|


Operations Management

William J. Stevenson

î
 
 | 


CHAPTER
3

Forecasting

Operations Management, Eighth Edition, by William J. Stevenson

j

 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
|| 


?
:
a A statement about the future value of a variable of
interest such as demand.
a Forecasts affect decisions and activities throughout
an organization
a Accounting, finance
a Human resources
a Marketing
a MIS
a Operations
a Product / service design
| 


ºses of Forecasts

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

| 


a Assumes causal system

past ==> future
a Forecasts rarely perfect because of
randomness
a Forecasts more accurate for
groups vs. individuals ˜ see that you will
get an A this semester.
a Forecast accuracy decreases
as time horizon increases
| 


Elements of a Good Forecast

w


  



| 


—teps in the Forecasting Process

$w 
%

—
"#

 

—
 ! 
 

—

   

—
—
  

 
—

  

 
—


 

| 


Types of Forecasts

a R 
Y uses subjective inputs
a w Y uses historical data
assuming the future will be like the past
a M 
Y uses explanatory
variables to predict the future
| 


R dgmental Forecasts

a §xecutive opinions
a Sales force opinions
a Consumer surveys
a Outside opinion
a Delphi method
a Opinions of managers and staff
a Achieves a consensus forecast
|
 


Time —eries Forecasts

a w  Y longYterm movement in data

a — 
  Y shortYterm regular variations in
data
a Cycle ± wavelike variations of more than one
year¶s duration
a ˜ 
  Y caused by unusual
circumstances
a Õ   Y caused by chance
|




Forecast Variations
?igure 3.1

& 
' 


w

+

()
*(
**
—  ' 

|



£aive Forecasts

º


 

 
 


  


 



|
| 


£aïve Forecasts

a Simple to use
a Virtually no cost

a Quick and easy to prepare

a Data analysis is nonexistent

a §asily understandable

a Cannot provide high accuracy

a Can be a standard for accuracy

|
 


ºses for £aïve Forecasts

a Stable time series data

a F(t) = A(tY )
a Seasonal variations
a F(t) = A(tYn)
a Data with trends
a F(t) = A(tY ) + (A(tY ) ± A(tY
))
|
 


Techniq es for Averaging

a Moving average
a Weighted moving average
a §xponential smoothing
|
 


joving Averages

a j   ± A technique that averages a

number of recent actual values, updated as new
values become available.
n

† Ai
i=
MAn =
n
a 2
   ± More recent values in a
series are given more weight in computing the
forecast.
|
 


—imple joving Average


 
#



|

|
|
#
|
  |  
    
n

† Ai
i=
MAn =
n
|
 


Exponential —moothing

?t = ?t-1 + §(At-1 - ?t-1)

Î ë YYThe most recent observations might
have the highest predictive value.
a Therefore,we should give more weight to the
more recent time periods when forecasting.
|
 


Exponential —moothing

?t = ?t-1 + §(At-1 - ?t-1)

a Weighted averaging method based on previous
forecast plus a percentage of the forecast error
a AYF is the error term, § is the % feedback
|  


Example 3 - Exponential —moothing

ë
 

   



   



 
     
     
     
     
     
     
     
     
     
     
  
|



Picking a —moothing Constant


 

§

i
§
i
 



|
  |
      
ë

| 


Common £onlinear Trends

?igure 3.5

!   

,


-

| | 


Dinear Trend Eq ation

?t

?t = a + bt

a Ft = Forecast for period t ) 

a t = Specified number of time periods

a a = Value of Ft at t = 0
a b = Slope of the line
|  


Calc lating a and b

n † (ty) Y † t † y
b =
n† t
Y ( † t)

† y Y b† t
a =
n
|  


Dinear Trend Eq ation Example

a


 a  a



 
 
   
   





×a
× a 

×á   ×áa 


*× a 

|  


Dinear Trend Calc lation

/((01  /*0 ( 1*)

 . . . "i
/ 01  2 1

812 - 6.3(15)
a = = i
5

y = 143.5 + 6.3t
|  


Associative Forecasting

a ë     
Y used to predict values of
variable interest
a Õ  Y technique for fitting a line to a set
of points
a D   
Y minimizes sum of squared
deviations around the line
|  


Dinear jodel —eems Reasonable

X Y Computed
7 15
relationship
2 10
13 50

4 15 40

14 25 30

15 27 20

10
1 24
0
12 20 0 5 10 15 20 25

14 27
20 44
15 34
7 17
A straight line is fitted to a set of sample points.
|  


Forecast Acc racy

a §rror Y difference between actual value and predicted

value
a Mean Absolute Deviation (MAD)
a Average absolute error
a Mean Squared §rror (MS§)
a Average of squared error
a Mean Absolute Percent §rror (MAP§)
a Average absolute percent error
| | 


jAD, j—E, and jAPE

† Actual  forecast
MAD =
n


† ( Actual  forecast)
MSE =
n Y1

† Actual  forecas / Actual*100)

MAPE =
t
n
| |



Example 10

ë
  3
 

3 434
3 5
4346 
p p
p  
p p    pp
 p p p p p 
 p p   p p
 p pp  
 p p    

p p
p p p 

p p   p p


 p 

 

 p

ë p

| | 


Controlling the Forecast

a Control chart
a A visual tool for monitoring forecast errors
a Used to detect nonYrandomness in errors

a Forecasting errors are in control if

a All errors are within the control limits
a No patterns, such as trends or cycles, are
present
| || 


—o rces of Forecast errors

a Model may be inadequate

a Irregular variations

a Incorrect use of forecasting technique

| | 


Tracking —ignal

Îwracking signal
±Ratio of cumulative error to MAD

wracking signal =
†(ActualYforecast)
MAD
ù
   ! 


 




  
 ' i
| | 


Choosing a Forecasting Techniq e

a No single technique works in every situation

a Two most important factors
a Cost
a Accuracy

a Other factors include the availability of:

a Historical data
a Computers

a Time needed to gather and analyze the data

a Forecast horizon
| | 


Exponential —moothing
| | 


Dinear Trend Eq ation

| | 


—imple Dinear Regression