Subjective - Based On Mathematical Formulas: Prof N. Balasubramanian

Forecasting Predicting the future Qualitative forecast methods
subjective
Quantitative forecast methods

based on mathematical formulas
Prof N. Balasubramanian
Forecast/MRP/ERP/Schd/PM MMS I
Supply Chain Management Accurate forecasting determines inventory levels in the supply chain Continuous replenishment
supplier & customer share continuously updated data typically managed by the supplier reduces inventory for the company speeds customer delivery quick response JIT (just-in-time) VMI (vendor-managed inventory) stockless inventory
Variations of continuous replenishment
The Effect of Inaccurate Forecasting
Accurate Forecasting Quality Management

Accurately forecasting customer demand is a key to providing good quality service
Strategic Planning
Successful strategic planning requires accurate forecasts of future products and markets
Types of Forecasting Methods
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
Depend on
time frame demand behavior causes of behavior
Long-range forecast
usually encompasses a period of time longer than two years
Demand Behavior Trend

a gradual, long-term up or down movement of demand
Random variations
movements in demand that do not follow a pattern
Cycle
an up-and-down repetitive movement in demand
Seasonal pattern
an up-and-down repetitive movement in demand occurring periodically
Forms of Forecast Movement
Demand
Random movement Time (a) Trend Time (b) Cycle
Demand
Time (c) Seasonal pattern Prof N. Balasubramanian
Demand
Demand
Time (d) Trend with seasonal pattern
Forecasting Methods Time series

statistical techniques that use historical demand data to predict future demand
Regression methods
attempt to develop a mathematical relationship between demand and factors that cause its behavior
Qualitative
use management judgment, expertise, and opinion to predict future demand
Qualitative Methods Management, marketing, purchasing, and engineering are sources for internal qualitative forecasts Delphi method
involves soliciting forecasts about technological advances from experts
Forecasting Process
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
10
Time Series Assume that what has occurred in the past will continue to occur in the future Relate the forecast to only one factor - time Include
moving average exponential smoothing linear trend line
11
Moving Average Naive forecast

demand in current period is used as next periods forecast
Simple moving average

uses average demand for a fixed sequence of periods stable demand with no pronounced behavioral patterns
Weighted moving average

weights are assigned to most recent data
12
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
13
Simple Moving Average
n
i=1
Di
MAn =
where
n = number of periods in the moving average Di = demand in period i
14
3-month Simple Moving Average
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 -
MOVING AVERAGE 103.3 88.3 95.0 78.3 78.3 85.0 105.0 110.0
MA3 =
=
i=1
Di
3 90 + 110 + 130 3
= 110 orders for Nov
15
5-month Simple Moving Average
MONTH MONTH Jan Jan Feb Feb Mar Mar Apr Apr May May June June July July Aug Aug Sept Sept Oct Oct Nov Nov
ORDERS ORDERS PER MONTH PER MONTH
MOVING MOVING AVERAGE AVERAGE
120 120 90 90 100 100 75 75 110 110 50 50 75 75 130 130 110 110 90 90 --
i = 1i = 1 MAMA = 5=5 5 5 90 +90 + 110 + 130+75+50 110 + 130+75+50 = = 5 5 99.0 99.0 85.0 85.0 82.0 82.0 = 91 orders for for Nov = 91 orders Nov 88.0 88.0 95.0 95.0 91.0 91.0
Di Di
16
Smoothing Effects
150 125 100 Orders 75 50 3-month
5-month
25 0 | Jan | Feb | Mar
Actual
| Apr
| May
| June
| July
| Aug
| Sept
| Oct
| Nov
Month
17
Weighted Moving Average Adjusts moving average method to more closely reflect data fluctuations
WMAn =
where
n
i=1
Wi Di
Wi = the weight for period i, between

0 and 100 percent
Wi = 1.00
18
Weighted Moving Average Example
MONTH August September October
WEIGHT 17% 33% 50%
DATA 130 110 90

3 i=1
November Forecast
WMA3 =
Wi Di
= (0.50)(90) + (0.33)(110) + (0.17)(130) = 103.4 orders
19
Exponential Smoothing Averaging method Weights most recent data more strongly Reacts more to recent changes Widely used, accurate method
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
20
Effect of Smoothing Constant

0.0 1.0 = 0.20, then Ft +1 = 0.20 Dt + 0.80 Ft If = 0, then Ft +1 = 0 Dt + 1 Ft = Ft
If
Forecast does not reflect recent data

