Demand Forecasting

Introduction Demand Forecasting Techniques

Qualitative Forecasting Methods Quantitative Forecasting Models

Forecast Error Case: Yankee Fork and Hoe Company

Forecasting
Effective planning requires matching product requirements of customers with the capacity of operations Forecasting: Predicting future events, such as, customer demand Demand forecast is generally daily/weekly/monthly/quarterly figure for each product/product group in a geographic region

Forecasting Techniques
Forecasting is both an art & a science. The science part deals with mathematical models, whereas the art part deals with judgment, experience and intuition. Thus, two broad methods Qualitative methods (subjective) Based on subjective methods Quantitative methods (objective) Based on mathematical formulas

Forecasting Techniques
Qualitative Methods (subjective) experts intuition, experience, opinions not repeatable by others. Used when
little or no historical data available Unstable environment during forecast horizon Forecast has long time horizon

Methods Available
Jury of executive opinion Sales force composite Delphi method Consumer market survey

Qualitative Methods
Jury of Executive Opinion
Given sales data and other reports, a group of high-level executives give their estimates of future demand. These estimates are summarized Main disadvantages Top level executives are not close to the customers Power struggles occur among executives

Qualitative Methods
Sales Force Composite Each salesperson provides an estimate of sales for his/her territory, and then the results are aggregated for all territories. This approach is often called the grass roots approach because salespeople are close to customers. Main disadvantages Overestimate for fear of losing job/territory Underestimate to have the quota set at a low level and reap good bonuses

Qualitative Methods
Delphi Method A coordinator asks a group of outside experts to estimate future demand. A statistical summary of their responses is prepared and sent back to the experts who can then revise their estimates if they choose to do so. The purpose is to reach consensus. Names of the participants are not revealed. Main disadvantages lengthy process

Qualitative Methods
Market Research A systematic approach to determine consumer interest in a product or service by creating and testing hypotheses through data-gathering surveys. Disadvantage Poor response rate

Forecasting Techniques
Quantitative methods (objective) mathematical models of relationships between variables, repeatable method Types of quantitative models
1. Time series methods: analyze the pattern in past demand to project demand in future period 2. Causal model: Forecast by Regression/Causal methods estimates sales on the basis of values of other independent factors.

Quantitative models: Time series models

A time series is a set of numbers where the order or sequence of the numbers is important, e.g., historical demand Analysis of the time series identifies patterns Once the patterns are identified, they can be used to develop a forecast

Patterns of Demand / Components of Demand

Component of demand include: 1) Horizontal/Permanent/Base Demand 2)Trends 3)Cycle 4) Seasonal 5) Promotional 6) Irregular or Random fluctuation (noise)

Patterns of Demand / Components of Demand

Horizontal/Permanent/Base- data cluster about a horizontal line. Trends are noted by a gradual upward or downward sloping line. Cycle is a data pattern (up or down movement) that may cover several years before it repeats itself. Seasonality is a data pattern (periodic oscillation in demand) that repeats itself over the period of one year or less. Promotional: Demand swing initiated by a firms marketing initiatives such as advertising, deals or promotions (known to the firm so need not be forecast) Random fluctuation (noise) results from random variation or unexplained causes.

Patterns of Demand: Base

Quantity

Time (a) Horizontal/Base: It represents long term average after the remaining components have been removed. Data cluster about a horizontal line.

Patterns of Demand: Trend

Quantity

Time (b) Trend: Long term shift in periodic sales. Data consistently increase or decrease.

Patterns of Demand: Seasonal

Quantity

Year 1

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J

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F

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M

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A

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M

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J

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J

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A

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S

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O

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N

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D

Months (c) Seasonal: Recurring upward/downward trend repeated within a year.

Patterns of Demand: Seasonal

Quantity

Year 1

Year 2 |
J

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F

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M

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A

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M

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J

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J

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A

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S

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O

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D

Months (c) Seasonal: Data consistently show peaks and valleys.

