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4677202 Forecasting APICS

4677202 Forecasting APICS

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Published by: Gnanamoorthi Subramaniam on Jul 11, 2011
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Forecasting Forecasting

The Starting Point for All Planning

Slide 1 of 56

Overview
q q q q q q

q

Introduction Qualitative Forecasting Methods Quantitative Forecasting Models How to Have a Successful Forecasting System Computer Software for Forecasting Forecasting in Small Businesses and Start-Up Ventures Wrap-Up: What World-Class Producers Do

Slide 2 of 56

Demand Management

Independent demand items are the only items demand for which needs to be forecast q These items include:
q
q q

Finished goods and Spare parts

Slide 3 of 56

Demand Management
Independent Demand
(finished goods and spare parts)

A

Dependent Demand
(components)

B(4)

C(2)

D(2)

E(1)

D(3)

F(2)

Slide 4 of 56

Introduction Introduction
q

q

q

Demand estimates for independent demand products and services are the starting point for all the other forecasts in POM. Management teams develop sales forecasts based in part on demand estimates. Sales forecasts become inputs to both business strategy and production resource forecasts.

Slide 5 of 56

Other Forecast Method(s) Demand Estimates Sales Forecast Management Team Business Strategy Production Resource Forecasts Slide 6 of 56 . Economic.Forecasting is an Integral Part Forecasting is an Integral Part of Business Planning of Business Planning Inputs: Market.

Examples of Production Resource Forecasts Forecast Horizon Long-Range Time Span Years q Item Being Forecast Product lines q Factory capacities q Planning for new products q Capital expenditures q Facility location or expansion q R&D Product groups Department capacities q Sales planning q Production planning and budgeting q q Units of Measure Dollars. etc. tons. Short-Range Weeks Specific product quantities q Machine capacities q Planning q Purchasing q Scheduling q Workforce levels q Production levels q Job assignments q Physical units of products Slide 7 of 56 . etc. Medium-Range Months Dollars. tons.

Forecasting Methods Qualitative Approaches q Quantitative Approaches q Slide 8 of 56 .

Slide 9 of 56 .4% 48 Source: Nada Sanders and Karl Mandrodt (1994) “Practitioners Continue to Rely on Judgmental Forecasting Methods Instead of Quantitative Methods. Note: More than one response was permitted.6% 41. 2. 92-100.Qualitative Forecasting Applications Small and Large Firms Technique Manager’s Opinion Executive’s Opinion Sales Force Composite Number of Firms Low Sales 40.” Interfaces. 24. vol.6% 35.7% 29.7% 40. pp. no.6% 27 (less than $100M) (more than $500M) High Sales 39.

Qualitative Approaches q q q Usually based on judgments about causal factors that underlie the demand of particular products or services Do not require a demand history for the product or service. therefore are useful for new products/services Approaches vary in sophistication from scientifically conducted surveys to intuitive hunches about future events Slide 10 of 56 .

Qualitative Methods Qualitative Methods q q q q q q Executive committee consensus Delphi method Survey of sales force Survey of customers Historical analogy Market research Slide 11 of 56 .

e. history will tend to repeat itself Analysis of the past demand pattern provides a good basis for forecasting future demand Majority of quantitative approaches fall in the category of time series analysis Slide 12 of 56 . i..Quantitative Forecasting Approaches Quantitative Forecasting Approaches q q q Based on the assumption that the “forces” that generated the past demand will generate the future demand.

3 6.8% 22.3 48 High Sales Source: Nada Sanders and Karl Mandrodt (1994) “Practitioners Continue to Rely on Judgmental Forecasting Methods Instead of Quantitative Methods.6 20. 2. vol.6 14.7% 3.” Interfaces.2 14.8% 18. pp. no.5% 14. 24.8 27. Note: More than one response was permitted. 92-100.1 10.6% 14.Quantitative Forecasting Applications Small and Large Firms Technique Moving Average Simple Linear Regression Naive Single Exponential Smoothing Multiple Regression Simulation Classical Decomposition Box-Jenkins Number of Firms Low Sales 29. Slide 13 of 56 .2% 3.7% 3.7% 27 (less than $100M) (more than $500M) 29.4 8.

they can be used to develop a forecast Slide 14 of 56 .g. historical demand Analysis of the time series identifies patterns Once the patterns are identified.. e.Time Series Analysis Time Series Analysis q q q A time series is a set of numbers where the order or sequence of the numbers is important.

Components of Time Series What’s going on here? x x x x x Sales x x x xx x x xx x x x x x x x xxx x x x x x xxxx x x x x x x x x x x x x x x 1 2 3 4 Year Slide 15 of 56 .

may take years Irregular variations are jumps in the level of the series due to extraordinary events Random fluctuation from random variation or unexplained causes Slide 16 of 56 .Components of Time Series Components of Time Series q q q q q Trends are noted by an upward or downward sloping line Seasonality is a data pattern that repeats itself over the period of one year or less Cycle is a data pattern that repeats itself...