If = 1, then Ft +1 = 1 Dt + 0 Ft = Dt
Forecast based only on most recent data
21
Exponential Smoothing (=0.30)
PERIOD 1 2 3 4 5 6 7 8 9 10 11 12
MONTH Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
DEMAND 37 40 41 37 45 50 43 47 56 52 55 54
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
22
Exponential Smoothing
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
MONTH
DEMAND
1 2 3 4 5 6 7 8 9 10 11 12 13
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
37 40 41 37 45 50 43 47 56 52 55 54
23
Adjusted Exponential Smoothing

AFt +1 = Ft +1 + Tt +1
where
T = an exponentially smoothed trend factor Tt +1 = (Ft +1 - Ft) + (1 - ) Tt
where
Tt = the last period trend factor = a smoothing constant for trend 0
24
Adjusted Exponential Smoothing (=0.30)
PERIOD
1 2 3 4 5 6 7 8 9 10 11 12
MONTH
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
DEMAND
37 40 41 37 45 50 43 47 56 52 55 54
T3
= (F3 - F2) + (1 - ) T2
= (0.30)(38.5 - 37.0) + (0.70)(0)
= 0.45 AF3 = F3 + T3 = 38.5 + 0.45 = 38.95

T13 = (F13 - F12) + (1 - ) T12 = (0.30)(53.61 - 53.21) + (0.70)(1.77) = 1.36 AF13 = F13 + T13 = 53.61 + 1.36 = 54.97
25
Adjusted Exponential Smoothing
PERIOD
MONTH
DEMAND
FORECAST Ft +1 37.00 37.00 38.50 39.75 38.37 38.37 45.84 44.42 45.71 50.85 51.42 53.21 53.61
TREND Tt +1 0.00 0.45 0.69 0.07 0.07 1.97 0.95 1.05 2.28 1.76 1.77 1.36
ADJUSTED FORECAST AFt +1 37.00 38.95 40.44 38.44 38.44 47.82 45.37 46.76 58.13 53.19 54.98 54.96 26
1 2 3 4 5 6 7 8 9 10 11 12 13
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan
37 40 41 37 45 50 43 47 56 52 55 54
Linear Trend Line

xy - nxy b = x2 - nx2 a = y-bx
where n = number of periods
y = a + bx
where a = intercept b = slope of the line x = time period y = forecast for demand for period x
x = y =
x = mean of the x values n y n = mean of the y values
27
Least Squares Example
x(PERIOD)
y(DEMAND)
xy
x2
1 2 3 4 5 6 7 8 9 10 11 12
78
37 40 41 37 45 50 43 47 56 52 55 54
557
37 80 123 148 225 300 301 376 504 520 605 648
3867
1 4 9 16 25 36 49 64 81 100 121 144

650
28

x = 78 = 6.5 12 y = 557 = 46.42 12 xy - nxy b = x2 - nx2
a = y - bx = 46.42 - (1.72)(6.5) = 35.2
3867 - (12)(6.5)(46.42) 650 - 12(6.5)2
=1.72
29

Linear trend line y = 35.2 + 1.72x Forecast for period 13 y = 35.2 + 1.72(13) = 57.56 units
70 60 Demand 50 Actual
40
30 20 10 | 1 | 2 | 3 | 4 | 5
Linear trend line
| | 6 7 Period
| 8
| 9
| 10
| 11
| 12
| 13
30
Seasonal Adjustments
Repetitive increase/ decrease in demand Use seasonal factor to adjust forecast
Seasonal factor = Si =
Total
45.0 50.1 53.6 148.7
Di D
YEAR
2002 2003 2004 Total 12.6 14.1 15.3 42.0
DEMAND (1000S PER QUARTER) 1 2 3 4 8.6 10.3 10.6 29.5