Patterns of Demand: Cyclical

Quantity

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1

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2

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3

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4

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5

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6

Years (c) Cyclical: Data reveal gradual increases and decreases over extended periods.

Components of Demand in Time Series

Permanent (Base) component, B Trend, T Seasonal, S Cyclic, C Promotion, P Random, et Examples Yt = (B + T) + S + et , additive Yt = (B + T) x S + et , multiplicative

Seasonal Patterns
(b) Additive pattern
Demand | 0

| | | | | | | | | | | | | | | 2 4 5 8 10 12 14 16 Period

Seasonal Patterns
(a) Multiplicative pattern
Demand | 0

| | | | | | | | | | | | | | | 2 4 5 8 10 12 14 16 Period

Quantitative Method: Time-Series Methods

Naive approach Moving averages Exponential smoothing Trend projection (linear regression) Seasonal influences Combined seasonal and trend

Time-series method
Naive forecasting
The forecast for the next period equals the demand for the current period. The nave forecast can take into account a demand trend - the forecast is increased with the number with which it missed the last time. The advantages of the naive forecasts are its simplicity and low cost. Example - If demand for Wednesday was 35 people, then forecast for Thursday is 35 people. If 42 on Thursday, then 42 is the forecast for Friday. With trend it will be 49.

Simple Moving Average, SMA(n)

Ft+1 = [Dt + Dt-1 + ... + Dt-n+1 ]/n Small n, more responsive to changes in data Large n, more stable forecasts over time n is typically between 3 & 10

Time-Series Methods Simple Moving Averages

450 430 Patient arrivals 410 390 370 Actual patient arrivals | 5 | 10 | 15 Week | 20 | 25 | 30

Time-Series Methods Simple Moving Averages

450 430 Patient arrivals 410 390 370

Week 1 2 3

Patient Arrivals 400 380 411

411 + 380 + 400 3 Actual patient = 397 arrivals F4 =

| 5 | 10 | 15 Week | 20 | 25 | 30

Time-Series Methods Simple Moving Averages

450 430 Patient arrivals 410 390 370 Actual patient arrivals | 5 | 10 | 15 Week | 20 | 25 | 30 3-week MA forecast 6-week MA forecast

Weighted Moving Average, WMA(n)

Moving averages are unresponsive/sluggish to change, to partially overcome this we use weighted average Ft+1 = w1 Dt + w2 Dt-1 + ... + wn Dt-n+1 One method to assign weights (not the only method): w1 > w2 > ... > wn > 0, weights sum to 1 Sum-of-digits weights S= 1+2+...+n w1 = n/S, w2 = (n-1)/S, , wn = 1/S

Time-Series Methods Weighted Moving Average

450 430 Patient arrivals 410 390 370 Actual patient arrivals | 5 | 10 | 15 Week | 20 | 25 | 30 3-week MA forecast 6-week MA Weighted forecastMoving Average Assigned weights t t-1 t-2 0.70 0.20 0.10

F4 = 0.70(411) + 0.20(380) + 0.10(400) =403.7

Simple Exponential Smoothing, SES ()

To overcome the drawback of large data requirements of moving averages, SES implicitly considers previous points. It is a sophisticated weighted moving average technique. Ft+1 = Ft +( Dt - Ft) Ft+1 = Dt + (1 ) Dt-1 + (1 )2 Dt-2 + +(1 ) t F0 smoothing constant 0 1 Dt - Ft = forecasting error in period t Larger values make forecast more responsive If =1, naive model In practice, 0.05 0.30

Weights & Initial Forecasts

w1 =, w2 =(1- ), w3 =(1- )2 ... Initial forecast required
use actual value at initial period

