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Forecasts
A statement about the future value of a variable of
interest such as demand.
Forecasting is used to make informed decisions.
Long-range
Short-range
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Why Forecasts
Forecasts affect decisions and activities throughout an
organization
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Why Forecasting Demand in SCM
Match demand and supply to avoid
stock out
lost sales
high costs of inventory and obsolescence
material shortage
poor responsiveness to market dynamics
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How to Match Supply and Demand
Techniques
Hold plenty of stock to satisfy uncertain pull
Flexible pricing
Overtime, subcontracting and temporary worker in the
short term
Effective forecasting
Collaboration Planning, Forecasting and Replenishment
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Features of Forecasts
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Steps in the Forecasting Process
“The forecast”
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Step 1 Determine purpose of forecast
Forecasting Techniques
Qualitative forecasting: methods of using opinions
and intuition- subjective approach
1. Jury of executive opinion
2. Delphi method etc.
3. Sales force opinion
4. Consumer surveys
Quantitative forecasting : methods of using
mathematical models and historical data
1. Time series models
i. Static models
ii. Adaptive models
i. Simple moving average
ii. Weighted moving average
iii. Exponential smoothing
2. Regression Analysis etc.
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Qualitative Forecasting
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Qualitative Forecasting
1. Jury of executive opinion
• A panel of senior experienced executive forecasts
• Dominance may diminish effectiveness
• Sports Obermeyer averages the weighted individual forecast of
each committee member
2. Delphi Method
• A group of internal and external experts were surveyed
• Members do not physically meet so no dominance problem
• Answers of each round survey are accumulated and summarized
and then resend to every participants for review until consensus
is reached
• The method is time consuming and expensive
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Qualitative Forecasting
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Quantitative Methods
Time series forecasting: Future is an extension of past
Components are time variations, cyclical variations, seasonal
variations, and random variations
Techniques:
Static
Adaptive
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Forecast Variations
Irregular
variation
Trend
Cycles
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Seasonal variations
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Components of an Observation
Observed demand (O) =
Systematic component (S) + Random component (R)
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Components of an Observation
• 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
• Goal is to predict systematic component of demand
Multiplicative: (level)(trend)(seasonal factor)
Additive: level + trend + seasonal factor
Mixed: (level + trend)(seasonal factor)
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Static Methods
A static method assumes that the estimates of level, trend, and
seasonality within the systematic component do not vary as
new demand is observed.
Assume a mixed model:
Systematic component = (level + trend)(seasonal factor)
Ft+l = [L + (t + l)T]St+l
L = Estimate of level for period 0
T = Estimate of trend
St = Estimate of seasonal factor for period t
Dt = Actual demand in period t
Ft = Forecast of demand in period t
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Static Methods
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Time Series Forecasting
Quarter, Year Demand Dt
II, 1 8000
III, 1 13000
IV, 1 23000
I, 2 34000
II, 2 10000
III, 2 18000
IV, 2 23000
I, 3 38000
II, 3 12000
III, 3 13000
IV, 3 32000
I, 4 41000
21 Forecast demand for the next four quarters.
Estimating Level and Trend
Before estimating level and trend, demand data must
be deseasonalized
Deseasonalized 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
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Static Methods
Deseasonalizing Demand (Dt )
S Di / p for p odd
(sum is from i = t-(p/2) to t+(p/2)), p/2 truncated to lower integer
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Static Methods
Deseasonalizing Demand
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Static Methods
Deseasonalizing Demand
Then use the following linear regression model
Dt = L + tT
where Dt = deseasonalized demand in period t
L = level (deseasonalized demand at period 0)
T = trend (rate of growth of deseasonalized demand)
t = period
Trend and Level is determined by linear regression using:
deseasonalized demand as the dependent variable, and
period as the independent variable (can be done in Excel)
In the example, L = 18,439 and T = 524
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Static Methods
Measuring Linear trend
Linear Regression Model
Fitting simple linear regression line to a time series data.
