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Chapter 15
Demand Management & Forecasting
• Demand Management
• Exponential Smoothing
Demand Management
Independent Demand:
Finished Goods
A Dependent Demand:
Raw Materials,
Component parts,
B(4) C(2) Sub-assemblies, etc.
What Is Forecasting?
Types of Forecasts
by Time Horizon
• Short-range forecast
–
– Job scheduling, worker assignments
• Medium-range forecast
–
– Sales & production planning, budgeting
• Long-range forecast
–
– New product planning, facility location
6
Types of Forecasts
by Item Forecast
• Economic forecasts
– Address business cycle
– e.g., inflation rate, money supply etc.
• Technological forecasts
– Predict technological change
– Predict new product sales
• Demand forecasts
– Predict existing product sales
7
Types of Forecasts
• Qualitative (Judgmental)
• Quantitative
– Time Series Analysis
– Causal Relationships
– Simulation
8
Components of Demand
• Average demand for a period of time
• Trend
• Seasonal element
• Cyclical elements
• Random variation
• Autocorrelation
9
x Linear
x x
x x
x x x Trend
Sales
x
x x x
x
x
xx
x xx x x
x
x
x x x x x x
x x x x x x
x x x
x xxxxx
x
x x
1 2 3 4
Year
10
Cyclical Component
Cycle
Response
B
Mo., Qtr., Yr.
11
Random Component
• Erratic, unsystematic, unpredictable
‘residual’ fluctuations
• © 1984-1994 T/Maker Co.
•
12
Qualitative Methods
Delphi Method
l. Choose the experts to participate. There should be
a variety of knowledgeable people in different
areas.
2. Through a questionnaire (or E-mail), obtain
forecasts (and any premises or qualifications for
the forecasts) from all participants.
3. Summarize the results and redistribute them to
the participants along with appropriate new
questions.
4. Summarize again, refining forecasts and
conditions, and again develop new questions.
5. Repeat Step 4 if necessary. Distribute the final
results to all participants.
14
Quantitative
Forecasting
Forecasting Example # 1
Weekly Video Rentals
Week Video Rentals
W e e kly V id e o Re n ta ls
1 654
2 658
3 665 720
4 672 710
5 673 700
6 671 690
7 693
Videos Rented
680
8 694 670
9 701 660
10 703 650
11 702 640
12 710 630
620
1 2 3 4 5 6 7 8 9 10 11
We ek
18
720
710
Video Rentals
700
690 Forecast
680 Actual
670
660
650
3 4 5 6 7 8 9 10 11 12 13
Week
720
710
Video Rentals
700
690 Forecast
680 Actual
670
660
650
5 6 7 8 9 10 11 12 13
Week
21
Forecasting Example # 2
Quarterly Sales Data (Acme Tool Company)
Qua rte rly Sa le s Da ta
Quarter Sales
(Acm e Tool Com pa ny)
1 550
2 400
3 350 900
4 600 800
5 750 700
6 500 600
Quarterly Sales
7 400 500
8 650 400
9 850 300
10 600 200
11 450
100
12 700
0
3 4 5 6 7 8 9 10 11 12
Quar te r
22
900
800
700
Quarterly Sales
600
500 Forecast
400 Actual
300
200
100
0
3 4 5 6 7 8 9 10 11 12 13
Quarter
900
800
700
Quarterly Sales
600
500 Forecast
400 Actual
300
200
100
0
5 6 7 8 9 10 11 12 13
Quarter
25
Where,
α = smoothing constant
Ft = Forecast for period t
At = Actual value in period t
Note:
31
Video
Week Rentals
1 654
• Question: Given the
2
3
658
665 weekly video rental data,
4
5
672
673
what are the exponential
6
7
671
693
smoothing forecasts for
8
9
694
701
periods 2-13 using
10 703 α =0.10 and α =0.60?
11 702
12 710 • Assume F1=A1
33
Calculating the Exponential smoothing forecasts gives us:
Forecasts
Video
Week Rentals α = .1 α = .6
1 654 654.00 654.00
2 658 654.00 654.00
3 665 654.40 656.40
4 672 655.46 661.56
5 673 657.11 667.82
6 671 658.70 670.93
7 693 659.93 670.97
8 694 663.24 684.19
9 701 666.32 690.08
10 703 669.78 696.63
11 702 673.11 700.45
12 710 675.99 701.38
13 679.40 706.55
34
720
710
700
690
Video Rentals
680
Forecast
670
Actual
660
650
640
630
620
2 3 4 5 6 7 8 9 10 11 12 13
Week
720
710
700
690
Video Rentals
680
Forecast
670
Actual
660
650
640
630
620
2 3 4 5 6 7 8 9 10 11 12 13
Week
35
Quarter Sales
1 550
• Question: Given the
2 400
3
4
350
600
quarterly sales data,
5 750 what are the exponential
6 500
7 400 smoothing forecasts for
8
9
650
850
periods 2-13 using
10 600 α =0.10 and α =0.60?