F1 = D1
use average of some initial actual values

F1 = [D1 + D2 + D3 ]/3

Time-Series Methods Exponential Smoothing

450 430 Patient arrivals 410 390 370

Exponential Smoothing = 0.10 Ft +1 = Ft + (Dt Ft )

| 5

| 10

| 15 Week

| 20

| 25

| 30

Time-Series Methods Exponential Smoothing

450 430 Patient arrivals 410 390 370

Exponential Smoothing = 0.10 Ft +1 = Ft + (Dt Ft ) F3 = (400 + 380)/2 D3 = 411 F4 = 0.10(411) + 0.90(390)

| 5

| 10

| 15 Week

| 20

| 25

| 30

Time-Series Methods Exponential Smoothing

450 430 Patient arrivals 410 390 370

Exponential Smoothing = 0.10 Ft +1 = Ft + (Dt Ft ) F3 = (400 + 380)/2 D3 = 411 F4 = 392.1

| 5

| 10

| 15 Week

| 20

| 25

| 30

Time-Series Methods Exponential Smoothing

450 430 Patient arrivals 410 390 370

Exponential Smoothing = 0.10 Ft +1 = Ft + (Dt Ft ) F4 = 392.1 D4 = 415 F4 = 392.1 F5 = 394.4

| 25 | 30

| 5

| 10

| 15 Week

| 20

Time-Series Methods Exponential Smoothing

450 430 Patient arrivals 410 390 370 Exponential smoothing = 0.10 | | 15 20 Week

| 5

| 10

| 25

| 30

Time-Series Methods Exponential Smoothing

450 430 Patient arrivals 410 390 370 Exponential smoothing = 0.10 | | 15 20 Week 3-week MA forecast 6-week MA forecast

| 5

| 10

| 25

| 30

Time-Series Methods Trend-Adjusted Exponential Smoothing

A = average; T = Trend =smoothing constant for average; = smoothing constant for trend At = Dt + (1-) (At-1 + Tt-1) Tt = (At At-1) + (1- ) Tt-1 Ft+1 = At + Tt

Time-Series Methods Trend-Adjusted Exponential Smoothing

80 70 Patient arrivals 60 50

Medanalysis, Inc. Demand for blood analysis At = Dt + (1 )(At-1 + Tt-1) Tt = (At At-1) + (1 )Tt-1 A0 = 28 patients T0 = 3 patients = 0.20

40 30 | 1 | 2 | 3 | 4 | 5

= 0.20

A1 = 0.2(27) + 0.80(28 + 3) T - 28) | 1= | 0.2(30.2 | | | | + |0.80(3) | |

6 7 8 Week 9 10 11 12 13

| 14 15

Time-Series Methods Trend-Adjusted Exponential Smoothing

80 70 Patient arrivals 60 50

Medanalysis, Inc. Demand for blood analysis At = Dt + (1 )(At-1 + Tt-1) Tt = (At At-1) + (1 )Tt-1 A0 = 28 patients T0 = 3 patients = 0.20 Forecast2 = 30.2 + 2.8 = 33

40 30 | 1 | 2 | 3 | 4 | 5

= 0.20

A1 = 30.2 T 2.8 | 1= | | |
6 7 8 Week 9

| | | | 10 11 12 13

| | 14 15

Time-Series Methods Trend-Adjusted Exponential Smoothing

80 70 Patient arrivals 60 50

Medanalysis, Inc. Demand for blood analysis At = Dt + (1 )(At-1 + Tt-1) Tt = (At At-1) + (1 - )Tt-1 A2 = 30.2 D2 = 44 T1 = 2.8 = 0.20

40 30 | 1 | 2 | 3 | 4 | 5

= 0.20

A2 = 0.2(44) + 0.80(30.2 + 2.8) T2 = | | 0.2(35.2 | | |- 30.2) | |+ 0.80(2.8) | | |

6 7 8 Week 9 10 11 12 13 14 15

Time-Series Methods Trend-Adjusted Exponential Smoothing

80 70 Patient arrivals 60 50

Medanalysis, Inc. Demand for blood analysis At = Dt + (1 )(At-1 + Tt-1) Tt = (At At-1) + (1 - )Tt-1 A2 = 30.2 D2 = 44 T1 = 2.8 = 0.20 Forecast = 35.2 + 3.2 = 38.4

