Supply Chain Management

Lecture 12
Outline

Today
Chapter 7
Homework 3
Online tomorrow
Due Friday February 26 before 5:00pm
Next week Thursday
Finish Chapter 7 (forecast error measures)
Start with Chapter 8
Network design simulation assignment
Announcements

What?
Tour the Staples Fulfillment Center in Brighton, CO
Informal Lunch-and-Learn
Up to 20 students with a Operations Management major
When?
Weeks of March 15 or March 29
There is a fair amount of time involved in the activity
Transit is close to an hour in each direction
Probably 2 hours onsite
Interested?
Let me know (email) by the end of this week
Time Series Forecasting

Observed demand =
Systematic component + Random component
L Level (current deseasonalized demand)
T Trend (growth or decline in demand)
S Seasonality (predictable seasonal fluctuation)

The goal of any forecasting method is to predict the systematic

component (Forecast) of demand and measure the size and
variability of the random component (Forecast error)
Summary: N-Period Moving Average
Method
1. Estimate level
Take the average demand over the most recent N periods
Lt = (Dt + Dt-1 + + Dt-N+1) / N
2. Forecast
Forecast for all future periods is based on the current estimate of
level Lt
Ft+n = Lt

Forecast
Ft+n = Lt
3500
3000
2500

Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Simple Exponential
Smoothing Method
1. Estimate level
The initial estimate of level L0 is the average of all historical
data
L0 = (i Di)/ n
Revise the estimate of level for all periods using smoothing
constant
Lt+1 = Dt+1 + (1 )*Lt
2. Forecast
Forecast
Forecast for future periods is Ft+n = Lt

3500
Ft+n = Lt 3000
2500

Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Holts Method (Trend
Corrected Exponential Smoothing)
1. Estimate level and trend
The initial estimate of level L0 and trend T0 are obtained using
linear regression
=INTERCEPT(known_ys, known_xs)
=LINEST(known_ys, known_xs)
Revise the estimates for all periods using smoothing constants
and
Lt+1 = Dt+1 + (1 )*(Lt + Tt)
Tt+1 = (Lt+1 Lt) + (1 )*Tt
Forecast
2. Forecast Ft+n = Lt + nTt
3500
Forecast for future periods is 3000
2500
Ft+n = Lt + nTt
Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Winters Model (Trend
and Seasonality Corrected Exp.
Smoothing)
1. Estimate level, trend, and seasonality
The initial estimates of L0, T0, S1, S2, S3, and S4 are obtained from
static forecasting procedure
Revise the estimates for all periods using smoothing constants
, and
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
Forecast
2. Forecast Ft+n = (Lt + nTt)St+n
3500
Forecast for future periods is 3000
2500

Ft+n = (Lt + nTt)*St+n

Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Components of an Observation
3500
3000 Trend (T)
2500
Demand

2000
1500 Forecast(F)
1000
500 Ft+n = Lt + nTt
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter

Holts method is appropriate when demand is

assumed to have a level and a trend
Example: Holts Method
An electronics manufacturer has seen demand for its
latest MP3 player increase over the last six months
8415, 8732, 9014, 9808, 10413, 11961
Determine initial level
L0 = INTERCEPT(ys, xs)
T0 = LINEST(ys, xs)
Example: Holts Method
An electronics manufacturer has seen demand for its
latest MP3 player increase over the last six months
8415, 8732, 9014, 9808, 10413, 11961
Determine initial level
L0 = INTERCEPT(ys, xs)
T0 = LINEST(ys, xs)
Determine levels
Lt+1 = Dt+1 + (1 )*(Lt + Tt)
Tt+1 = (Lt+1 Lt) + (1 )*Tt

Forecast
Ft+n = Lt + nTt
= 0.1, = 0.2
Example: Tahoe Salt
Example: Tahoe Salt

Demand forecasting using Holts method

50,000 Actual
Forecast (Holt)
40,000
Demand

30,000

20,000

10,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Components of an Observation