11 450
12 700 • Assume F1=A1
36
Calculating the Exponential smoothing forecasts gives us:
Forecasts
Quarterly
Week Sales α = .1 α = .6
1 550.00 550.00 550.00
2 400.00 550.00 550.00
3 350.00 535.00 460.00
4 600.00 516.50 394.00
5 750.00 524.85 517.60
6 500.00 547.37 657.04
7 400.00 542.63 562.82
8 650.00 528.37 465.13
9 850.00 540.53 576.05
10 600.00 571.48 740.42
11 450.00 574.33 656.17
12 700.00 561.90 532.47
13 575.71 632.99
37
900
800
Quarterly Sales
700
600 Actual
500 Forecasted
400
300
200
2 3 4 5 6 7 8 9 10 11 12 13
Quarter
900
800
Quarterly Sales
700
600 Actual
500 Forecasted
400
300
200
2 3 4 5 6 7 8 9 10 11 12 13
Quarter
38
Forecast Effects of
Smoothing Constant α
Ft = α At -1 + α (1- α )At -2 + α (1- α )2At -3 + ...
Weights
α = Prior Period 2 periods ago 3 periods ago
α α (1 - α ) α (1 - α )2
α = 0.10
α = 0.90
39
The MAD Statistic to Determine
Forecasting Error
n
∑ A t - Ft
t=1
1 MAD ≈ 0.8 standard deviation
1 standard deviation ≈ 1.25 MAD
MAD =
n
• The ideal MAD is zero.
• The larger the MAD, the less the desirable the resulting model.
•
40
R u n n in g
S um of
A c t u a l F o re c a s tF o re c a s t F o re c a s t A b s o lu t e S u m o f T ra c k in g
(A t ) (F t ) E rro r E rro rs D e via tio n A b s . D e v.M A D S ig n a l
1 5 5 0 . 0 0 5 5 0 .0 0
2 4 0 0 . 0 0 5 5 0 .0 0 -1 5 0 .0 0 -1 5 0 .0 0 1 5 0 . 0 0 1 5 0 . 0 0 1 5 0 . 0 0 -1 .0 0
3 3 5 0 . 0 0 5 3 5 .0 0 -1 8 5 .0 0 -3 3 5 .0 0 1 8 5 . 0 0 3 3 5 . 0 0 1 6 7 . 5 0 -2 .0 0
4 6 0 0 . 0 0 5 1 6 .5 0 8 3 .5 0 -2 5 1 .5 0 8 3 .5 0 4 1 8 . 5 0 1 3 9 . 5 0 -1 .8 0
5 7 5 0 . 0 0 5 2 4 .8 5 225.15 -2 6 . 3 5 2 2 5 . 1 5 6 4 3 . 6 5 1 6 0 . 9 1 -0 .1 6
6 5 0 0 . 0 0 5 4 7 .3 7 -4 7 .3 7 -7 3 . 7 2 4 7 .3 7 6 9 1 . 0 2 1 3 8 . 2 0 -0 .5 3
7 4 0 0 . 0 0 5 4 2 .6 3 -1 4 2 .6 3 -2 1 6 .3 4 1 4 2 . 6 3 8 3 3 . 6 4 1 3 8 . 9 4 -1 .5 6
8 6 5 0 . 0 0 5 2 8 .3 7 121.63 -9 4 . 7 1 1 2 1 . 6 3 9 5 5 . 2 8 1 3 6 . 4 7 -0 .6 9
9 8 5 0 . 0 0 5 4 0 .5 3 309.47 21 4.76 309.47 1264.75 158.09 1.36
1 0 6 0 0 . 0 0 5 7 1 .4 8 2 8 .5 2 243.29 2 8 .5 2 1 2 9 3 . 2 7 1 4 3 . 7 0 1.69
1 1 4 5 0 . 0 0 5 7 4 .3 3 -1 2 4 .3 3 11 8.96 124.33 1417.60 141.76 0.84
1 2 7 0 0 . 0 0 5 6 1 .9 0 138.10 25 7.06 138.10 1555.71 141.43 1.82
46
Tracking Signal Charts
Tracking Signal (Weekly Video Rentals)
α = 0.1
12
10
Tracking Signal
8
6 Tracking Signal
0
2 3 4 5 6 7 8 9 10 11 12
Forecast Period
2.5
2
1.5
1
Tracking Signal
0.5
0 Tracking Signal
-0.5 2 3 4 5 6 7 8 9 10 11 12
-1
-1.5
-2
-2.5
Forecas t Period
47
Y Yi = a + b X i + Error
Error
Regression line
Yi = a + b X i
X
Observed value
49
Correlation
Perfect Perfect
Negative No Positive
Correlation Correlation Correlation
Web-Based Forecasting:
Steps in CPFR
• 1. Creation of a front-end partnership
agreement
• 2. Joint business planning
• 3. Development of demand forecasts
• 4. Sharing forecasts
• 5. Inventory replenishment