^
Y = a + b X Dt = L + T . t
Where
Y / Dt = dependent variable / deseasonalized demand /Estimate
X / t = Independent variable /time variable
a / L= Intercept of the line and
b / T = Slope of the line
n =number of period
_
( t Y) n t Y
b or T = 2 _ 2
t n t
b or L= Y bt
Static Methods
Linear Trend Calculation Example
Adjusted 4 Avg.
4 period Estimated Seasonal
Period Quarter Demand Yrs Moving t^2 ty Seasonal
moving average Demand index
Avg Index
1 II, 1 8000 18963 0.42 0.47
Deseasonaliz
ed demand
2 III, 1 13000 19487 0.67 0.68
19500
3 IV, 1 23000 19750 9 59250 20010 1.15 1.17
20000
4 I, 2 34000 20625 16 82500 20534 1.66 1.66
21250
5 II, 2 10000 21250 25 106250 21058 0.47 0.47
21250
6 III, 2 18000 21750 36 130500 21582 0.83 0.68
22250
7 IV, 2 23000 22500 49 157500 22106 1.04 1.17
22750
8 I, 3 38000 22125 64 177000 22629 1.68 1.66
21500
9 II, 3 12000 22625 81 203625 23153 0.52 0.47
23750
10 III, 3 13000 24125 100 241250 23677 0.55 0.68
24500
11 IV, 3 32000 24201 1.32 1.17
( t Y) _ n t Y = 523.81
b or T =
t
2 _ n t 2
b or L = Y bt = 18439
Y = 18439 + 5.23 t
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Static Methods
Estimating Seasonal Factors
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Static Methods
Estimating Seasonal Factors
t Dt Dt-bar S-bar
1 8000 18963 0.42 = 8000/18963
2 13000 19487 0.67 = 13000/19487
3 23000 20011 1.15 = 23000/20011
4 34000 20535 1.66 = 34000/20535
5 10000 21059 0.47 = 10000/21059
6 18000 21583 0.83 = 18000/21583
7 23000 22107 1.04 = 23000/22107
8 38000 22631 1.68 = 38000/22631
9 12000 23155 0.52 = 12000/23155
10 13000 23679 0.55 = 13000/23679
11 32000 24203 1.32 = 32000/24203
12 41000 24727 1.66 = 41000/24727
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Static Methods
Estimating Seasonal Factors
The overall seasonal factor for a “season” is then obtained by averaging
all of the factors for a “season”
If there are r seasonal cycles, for all periods of the form pt+i, 1<i<p,
the seasonal factor for season i is
Si = [Sum(j=0 to r-1) Sjp+i]/r
In the example, there are 3 seasonal cycles in the data and p=4, so
S1 = (0.42+0.47+0.52)/3 = 0.47
S2 = (0.67+0.83+0.55)/3 = 0.68
S3 = (1.15+1.04+1.32)/3 = 1.17
S4 = (1.66+1.68+1.66)/3 = 1.67
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Static Methods
Estimating the Forecast
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Static Methods
Adaptive Forecasting
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Adaptive Time Series Forecasting Models
Moving Average method is used when demand has no observable trend
or seasonality.
1. Simple Moving Average Forecasting Model : A technique that averages a
number of recent actual values, updated as new values become available. Last forecast is
considered as forecast for all future periods for which data is still to release.
3 year moving average
n
A
Period Actual Forecasted
t i Demand Demand
Ft MAn i 1 1
2
1600
2200
n 3 2000
i = An index that corresponds to time period 4 1600 1933
n = Number of periods (data points) in the 5 2500 1933
6 3500 2033
moving average
7 3300 2533
At-i = Actual value in period t-i 8 3200 3100
MA= Moving average 9 3900 3333
Ft = Forecast for time period t 10 4700 3467
11 4300 3933
12 4400 4300
Adaptive Forecasting
Adaptive Time Series Forecasting Models
2. Weighted Moving Average Forecasting Model
This models overcomes the question of Simple moving average method giving
equal weight in all years
More recent values in a series are given more weight in computing the forecast.