3500
3000 Seasonality (S)
2500
Demand

2000
1500
1000
500
Forecast(F)
0
1 2 3 4 5 6 7 8 9
Ft+n = (Lt + Tt)St+n
10 11 12 13 14 15 16
Quarter
Example: Winters Model
A theme park has seen the following attendance over the
last eight quarters (in thousands)
54, 87, 192, 130, 80, 124, 265, 171 Determine initial levels
L0 = From static forecast
T0 = From static forecast
Si,0 = From static forecast
Determine levels
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
Forecast
Ft+1 = (Lt + Tt)St+1
Example: Tahoe Salt
Example: Tahoe Salt

Demand forecast using Winters method

50,000 Actual
Forecast (Winter)
40,000
Demand

30,000

20,000

10,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Static Versus Adaptive Forecasting
Methods
Static Adaptive
Dt: Actual demand Dt: Actual demand

L: Level Lt: Level

T: Trend Tt: Trend
S: Seasonal factor St: Seasonal factor

Ft: Forecast Ft: Forecast

Components of an Observation

3500
3000 Seasonality (S)
2500
Demand

2000
1500
1000
500
Forecast(F)
0
1 2 3 4 5 6 7 8 9
Ft+n = (Lt + Tt)St+n
10 11 12 13 14 15 16
Quarter
Example: Static Method
A theme park has seen the following attendance over the
last eight quarters (in thousands)
54, 87, 192, 130, 80, 124, 265, 171
Determine initial level
L = INTERCEPT(ys, xs)
T = LINEST(ys, xs)
Determine deason. demand
Dt = L + Tt
Determine seasonal factors
St = Dt / Dt
Determine seasonal factors
Si =AVG(St)
Forecast
Ft = (L + T)Si
Example: Tahoe Salt
Static Forecasting Method

45,000
40,000
35,000
30,000
Demand
Demand

25,000
20,000
15,000
10,000 Demand
Demand
Lin. Reg.
5,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Quarter
Static Forecasting Method

Deseasonalize demand
Demand that would have been observed in the
absence of seasonal fluctuations
Periodicity p
The number of periods after which the seasonal cycle
repeats itself
12 months in a year
7 days in a week
4 quarters in a year
3 months in a quarter
Deseasonalize demand
Deseasonalize demand
Periodicity p is odd Periodicity p is even
Example: Tahoe Salt
Static Forecasting Method

45,000
40,000
35,000
30,000
Demand

25,000
20,000
15,000 Demand
10,000 Demand
Deseason.
5,000 Deseason.
Deseason. Lin. Reg.
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Example: Tahoe Salt

Demand forecast using Static forecasting method

50,000 Actual
Forecast (Static)
40,000
Demand

30,000

20,000

10,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Static Forecasting
Method
1. Estimate level and trend
Deseasonalize the demand data
Estimate level L and trend T using linear regression
Obtain deasonalized demand Dt
2. Estimate seasonal factors
Estimate seasonal factors for each period St = Dt /Dt
Obtain seasonal factors Si = AVG(St) such that t is the same
season as i Forecast
Ft+n = (L + nT)St+n
3. Forecast 3500
3000

Forecast for future periods is 2500

Demand
2000

Ft+n = (L + nT)*St+n 1500

1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Time Series Forecasting

Observed demand =
Systematic component + Random component
L Level (current deseasonalized demand)
T Trend (growth or decline in demand)
S Seasonality (predictable seasonal fluctuation)

Forecast Forecast error

The goal of any forecasting method is to predict the systematic

component (Forecast) of demand and measure the size and
variability of the random component (Forecast error)
1) Characteristics of Forecasts

Forecasts are always wrong!

Forecasts should include an expected value and a
measure of error (or demand uncertainty)
Forecast 1: sales are expected to range between 100
and 1,900 units
Forecast 2: sales are expected to range between 900
and 1,100 units
Examples
1000000 10000
Demand Demand
Forecast Forecast

900000 9000

800000 8000
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

50000 Demand 40000 Demand

Forecast Forecast
40000
30000
30000
20000
20000

10000
10000

0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Measures of Forecast Error

Measure Description
Error Forecast Actual Demand

Mean Square Error (MSE) Estimate of the variance

Mean Absolute Deviation Estimate of the standard

(MAD) deviation of the random
component
Mean Absolute Percentage Absolute error as a
Error (MAPE) percentage of the demand
Tracking signal Ratio of bias and MAD