40 30 | 1 | 2 | 3 | 4 | 5

= 0.20

A2 = 35.2 T2 = | | | 3.2|
6 7 8 Week 9

| | | | 10 11 12 13

| | 14 15

Time-Series Methods Trend-Adjusted Exponential Smoothing

80 70 Patient arrivals 60 50 40 30 | 1 | 2 | 3 | 4 | 5 | 6 | | 7 8 Week | 9 | | | | 10 11 12 13 | | 14 15 Actual blood test requests Trend-adjusted forecast

Time-Series Methods
Seasonal Influences
Quarter 1 2 3 4 Total Average Year 1 45 335 520 100 1000 250 Year 2 70 370 590 170 1200 300 Year 3 100 585 830 285 1800 450 Year 4 100 725 1160 215 2200 550

Actual Demand Seasonal Index = Average Demand

Time-Series Methods
Seasonal Influences
Quarter 1 2 3 4 Year 1 Year 2 70/300 = 0.23 370/300 = 1.23 590/300 = 1.97 170/300 = 0.57 Year 3 Year 4

45/250 = 0.18 335/250 = 1.34 520/250 = 2.08 100/250 = 0.40

100/450 = 0.22 100/550 = 0.18 585/450 = 1.30 725/550 = 1.32 830/450 = 1.84 1160/550 = 2.11 285/450 = 0.63 215/550 = 0.39

Time-Series Methods
Seasonal Influences
Quarter 1 2 3 4 Year 1 Year 2 70/300 = 0.23 370/300 = 1.23 590/300 = 1.97 170/300 = 0.57 Year 3 Year 4

45/250 = 0.18 335/250 = 1.34 520/250 = 2.08 100/250 = 0.40

100/450 = 0.22 100/550 = 0.18 585/450 = 1.30 725/550 = 1.32 830/450 = 1.84 1160/550 = 2.11 285/450 = 0.63 215/550 = 0.39

Quarter 1 2 3 4

Average Seasonal Index (0.18 + 0.23 + 0.22 + 0.18)/4 = 0.20

Time-Series Methods
Seasonal Influences
Quarter 1 2 3 4 Year 1 Year 2 70/300 = 0.23 370/300 = 1.23 590/300 = 1.97 170/300 = 0.57 Year 3 Year 4

45/250 = 0.18 335/250 = 1.34 520/250 = 2.08 100/250 = 0.40

100/450 = 0.22 100/550 = 0.18 585/450 = 1.30 725/550 = 1.32 830/450 = 1.84 1160/550 = 2.11 285/450 = 0.63 215/550 = 0.39

Quarter 1 2 3 4

Average Seasonal Index (0.18 + 0.23 + 0.22 + 0.18)/4 = 0.20 (1.34 + 1.23 + 1.30 + 1.32)/4 = 1.30 (2.08 + 1.97 + 1.84 + 2.11)/4 = 2.00 (0.40 + 0.57 + 0.63 + 0.39)/4 = 0.50

Time-Series Methods
Seasonal Influences
Quarter 1 2 3 4 Year 1 Year 2 Year 3 Year 4

45/250 = 0.18 70/300 = 0.23 100/450 = 0.22 100/550 = 0.18 Projected Annual Demand = 2600 335/250 = 1.34 370/300 = 1.23 585/450 = 1.30 725/550 = 1.32 Average Demand == 2600/4 = 650 = 2.11 520/250 = 2.08 Quarterly 590/300 = 1.97 830/450 1.84 1160/550 100/250 = 0.40 170/300 = 0.57 285/450 = 0.63 215/550 = 0.39

Quarter 1 2 3 4

Average Seasonal Index (0.18 + 0.23 + 0.22 + 0.18)/4 = 0.20 (1.34 + 1.23 + 1.30 + 1.32)/4 = 1.30 (2.08 + 1.97 + 1.84 + 2.11)/4 = 2.00 (0.40 + 0.57 + 0.63 + 0.39)/4 = 0.50