Actual Data & the Regression Line 160 140 Power Demand 120 100 80 60 40 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year l Actual Data Linear (Actual Data) Slide 17 of 56 .

Seasonality Seasonality Length of Time Before Pattern Is Repeated Year Quarter Year Month Year Week Month Week Month Day Week Day 7 Number of Length of Seasons Season in Pattern 4 12 52 4 28-31 Slide 18 of 56 .

Eight Steps to Forecasting q q q q q q q q Determining the use of the forecast--what are the objectives? Select the items to be forecast Determine the time horizon of the forecast Select the forecasting model(s) Collect the data Validate the forecasting model Make the forecast Implement the results Slide 19 of 56 .

Quantitative Forecasting Approaches q q q q q Linear Regression Simple Moving Average Weighted Moving Average Exponential Smoothing (exponentially weighted moving average) Exponential Smoothing with Trend (double smoothing) Slide 20 of 56 .

and a dependent variable. Y. X. Assumed to be linear (a straight line) Form: Y = a + bX Y = dependent variable X = independent variable a = y-axis intercept b = slope of regression line q q q q Slide 21 of 56 .Simple Linear Regression Simple Linear Regression q q q Relationship between one independent variable.

However.Simple Linear Regression Model Yt = a + bx Y 0 1 2 3 4 5 q x (weeks) b is similar to the slope. its formulation is not as straight-forward as our usual notion of slope Slide 22 of 56 . since it is calculated with the variability of the data in mind.

Calculating a and b a = y .n(x ) 2 2 b= Slide 23 of 56 .bx ∑ xy .n(y)(x) ∑ x .

Regression Equation Example Week 1 2 3 4 5 Sales 150 157 162 166 177 Develop a regression equation to predict sales based on these five points. Slide 24 of 56 .

4 2499 Average Sum Average Sum ∑ xy .5 Slide 25 of 55 .bx = 162.4)(3 ) = 63 = 6.(6.4 .Regression Equation Example Week Week*Week Sales Week*Sales 1 1 150 150 2 4 157 314 3 9 162 486 4 16 166 664 5 25 177 885 3 55 162.3)(3) = 143.n( x ) 2 2 a = y .n( y)(x) = 2499 .5(162.3 b= 55 − 5(9) 10 ∑ x .

3t 180 175 170 165 160 155 150 145 140 135 1 2 3 4 5 Sales Sales Forecast Period Slide 26 of 55 .Regression Equation Example y = 143.5 + 6.

Forecast Accuracy q q Accuracy is the typical criterion for judging the performance of a forecasting approach Accuracy is how well the forecasted values match the actual values Slide 27 of 56 .

Monitoring Accuracy Monitoring Accuracy q q Accuracy of a forecasting approach needs to be monitored to assess the confidence you can have in its forecasts and changes in the market may require reevaluation of the approach Accuracy can be measured in several ways Mean absolute deviation (MAD) Mean squared error (MSE) q q Slide 28 of 56 .

F ) i i i =1 n n Slide 29 of 56 .Mean Absolute Deviation (MAD) n MAD = ∑ Actual i =1 demand .Forecast demand n i MAD = ∑ (A .

Mean Squared Error (MSE) MSE = (Syx)2 Small value for Syx means data points tightly grouped around the line and error range is small.25(MAD) When the forecast errors are normally distributed Slide 30 of 56 . The smaller the standard error the more accurate the forecast. MSE = 1.

Example--MAD Month 1 2 3 4 5 Sales 220 250 210 300 325 Forecast n/a 255 205 320 315 Determine the MAD for the four forecast periods Slide 31 of 56 .

Solution Month 1 2 3 4 5 Sales 220 250 210 300 325 Forecast Abs Error n/a 255 5 205 5 320 20 315 10 40 MAD = ∑A t=1 n t .Ft n 40 = = 10 4 Slide 32 of 56 .

. .Simple Moving Average q q q q An averaging period (AP) is given or selected The forecast for the next period is the arithmetic average of the AP most recent actual demands It is called a “simple” average because each period used to compute the average is equally weighted . more Slide 33 of 56 .

Simple Moving Average Simple Moving Average q q q It is called “moving” because as new demand data becomes available. the oldest data is not used By increasing the AP. the forecast is less responsive to fluctuations in demand (low impulse response) By decreasing the AP. the forecast is more responsive to fluctuations in demand (high impulse response) Slide 34 of 56 .

n Ft = n q q Let’s develop 3-week and 6week moving average forecasts for demand.+A t... Assume you only have 3 weeks and 6 weeks of actual demand data for the respective forecasts Slide 35 of 56 .Simple Moving Average Week 1 2 3 4 5 6 7 8 9 10 11 12 Demand 650 678 720 785 859 920 850 758 892 920 789 844 A t-1 + A t-2 + A t-3 +.