For 2005
6.3 7.5 8.1 21.9
17.5 18.2 19.6 55.3
S1 = 42/148.7
= 0.28
S2 = 29.5/148.7 = 0.20 S3 = 21.9/148.7 = 0.15 S4 = 55.3/148.7 = 0.37
y = 40.97 + 4.30x = 40.97 + 4.30(4) = 58.17
SF1 = (S1) (F5) = (0.28)(58.17) = 16.28 SF2 = (S2) (F5) = (0.20)(58.17) = 11.63 SF3 = (S3) (F5) = (0.15)(58.17) = 8.73 SF4 = (S4) (F5) = (0.37)(58.17) = 21.53
31
Forecast Accuracy Forecast error

difference between forecast and actual demand
MAD
mean absolute deviation
MAPD
mean absolute percent deviation
Cumulative error Average error or bias
32
Regression Methods
Linear regression
mathematical technique that relates a dependent variable to an independent variable in the form of a linear equation
Correlation
a measure of the strength of the relationship between independent and dependent variables
33
Linear Regression
y = a + bx
a = y-bx xy - nxy b = x2 - nx2 where
a = intercept b = slope of the line

x = x = mean of the x data n y n = mean of the y data
y =
34
Linear Regression Example
x (WINS) 4 6 6 8 6 7 5 7 49
y (ATTENDANCE) 36.3 40.1 41.2 53.0 44.0 45.6 39.0 47.5 346.7
xy 145.2 240.6 247.2 424.0 264.0 319.2 195.0 332.5 2167.7
x2 16 36 36 64 36 49 25 49 311
35
Linear Regression Example

49 = 6.125 8 346.9 y= = 43.36 8 x=
b=
xy - nxy2 x2 - nx2
(2,167.7) - (8)(6.125)(43.36) (311) - (8)(6.125)2
= 4.06 a = y - bx = 43.36 - (4.06)(6.125) = 18.46

Prof N. Balasubramanian Forecast/MRP/ERP/Schd/PM MMS I
36
Mean Absolute Deviation (MAD)
MAD =
where
Dt - Ft n
t = period number Dt = demand in period t Ft = forecast for period t n = total number of periods = absolute value
37
Other Accuracy Measures MAD Calculation Mean absolute percent deviation (MAPD) MAPD =
Cumulative error
|Dt - Ft| Dt
E = et Average error
E=
et n
38
Comparison of Forecasts
FORECAST
MAD
MAPD
(E)
Exponential smoothing ( = 0.30) Exponential smoothing ( = 0.50) Adjusted exponential smoothing ( = 0.50, = 0.30) Linear trend line
4.85 4.04 3.81 2.29
9.6% 8.5% 7.5% 4.9%
49.31 33.21 21.14
4.48 3.02 1.92
39
Inventory Management
What Is Inventory? Stock of items kept to meet future demand Purpose of inventory management
how many units to order when to order
40
Supply Chain Management Bullwhip effect

demand information is distorted as it moves away from the end-use customer higher safety stock inventories to are stored to compensate
Seasonal or cyclical demand Inventory provides independence from vendors Take advantage of price discounts Inventory provides independence between stages and avoids work stoppages
41
Quality Management in the Supply Chain
Customers usually perceive quality service as availability of goods they want when they want them Inventory must be sufficient to provide high-quality customer service in QM.
42
Types of Inventory
43
Two Forms of Demand

Dependent
Demand for items used to produce final products Tires for autos are a dependent demand item
Independent
Demand for items used by external customers Cars, appliances, computers, and houses are examples of independent demand inventory
44
Objectives of Inventory Management
Provide desired customer service level Customer service is the ability to satisfy customer requirements
Percentage of orders shipped on schedule Percentage of line items shipped on schedule Percentage of dollar volume shipped on schedule Idle time due to material and component shortages
Provide for cost-efficient operations:

Buffer stock for smooth production flow Maintain a level work force Allowing longer production runs & quantity discounts
Minimum inventory investments:

Inventory turnover Weeks, days, or hours of supply
45
Inventory Investment Measures Example: The Coach Motor Home Company has annual cost of goods sold of $10,000,000. The average inventory value at any point in time is $384,615. Calculate inventory turnover and weeks/days of supply.
Inventory Turnover:
annual cost of goods sold average inventory value $10,000,00 0 $384,615
Turnover
26 inventory turns
Weeks/Days of Supply:
Weeks of Supply average inventory on hand in dollars average weekly usage in dollars $384,615 $10,000,00 0/52 2weeks
Days of Supply
$384,615 $10,000,000/260
10 days
46
Inventory Costs
Carrying cost
cost of holding an item in inventory
Ordering cost
cost of replenishing inventory
Shortage cost
temporary or permanent loss of sales when demand cannot be met
47
Inventory Control Systems

