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Outline
The role of forecasting in a supply chain Characteristics of forecasts Components of forecasts and forecasting methods Basic approach to demand forecasting Time series forecasting methods Measures of forecast error Forecasting demand at Tahoe Salt Forecasting in practice
Characteristics of Forecasts
Forecasts are always wrong. Should include expected value and measure of error. Long-term forecasts are less accurate than short-term forecasts (forecast horizon is important) Aggregate forecasts are more accurate than disaggregate forecasts
Forecasting Methods
Qualitative: primarily subjective; rely on judgment and opinion Time Series: use historical demand only
Static Adaptive
Causal: use the relationship between demand and some other factor to develop forecast Simulation
Imitate consumer choices that give rise to demand Can combine time series and causal methods
Components of an Observation
Observed demand (O) = Systematic component (S) + Random component Level (current deseasonalized demand) (R)
Trend (growth or decline in demand) Seasonality (predictable seasonal fluctuation) 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
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Forecasting Methods
Static Adaptive
Moving average Simple exponential smoothing Holt s model (with trend) Winter s model (with trend and seasonality)
Static Methods
Assume a mixed model: Systematic component = (level + trend)(seasonal factor) Ft+l = [L + (t + l)T]St+l = forecast in period t for demand in period t + 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
Static Methods
Estimating level and trend Estimating seasonal factors
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Deseasonalizing Demand
7 Di / p for p odd
(sum is from i = t-(p/2) to t+(p/2)), p/2 truncated to lower integer
Deseasonalizing Demand
For the example, p = 4 is even For t = 3: D3 = {D1 + D5 + Sum(i=2 to 4) [2Di]}/8 = {8000+10000+[(2)(13000)+(2)(23000)+(2)(34000)]}/8 = 19750 D4 = {D2 + D6 + Sum(i=3 to 5) [2Di]}/8 = {13000+18000+[(2)(23000)+(2)(34000)+(2)(10000)]/8 = 20625
Deseasonalizing Demand
Then include trend 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) Trend 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
Adaptive Forecasting
The estimates of level, trend, and seasonality are adjusted after each demand observation General steps in adaptive forecasting Moving average Simple exponential smoothing Trend-corrected exponential smoothing (Holt s model) Trend- and seasonality-corrected exponential smoothing (Winter s model)
Moving Average
Used when demand has no observable trend or seasonality Systematic component of demand = level The level in period t is the average demand over the last N periods (the N-period moving average) Current forecast for all future periods is the same and is based on the current estimate of the level Lt = (Dt + Dt-1 + + Dt-N+1) / N Ft+1 = Lt and Ft+n = Lt After observing the demand for period t+1, revise the estimates as follows: Lt+1 = (Dt+1 + Dt + + Dt-N+2) / N Ft+2 = Lt+1
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Forecasting in Practice
Collaborate in building forecasts The value of data depends on where you are in the supply chain Be sure to distinguish between demand and sales
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