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Session 2
Forecasting Demand
What is a Forecast?
Investment decisions
Capital equipment decisions
Inventory planning
Capacity planning
Operations budgets
Lead-time management
Forecast System Design Issues
Expert opinion
Market research
Focus groups
Historical analogy
Delphi method
Panel consensus
2-7
Quantitative Techniques
Moving average
Exponential smoothing
Regression analysis
Adaptive smoothing
Graphical methods
Econometric modeling
Life-cycle modeling
General Forecasting Data Methods
2-10
External (Extrinsic) Factors
Competition
New customers
Plans of major
customers
Government policies
Regulatory concerns
Economic conditions
Environmental issues
Weather conditions
Global trends
2-11
Leading Indicators
Indicator
(Causal Factor) Influences volume of
2-12
Demand
A need for a particular product or component
Independent demand is demand for an item that is unrelated to the demand for
other items. Independent demand items are saleable products or services that are
added to the master schedule.
Dependent demand can be calculated directly from the demand for other products.
It is related to the bill of material structure.
2-13
Sources of Demand
800
700
600
500
400 Year 1
300 Year 2
200
100
0
J F M A M J J A S O N D
Seasonality Calculation
35
30
25
20
15
10
5
0
1 3 5 7 9 11 13 15 17 19
Quarter
Pyramid Forecasting
Total
business
volume
(dollars)
Product/item volume
(units)
Pyramid Forecasting
Pyramid Forecasting
TechniquePyramid Forecasting Example
ROLL-UP
Product-level forecast
X1 units8,200 X2 units4,845
price$20.61 price$10.00
Family-level forecast units13,045
Family avg price$16.67
Family-adjusted forecast units15,000
FORCE-DOWN
15,000
X1 8,200 = 9,429 units
13,045
A B C D E F
X1 X2 Totals
units price units price Qty $
1 8,200 $20.61 4,845 $10.00 13,045 $217,452
2 1.15
3 9,429 $20.61 5,571 $10.00 15,000 $250,042
4 $250,070
2-25
Pyramid Forecasting Exercise
Historical Demand
Product A Product B
Region 1 150 Region 1 300
Region 2 300 Region 2 450
Selling Price $4.50 Selling Price $8.50
2-26
Pyramid Forecasting ExerciseSolution
Based upon historical demand
A = 150 + 300 = 450 $4.50 = $2,025
B = 300 + 450 = 750 $8.50 = $6,375
Total = $8,400
$10,000
= 1.19 (19% increase)
$8,400
A: Region 1 = 1.19 150 = 178.5
Region 2 = 1.19 300 = 357.0
B: Region 1 = 1.19 300 = 357.0
Region 2 = 1.19 450 = 535.5
Advantages
A simple technique that is easy to calculate
It can be used to filter out random variation
Longer periods provide more smoothing
Limitations
If a trend exists, it is hard to detect
Moving averages lag trends
2-28
Moving Average Exercise
Actual sales Next months variation
forecast
Jan 100
Feb 500
Mar 1000
Apr 1500
May 2800
June 5100
Jul 6200
Aug 5700
Sep 3200
Oct 1200
Nov 500
Dec 100
Exponential Smoothing
New Forecast = x Actual Demand + (1 - ) x Old Forecast
New Forecast = Old Forecast + x (Actual Demand Old Forecast)
2-31
Smoothing Factor
Referred to as Alpha (a)
Determines the weight of historical
data on projection
Sets responsiveness to changes in
demand
Range 0 a 1
2
a=
n+1
2-32
Smoothing Factor (cont.)
Determines how many periods of
actual demand will influence forecast
1.00 = 1 period
0.50 = 3 periods
0.29 = 6 periods
0.15 = 12 periods
0.10 = 19 periods
2-33
Comparison of Exponential Smoothing Alpha Factors
Actual sales
2-34
Exponential Smoothing Examples
New forecast = Old forecast + smoothing factor (a)
(actual demand - old forecast)
2-35
New Product Introduction
2-36
Product Life Cycle
Volume
Introduction Growth Maturity Decline
2-37
Focus ForecastingAssumptions/Methods
Assumptions
The most recent past is the best indicator of the
future
One forecasting model is better than the others
Methods
All forecasting models for all items forecasted will
be compared against recent sales history
The model that achieves the closest fit will be
used to forecast this item this time
Next time, a different model may be selected
2-38
Data Issues for Forecasting
Availability of data
Consistency of data
Amount of history required
Forecast frequency
Frequency of model reevaluation
Cost and time issues
Recording true demand
Order date vs. ship date
Product units vs. financial units
Level of aggregation
Customer partnering
2-39
Planning Horizon and Time Periods
Forecast Length
Planning
Horizon
Weeks Months Quarters
1 2 3 4 5 6 7 8 9 1011 12 13 17 21 25 29 33 37 41 45 49 53 65 78 91 104
2-41
Dealing with Outliers
55
50
25
20
15
10
0
J F M A M J J A S O N D J F M A M J J A S O N D
2-42
Decomposition of Data
Purify the data
Adjust the data
Take out the baseline and components
Identify demand components
Trend
Seasonality
Nonannual cycle
Random error
Measure the random error
Project the series
Recompose
2-43
Session 2 Review
You should now be able to
Explain why forecasting is important
forecasting
Identify factors influencing demand
forecasts
Outline the process of data decomposition
2-44