Continuous system (fixed-order-quantity)
constant amount ordered when inventory declines to predetermined level
Periodic system (fixed-time-period)

order placed for variable amount after fixed passage of time
48
ABC Classification
Class A
5 15 % of units 70 80 % of value
Class B
30 % of units 15 % of value
Class C
50 60 % of units 5 10 % of value
49
ABC Classification
PART 1 2 3 4 5 6 7 8 9 10 UNIT COST $ 60 350 30 80 30 20 10 320 510 20 ANNUAL USAGE 90 40 130 60 100 180 170 50 60 120
50
ABC Classification
PART
TOTAL VALUE % OF TOTAL VALUE % OF TOTAL QUANTITY
% CUMMULATIVE
9 8 2 1 4 3 6 5 10 7
$30,600 16,000 14,000 5,400 4,800 3,900 3,600 3,000 2,400 1,700
35.9 18.7 16.4 6.3 5.6 4.6 4.2 3.5 2.8 2.0
6.0 5.0 4.0 9.0 6.0 10.0 18.0 13.0 12.0 17.0
B
C
6.0 11.0 15.0 24.0 30.0 40.0 58.0 71.0 83.0 100.0
$85,400
% OF TOTAL VALUE
71.0 16.5 12.5
CLASS
A B C
ITEMS
9, 8, 2 1, 4, 3 6, 5, 10, 7
% OF TOTAL QUANTITY
15.0 25.0 60.0
51
Examples of Ordering Approaches

Lot for Lot Example Requirements Projected-on-Hand (30) Order Placement 1 70 0 40 2 70 0 70 3 65 0 65 4 60 0 60 5 55 0 55 6 85 0 85 7 75 0 75 8 85 85
Fixed Order Quantity Example with Order Quantity of 200 1 2 3 4 Requirements 70 70 65 60 Projected-on-Hand (30) 160 90 25 165 Order Placement 200 200 Min-Max Example with min.= 50 and max.= 250 units 1 2 3 Requirements 70 70 65 Projected-on-Hand (30) 180 110 185 Order Placement 220 140 Order n Periods with n = 3 periods 1 Requirements 70 Projected-on-Hand (30) 135 Order Placement 175
5 55 110
6 85 25
7 75 150 200
8 85 65
4 60 125
5 55 70
6 85 165 180
7 75 90
8 85 165 160
2 70 65
3 65 0
4 60 140 200
5 55 85
6 85 0
7 75 85 160
8 85 0
52
Economic Order Quantity (EOQ) Models & Assumptions
EOQ -optimal order quantity that will minimize total inventory costs
EOQ Assumptions:
Demand is known & constant - no safety stock is required Lead time is known & constant No quantity discounts are available Ordering (or setup) costs are constant All demand is satisfied (no shortages) The order quantity arrives in a single shipment
53
Inventory Order Cycle
Order quantity, Q Inventory Level
Demand rate
Average inventory
Q 2
Reorder point, R
Lead time Order Order placed receipt
Lead time Order Order placed receipt
Time
54
EOQ Cost Model
Co - cost of placing order Cc - annual per-unit carrying cost

Annual ordering cost =
D - annual demand Q - order quantity

CoD Q CcQ 2 + CcQ 2
Annual carrying cost =

Total cost = CoD Q
55
EOQ Cost Model

Deriving Qopt
TC =
CoD CcQ + Q 2 Cc 2
Cc 2
Proving equality of costs at optimal point CoD CcQ = Q 2

Q2 = 2CoD Cc
CoD TC = Q2 + Q
C0D 0 = Q2 + Qopt = 2CoD Cc
Qopt =
2CoD Cc
56
EOQ Cost Model

Annual cost ($)
Slope = 0 Minimum total cost
Total Cost
Carrying Cost =
CcQ 2
Ordering Cost =
CoD Q
Optimal order Qopt
Order Quantity, Q
57
EOQ Example
Cc = $0.75 per gallon
Qopt = Qopt = 2CoD Cc
2(150)(10,000) (0.75)
Co = $150
TCmin = TCmin =
D = 10,000 gallons
CoD CcQ + Q 2
(150)(10,000) 2,000
(0.75)(2,000) 2
Qopt = 2,000 gallons

Orders per year = D/Qopt = 10,000/2,000 = 5 orders/year
TCmin = $750 + $750 = $1,500

Order cycle time = 311 days/(D/Qopt) = 311/5 = 62.2 store days
58
Reorder Point Inventory level at which a new order is placed