00 789 856.67 758 876.33 802.00 854.Simple Moving Average Week 1 2 3 4 5 6 7 8 9 10 11 12 Dem and 3-Week 6-Week 650 678 720 785 682.67 920 788.83 Slide 36 of 55 .67 815.33 920 833.00 850 854.50 844 867.67 859 727.67 866.67 768.00 892 842.33 844.

Simple Moving Average 1000 900 Demand 800 700 600 500 1 2 3 4 5 6 7 8 9 10 11 12 We e k Demand 3-Week 6-Week Slide 37 of 55 .

they are not equal This allows more recent demand data to have a greater effect on the moving average. .Weighted Moving Average q q q This is a variation on the simple moving average where instead of the weights used to compute the average being equal. therefore the forecast . more Slide 38 of 56 . .

0 and generally decrease in value with the age of the data The distribution of the weights determine impulse response of the forecast Slide 39 of 56 .Weighted Moving Average Weighted Moving Average q q The weights must add to 1.

5 t-2: .0): t-1: . .2 Slide 40 of 56 .3 t-3: .+w n A t-n Week 1 2 3 4 Demand 650 678 720 Determine the 3-period n weighted moving average ∑ wi = 1 i=1 forecast for period 4 Weights (adding up to 1.Weighted Moving Average Ft = w 1A t-1 + w 2 A t-2 + w 3A t-3 +..

5 (7 2 0 )+ .2 Slide 41 of 56 . 7 8 )+6 5(0 ) 3 (6 .4 F4 = .Solution Week 1 2 3 4 Demand 650 678 720 Forecast 693.

Exponential Smoothing q q The weights used to compute the forecast (moving average) are exponentially distributed The forecast is the sum of the old forecast and a portion of the forecast error Ft = Ft-1 + α (At-1 . .Ft-1 ) . more q Slide 42 of 56 . .

0) A large α provides a high impulse response forecast A small α provides a low impulse response forecast Slide 43 of 56 . α .0 (excluding 0. must be between 0.Exponential Smoothing Exponential Smoothing q q q The smoothing constant.0 and 1.0 and 1.

Exponential Smoothing Example Week 1 2 3 4 5 6 7 8 9 10 Demand 820 775 680 655 750 802 798 689 775 q Determine exponential smoothing forecasts for periods 2 through 10 using α =. q Let F1=D1 Slide 44 of 56 .60.10 and α =.

00 820.64 776.61 780.35 786.88 776.09 795.6 820.1 820.26 783.00 815.00 817.59 788.77 Slide 45 of 55 .30 808.95 787.00 820.50 801.57 786.Exponential Smoothing Example Week 1 2 3 4 5 6 7 8 9 10 Demand 820 775 680 655 750 802 798 689 775 0.00 820.38 786.69 0.53 785.

6 Slide 46 of 56 .Effect of α on Forecast 9 00 8 00 Demand 7 00 6 00 5 00 1 2 3 4 5 6 7 8 9 10 Week De man d 0.1 0.

Criteria for Selecting a Forecasting Method q q q q q q Cost Accuracy Data available Time span Nature of products and services Impulse response and noise dampening Slide 47 of 56 .

Reasons for Ineffective Forecasting Reasons for Ineffective Forecasting q q q q q q Not involving a broad cross section of people Not recognizing that forecasting is integral to business planning Not recognizing that forecasts will always be wrong (think in terms of interval rather than point forecasts) Not forecasting the right things (forecast independent demand only) Not selecting an appropriate forecasting method (use MAD to evaluate goodness of fit) Not tracking the accuracy of the forecasting models Slide 48 of 56 .

Forecast demand) i =1 n i MAD = ∑ (A .F ) i i i =1 n MAD Slide 49 of 56 .How to Monitor and How to Monitor and Control a Forecasting Model Control a Forecasting Model q Tracking Signal Tracking signal = ∑ (Actual demand .

Tracking Signal: What do you notice? 40 35 Sales 30 25 20 0 1 2 3 4 5 6 7 8 9 10 11 Pe riod Slide 50 of 56 .

Sources of Forecasting Data Sources of Forecasting Data q q q q q q q q Consumer Confidence Index Consumer Price Index Housing Starts Index of Leading Economic Indicators Personal Income and Consumption Producer Price Index Purchasing Manager’s Index Retail Sales Slide 51 of 56 .

excellent short range forecasts as well Slide 52 of 56 .. which is readily available today Do not overlook the short run.Wrap-Up: World-Class Practice q q q q q Predisposed to have effective methods of forecasting because they have exceptional long-range business planning Formal forecasting effort Develop methods to monitor the performance of their forecasting models Use forecasting software with automated model fitting features...

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