Forecast 650(0.20) = 130

Time-Series Methods
Seasonal Influences
Quarter 1 2 3 4 Year 1 Year 2 70/300 = 0.23 370/300 = 1.23 590/300 = 1.97 170/300 = 0.57 Year 3 Year 4

45/250 = 0.18 335/250 = 1.34 520/250 = 2.08 100/250 = 0.40

100/450 = 0.22 100/550 = 0.18 585/450 = 1.30 725/550 = 1.32 830/450 = 1.84 1160/550 = 2.11 285/450 = 0.63 215/550 = 0.39

Quarter 1 2 3 4

Average Seasonal Index (0.18 + 0.23 + 0.22 + 0.18)/4 = 0.20 (1.34 + 1.23 + 1.30 + 1.32)/4 = 1.30 (2.08 + 1.97 + 1.84 + 2.11)/4 = 2.00 (0.40 + 0.57 + 0.63 + 0.39)/4 = 0.50

Forecast 650(0.20) = 650(1.30) = 650(2.00) = 650(0.50) = 130 845 1300 325

Linear Trend and Seasonality

A more refined method will be discussed

Choosing a Method
FORECAST ACCURACY

FORECAST ACCURACY refers to the difference between forecasts and corresponding actual sales.

Choosing a Method
Forecast Error
Measures of Forecast Error Et = Dt Ft CFE = Et MSE = MAD =

Et2
n

|Et |
n

MAPE =

[ |Et | (100) ] / Dt
n

Choosing a Method
Forecast Error
Absolute Absolute Percent Error, Error, |Et| (|Et|/Dt)(100) 25 20 15 20 20 20 40 35 195 12.5% 8.3 5.0 7.4 8.7 7.7 19.0 12.7 81.3%

Month, Demand, t Dt 1 2 3 4 5 6 7 8 200 240 300 270 230 260 210 275

Forecast, Ft 225 220 285 290 250 240 250 240 Total

Error, Et -25 20 15 20 20 20 40 35 15

Error Squared, Et2 625 400 225 400 400 400 1600 1225 5275

Choosing a Method
Forecast Error
Measures of Error CFE = 15
Month, Demand, Forecast, 15 t E= =D t 1.875 Ft 1 2 MSE 3 = 4 5 6 7 8 Error Squared, Et2 625 400 225 400 400 400 1600 1225 5275 Absolute Absolute Percent Error, Error, |Et| (|Et|/Dt)(100) 25 20 15 20 20 20 40 35 195 12.5% 8.3 5.0 7.4 8.7 7.7 19.0 12.7 81.3%

Error, Et 25 20 15 20 20 20 40 35 15

MAD =

200 240 5275 300 = 8 270 230 260 210 195 275

= 24.4

225 220 285 659.4 290 250 240 250 240 Total

81.3% MAPE = = 10.2% 8

Linear Trend With Seasonality

Carpet example Apply linear trend model 1st & 2nd quarter errors positive 3rd & 4th quarter errors negative Seasonality present Multiplicative model Dt = [a + bt] cs + et a + bt = 135.7 + 12.2 t = linear trend component cs = quarterly seasonal factor

Linear trend applied to carpet data Dt Ft t Yr Qtr Act. Fcst. Errors 1 1 1 160 147.9 +12.1 2 1 2 170 160.1 +9.9 3 1 3 140 172.3 -32.3 4 1 4 150 184.5 -34.5 5 2 1 230 196.7 +33.3 6 2 2 240 108.9 +31.1 7 2 3 180 221.1 -41.1 8 2 4 200 233.3 -33.3 9 3 1 310 245.5 +64.5 10 3 2 310 257.5 +52.3 11 3 3 230 269.9 -39.9 12 3 4 260 282.1 -22.1

Error2 146.4 98.0 1043.3 1190.3 1108.9 967.2 1689.2 1108.9 4160.3 2735.3 1592.0 488.4