R = dL
where d = demand rate per period L = lead time Demand = 10,000 gallons/year Store open 311 days/year Daily demand = 10,000 / 311 = 32.154 gallons/day Lead time = L = 10 days
R = dL = (32.154)(10) = 321.54 gallons
59
Safety Stock
Safety stock
buffer added to on hand inventory during lead time
Stockout
an inventory shortage
Service level
probability that the inventory available during lead time will meet demand P(Demand during lead time <= Reorder Point)
60
Variable Demand With Reorder Point

Q Inventory level
Reorder point, R
LT
LT
Time
61
Reorder Point With Safety Stock
Inventory level
Reorder point, R
Safety Stock
LT
Time
LT
62
Reorder Point With Variable Demand
R = dL + z
where
d = average daily demand L = lead time d = the standard deviation of daily demand z = number of standard deviations corresponding to the service level probability L = safety stock
63
Problem using EOQ Cost Model This exercise to be done by students

For a special ingredient YZ150 used in the manufacture of a detergent at Kolkata-based Bengal Chemicals, the following figures are existing:Yearly demand - 260,000 Kg; Production quantity 50,000 Kg Safety Stock 20,000 Kg The set-up cost independent of quantity is Rs 2000 for each production batch. The price of the ingredients Rs 150/Kg. Annual holding cost is 155 of the value of the ingredient (inventory interest rate 15%). Assuming 230 working days/year, calculate: a. The number of production batches during a year b. Average inventory level (including the safety stock) c. Inventory turnover d. Average days of supply in inventory (known as cover-time) e. Reorder point if the lead time is 10 working days f. Total inventory costs per year and total inventory costs per working day with production quantity 50000 kg g. EOQ (pure) h. The company can produce YZ150 at a production rate 7500 kg per working day. Determine the economic production lot size. Assuming the safety stock is decreased to 10000 kg, calculate the new number of production batches per year, average days of supply in inventory, and the new total costs per working day and year.
64

Subjective - Based On Mathematical Formulas: Prof N. Balasubramanian

Transféré par

Informations du document

Description originale:

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

Subjective - Based On Mathematical Formulas: Prof N. Balasubramanian

Transféré par

Droits d'auteur :

Formats disponibles

Forecasting Predicting the future Qualitative forecast methods

Quantitative forecast methods

Variations of continuous replenishment

The Effect of Inaccurate Forecasting

Accurate Forecasting Quality Management

Types of Forecasting Methods

Time Frame Indicates how far into the future is forecast

Demand Behavior Trend

Forms of Forecast Movement

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

Time (c) Seasonal pattern Prof N. Balasubramanian

Time (d) Trend with seasonal pattern

Forecasting Methods Time series

5. Develop/compute forecast for period of historical data

4. Select a forecast model that seems appropriate for data

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

Moving Average Naive forecast

Simple moving average

Weighted moving average

Moving Average: Nave Approach

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

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

3-month Simple Moving Average

ORDERS PER MONTH 120 90 100 75 110 50 75 130 110 90 -

= 110 orders for Nov

5-month Simple Moving Average

ORDERS ORDERS PER MONTH PER MONTH

MOVING MOVING AVERAGE AVERAGE

150 125 100 Orders 75 50 3-month

25 0 | Jan | Feb | Mar

Wi = the weight for period i, between

Weighted Moving Average Example

MONTH August September October

WEIGHT 17% 33% 50%

DATA 130 110 90

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

Ft +1 = forecast for next period Dt = actual demand for present period

Effect of Smoothing Constant

Forecast does not reflect recent data

Forecast based only on most recent data

Exponential Smoothing (=0.30)

Adjusted Exponential Smoothing

Adjusted Exponential Smoothing (=0.30)

= 0.45 AF3 = F3 + T3 = 38.5 + 0.45 = 38.95

Adjusted Exponential Smoothing

Linear Trend Line

x = mean of the x values n y n = mean of the y values

Least Squares Example

1 4 9 16 25 36 49 64 81 100 121 144

Least Squares Example

a = y - bx = 46.42 - (1.72)(6.5) = 35.2

3867 - (12)(6.5)(46.42) 650 - 12(6.5)2

Least Squares Example

Linear trend line

DEMAND (1000S PER QUARTER) 1 2 3 4 8.6 10.3 10.6 29.5

6.3 7.5 8.1 21.9

17.5 18.2 19.6 55.3

S2 = 29.5/148.7 = 0.20 S3 = 21.9/148.7 = 0.15 S4 = 55.3/148.7 = 0.37

y = 40.97 + 4.30x = 40.97 + 4.30(4) = 58.17

Forecast Accuracy Forecast error