions will exist over some future period.
Demand Forecasting (DF) is a projection of past
information and/or experience into expectation of
demand in the future.
DF is necessary for developing plans to make
deliveries in reasonable time and satisfy future
demand.
Once a demand forecast is at hand, plans for capacity
and other resources could be established.
Management, 6
th
ed.
DEMAND FORECASTING
Forecasting is the art and science of predicting the
future events. It may involve taking historical data
and projecting them into the future with some sort of
mathematical model. It may be subjective or
intuitive prediction of the future. Or, it may involve a
combination of these, that is, a mathematical model
adjusted by a managers good judgment.
Management, 6
th
ed.
Introduction
Factors influencing demand:
1. General business and economic conditions
(recovery, inflation, recession, depression).
2. Competitive factors
3. Market trends such as changing demand
4. Firms own plan for advertising, promotion,
pricing and product development.

Management, 6
th
ed.
Demand Forecasting

Must be made for:
Strategic Business Plan (SBP): Long term
Aggregate Production Plan (APP): Medium term
Master Production Schedule (MPS): Short term
Management, 6
th
ed.
Demand Forecasting
SBP: planning for new Products, plant expansion &
equipment purchase. Usually 3 to 5 years. Causal and
qualitative models are often used.
APP: families of products, labor planning, procurement
items & overall inventory levels. 3 months to 1-2 years.
Causal and time-series models are used.
MPS: individual items, raw material, job scheduling &
component parts. Actual number of units of the product is
needed per week, month, or quarter. Time series models
are most often used, but causal and qualitative models
could also be useful

Management, 6
th
ed.
Typical Demand Patterns
Plotting historical data of demand vs. time reveals
any shapes or consistent patterns.

Patterns include:
Trend (upward or downward, linear or non-linear)
Seasonality (a special form of cyclicality)
Cyclicality (spans over several years)
Random variations (many factors that affect
demand occur on a random basis)
Management, 6
th
ed.
Management, 6
th
ed.
Demand Over Time Example
Figure 8.2 Demand over time
Management, 6
th
ed.
Demand Classes
Stable vs. Dynamic
Stable: retains the same general shape
Dynamic: shape changes over time
Dependent vs. Independent
Dependent: demand is derived from that of
another item
Independent: not related to the demand of any
other product or service
Management, 6
th
ed.
Basic Principles of Forecasting
Forecasts are usually incorrect most
demand is dependent on so many variables
it is impossible to capture the impact of all.
Forecasts are more accurate
For families or groups of products
For time periods closer to the present
Every forecast should include an estimate of
error
Management, 6
th
ed.
Data Collection
Data may be available internally or
externally (Government sources- Statistics
Canada).
Three principles of data collection:
1. Record data in the same terms as needed for
the forecast.
2. Record the circumstances relating to the data.
3. Record the demand separately for different
customer groups.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.

Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
A trend in the demand pattern can be adjusted for by
double exponential smoothing.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Forecast Errors
Basic rule assume the forecast is
incorrect. The key issue: How incorrect is
it and what do we do about it?
The error can be used to:
Evaluate and possibly change forecasting
methodology
Apply buffer stock or capacity to account for
possible error
Management, 6
th
ed.
Forecast Errors
Difference between actual demand and forecast
demand.
Occurs due to: bias and random variation
Bias is a systematic error in which the actual
demand is consistently above or below the
forecasted demand
When exists, evaluate forecast to improve accuracy
When errors add up to zero, only random variation
exists and there is no bias.
Management, 6
th
ed.
Forecast error
Month Forecast Actual
Variation
(error)
1 100 105 5
2 100 94 -6
3 100 98 -2
4 100 104 4
5 100 103 3
6 100 96 -4
Total 600 600 0
Example: Forecast and actual sales without bias (the error
corrects itself and nothing should be done to adjust the forecast)
Management, 6
th
ed.
Forecast Errors
Average error made by a forecast
model over time provides an
estimate of how well the model will
fit the demand pattern one is trying
to predict. Of course, smaller the
error, better the forecasting model is:
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Tracking signal
Normally, actual period demand is within 3 MAD
of the average 98% of the time.
If not, we can be about 98% sure that the forecast is
in error.
A tracking signal can be used to track the quality of
the forecast.
algebric sum of forecast errors
Tracking signal =
MAD
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Management, 6
th
ed.
Example: =
0.2
Management, 6
th
ed.
Tracking signal
Example: a company uses a trigger of 4 to decide about
reviewing the forecast. In which period shall the forecast be
reviewed. (MAD
0
= 2)
Period Forecast Actual Deviation
Cumulative
deviation
Tracking
signal
5 2.5
1 100 96 -4 1 0.5
2 100 98 -2 -1 -0.5
3 100 104 4 3 1.5
4 100 110 10 13 6.5
The forecast should be reviewed in period 4

Introduction To Materials Management: Forecasting

Transféré par

Informations du document

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Introduction To Materials Management: Forecasting

Transféré par

Droits d'auteur :

Formats disponibles

Arnold, Chapman, & Clive: Intro Materials

Vous aimerez peut-être aussi