MAD = 33.9 MSE = 1360.7

Carpet Data & Trend Line

370 320
1 1 1 2 2 2 2 3 3 3 3 2 3 4 1 2 3 4 1 2 3 4 170 140 150 230 240 180 200 320 310 230 260 160.1 172.3 184.5 196.7 108.9 221.1 233.3 245.5 257.5 269.9 282.1 9.9 -32.3 -34.5 33.3 31.1 -41.1 -33.3 64.5 52.3 -39.9 -22.1 98 1043.3 1190.3 1108.9 967.2 1689.2 1108.9 4160.3 2735.3 1592 488.4

Sales

270 220
Fcst

Carpe t

MAD = 33.9 MSE = 1360.7 147.9 160.1 172.3 184.5 196.7 208.9 221.1 233.3 245.5 257.7 269.9 282.1

Carpet

160 170 140 150 230 240 180 200 320 310 230 260

170 120

Time

Constructing Model
1. 2. 3. 4. 5. 6. 7. 8. Compute 4-period moving averages, e.g., average quarters 1-4, then quarters 2-5 Compute centered moving averages (CMA), [avg for 1-4 + avg for 2-5]/2 Compute seasonal ratios = Actual/CMA = Col(1)/Col(3) Estimate cs = average of seasonal ratios for season s Deseasonalize data = Actual/ cs Estimate a & b for deseasonalized data Forecast = deseasonalized forecast x cs for quarter

1 2

Yr
1 1 1 2 2 2 2 3 3

Qtr

160

(1) Act.
170 140 150 230 240 180 200 310 310

(2) MA

(3) CMA

(4) SI

1.191 134

(5) cs

(6) Deseas.

2 3 4 1 2 3 4 1 2 3 4

3 4 5 6 7 8 9 10 11 12

155.0 172.5 190.0 200.0 212.5 232.5 250.0 262.5 277.5

1.153 147 163.75 181.25 195.00 506.25 222.50 241.25 256.25 270.00 0.855* 0.828 1.179 1.164 0.809* 0.829 1.210 1.148 0.830* 169 0.826 182 1.191 193 1.153 208 0.830 217 0.826 242 1.191 260 1.153 269 0.830 277 0.826 315

3 3

230 260

Computing Terms
c1 = (1.179 + 1.210)/2 = 1.195 x [4/4.011] = 1.191 c2 = (1.164 + 1.148)/2 = 1.156 x [4/4.011] = 1.153 c3 = (0.855 + 0.809)/2 = 0.832 x [4/4.011] = 0.830 c4 = (0.828 + 0.829)/2 = 0.828 x [4/4.011] = 0.826 Totals 4.011 4.000 Use deseasonalized data to compute a & b b = 15.4, a = 117.6 Ft = [117.6 + 15.4 t] cs Ft = [117.6 + 15.4 (6)] 1.153 = 242

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

Yr 1 1 1 1 2 2 2 2 3 3 3 3

Qtr 1 2 3 4 1 2 3 4 1 2 3 4

Dt Act. 160 170 140 150 230 240 180 200 310 310 230 260

Ft Fcst 158 171 136 148 232 242 187 199 305 313 238 250

Error +2 -1 +4 +2 -2 -2 -7 +1 +5 -3 -8 +10

Error2 4 1 16 4 4 4 49 1 25 9 64 100

MAD = 3.9 MSE = 23.4

Case: Yankee Fork and Hoe Company

Forecasting Techniques: Causal/Regression Model

Forecast by Regression/Causal methods estimates sales on the basis of values of other independent factors. Use historical data on independent variables, such as promotional campaigns, economic conditions and competitors actions to predict demand

Quantitative Approach: Causal Method/Regression Model

(Linear Regression)
Y Dependent variable
Deviation, Estimate of or error Y from regression equation