Last forecast is considered as forecast for all future periods for which
data is still to release.
Adaptive Forecasting
Adaptive Time Series Forecasting Models
3. Exponential Smoothing Forecasting Model
Weighted averaging method based on previous forecast plus a percentage of the forecast
error
The next period’s forecasted demand is the current period’s forecast adjusted by a
fraction of the difference between the current’s period's actual demand and its forecast.
Last forecast is considered as forecast for all future periods for which data is still to
release.
Simple and Minimal data required
Suitable for data that show little trend or seasonal patterns
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General Steps
Initialize: Compute initial estimates of level (L0), trend (T0), and
seasonal factors (S1,…,Sp). This is done as in static forecasting.
Forecast: Forecast demand for period t+1 using the general equation
Modify estimates: Modify the estimates of level (Lt+1), trend (Tt+1), and
seasonal factor (St+p+1), given the error Et+1 in the forecast
Repeat steps 2, 3, and 4 for each subsequent period
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Trend-Corrected Exponential Smoothing
(Holt’s 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:
Dt = at + b
T0 = a
L0 = b
In period t, the forecast for future periods is expressed as follows:
Ft+1 = Lt + Tt
Ft+n = Lt + nTt
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Trend-Corrected Exponential Smoothing
(Holt’s Model)
After observing demand for period t, revise the estimates for level and trend as follows:
Example: Tahoe Salt demand data. Forecast demand for period 1 using Holt’s model
(trend corrected exponential smoothing)
Assume periodicity p
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Trend- and Seasonality-Corrected Exponential
Smoothing (continued)
After observing demand for period t+1, revise estimates for level, trend, and seasonal
factors as follows:
Example: Tahoe Salt data. Forecast demand for period 1 using Winter’s model.
Initial estimates of level, trend, and seasonal factors are obtained as in the static
forecasting case
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Trend- and Seasonality-Corrected Exponential
Smoothing Example (continued)
Assume a = 0.1, b=0.2, g=0.1; revise estimates for level and trend for period 1 and for
seasonal factor for period 5
L1 = a(D1/S1)+(1-a)(L0+T0) = (0.1)(8000/0.47)+(0.9)(18439+524)=18769
Y = b0 + b1x
Where
Y = Forecast or dependent variable
x = Explanatory or Independent variable
b0 = Intercept of the line and
b1 = Slope of the line
2. Multiple regression
Y = b0 + b1 x1+b2x2+ ………+bk xk
Simple Linear Regression
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Forecasting Accuracy
Forecast error, et = At –Ft
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MAD, MSE, and MAPE
Actual forecast
MAD =
n
2
( Actual forecast)
MSE =
n
Tracking signal =
(Actual- forecast)
MAD
Bias – Persistent tendency for forecasts to be
Greater or less than actual values.
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Forecasting Accuracy
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Period Demand Forecast Error (e) Absolute e Absolute
Error %
Error
1 1600 1523 77 77 5929 4.8%
2 2200 1810 390 390 152100 17.7%
3 2000 2097 -97 97 9409 4.9%
4 1600 2383 -783 783 613089 48.9%
5 2500 2670 -170 170 28900 6.8%
6 3500 2957 543 543 294849 15.5%
7 3300 3243 57 57 3249 1.7%
8 3200 3530 -330 330 108900 10.3%
9 3900 3817 83 83 6889 2.1%
10 4700 4103 597 597 356409 12.7%
11 4300 4390 -90 90 8100 2.1%
12 4400 4677 -277 277 76729 6.3%
Total 0 3494 1664552 1.339001
Average 291.1667 138712.7 11.158%
RSFE MAD MSE MAPE
Software
Forecasting software
Forecast Pro and Forecast Pro XE
SmartForecasts
SPSS (Statistical Package for Social Science)
SAS
EBUSE
CPFR software
Manugistics
i2 Technologies
Syncra systems
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