Regression equation: Y = a + bX
Actual value of Y Value of X used to estimate Y

X Independent variable

Causal Methods Linear Regression

Sales (000 units) 264 116 165 101 209 Advertising (000 $) 2.5 1.3 1.4 1.0 2.0

Month 1 2 3 4 5

a b r r2

= = = =

8.137 109.23 0.98 0.96

Causal Methods Linear Regression

300 Sales (thousands of units) 250 200

Month 1 2 150 3 4 100 5

50

Sales (000 units)

Advertising (000 $) 2.5 1.3 1.4 1.0 2.0 + 109.23X

264 116 165 101 209 Y = 8.137

a b r r2

= = = =

8.137 109.23 0.98 0.96

| | | | Forecast 6 1.0 1.5for Month 2.0 2.5 Advertising (thousands of dollars)

X = $1750, Y = 183.015, or 183,015 units

Causal Methods Linear Regression (formula)

Month 1 2 3 4 5 Total Sales, Y Advertising, X (000 units) (000 $) XY 264 116 165 101 209 855 Y = 171 2.5 1.3 1.4 1.0 2.0 8.2 X = 1.64 660.0 150.8 231.0 101.0 418.0 1560.8 X2 6.25 1.69 1.96 1.00 4.00 14.90 Y2 69,696 13,456 27,225 10,201 43,681 164,259

a = Y bX

b=

XY nXY X 2 n(X )2

Causal Methods Linear Regression

Month 1 2 3 4 5 Total Sales, Y Advertising, X (000 units) (000 $) XY 264 116 165 101 209 855 Y = 171 2.5 1.3 1.4 1.0 2.0 8.2 X = 1.64 660.0 150.8 231.0 101.0 418.0 1560.8 X2 6.25 1.69 1.96 1.00 4.00 14.90 Y2 69,696 13,456 27,225 10,201 43,681 164,259

a = Y bX

b=

1560.8 5(1.64)(171) 14.90 5(1.64)2

Causal Methods Linear Regression

Month 1 2 3 4 5 Total Sales, Y Advertising, X (000 units) (000 $) XY 264 116 165 101 209 855 Y = 171 2.5 1.3 1.4 1.0 2.0 8.2 X = 1.64 660.0 150.8 231.0 101.0 418.0 1560.8 X2 6.25 1.69 1.96 1.00 4.00 14.90 Y2 69,696 13,456 27,225 10,201 43,681 164,259

r=

nXY X Y [nX 2 (X) 2][nY 2 (Y) 2]

Coefficient of Correlation (r)

Meanings of several values of r: -1 a perfect negative relationship (as x goes up, y goes down by one unit, and vice versa) +1 a perfect positive relationship (as x goes up, y goes up by one unit, and vice versa) 0 no relationship exists between x and y +0.3 a weak positive relationship -0.8 a strong negative relationship

Designing a Demand Forecasting System: some considerations

Time Frame (How far to forecast?)
Short-range, medium-range, long-range

Appropriate Variable to Forecast, Units of measure (What to forecast?) Forecasting Technique (How to forecast?)
Purpose of forecast and decisions from it Time and effort required Data availability

Examples of Production Resource Forecasts

Forecast Horizon Long Range Medium Range Short Range

Time Span Years Months Days, Weeks

Item Being Forecasted Product Lines, Factory Capacities Product Groups, Depart. Capacities Specific Products, Machine Capacities

Unit of Measure Dollars, Tons Units, Pounds Units, Hours

Demand Forecast Applications

Time Horizon Short Term (03 months) Individual products or services Inventory management Final assembly scheduling Workforce scheduling Master production scheduling Time series Causal Judgment Medium Term (3 months 2 years) Total sales Groups or families of products or services Staff planning Production planning Master production scheduling Purchasing Distribution Causal Judgment Long Term (more than 2 years) Total sales

Application Forecast quantity

Decision area

Facility location Capacity planning Process management

Forecasting technique

Causal Judgment

Implementation & Use Of Forecasting Systems

Model evaluation & testing Partition data set into two parts i) for developing model and ii)testing the model Use of multiple forecasting methods Combine forecasts
average forecasts from several models

Focus forecasting
Focus forecasting uses several models Best model used in each period