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OPERATIONS MANGEMENT (ME0428)

Productions

Management

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Services

Management

Operations
Management

Syllabus Flow Chart


Unit 1
Unit 2
Unit 3
Unit 4
Unit 5
Unit 6
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ME0428

Operations Management concept

Design and Capacity Planning


Demand Forecasting
Aggregate Planning and Master Scheduling

Scheduling and controlling Production Activities


Just in Time Manufacturing

Unit-1

Course Outcomes
At the end of the course, the student will be able to:
1. Understand the factors affecting productivity and develop
decision support system.
2. Understand the cost Minimization in job shop layout and balance
assembly line layouts.
3. Analyze different qualitative and quantitative forecasting models.
4. Evaluate different material and capacity requirement planning
methods.

5. Create and solve different job scheduling strategies.


6. Understand the Optimisation of time in material logistic process.
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Unit 3

2016-17

Demand Forecasting: Forecasting time horizon, short and long


range forecasting, sources of data, types of forecasting, qualitative
forecasting techniques, quantitative forecasting models- linear
regression, moving average, exponential smoothing, monitoring and
controlling forecasting models, Numerical problems.

SLE: Forecasting as a planning tool

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OPERATIONS MANGEMENT (ME0428)

2014-15

Unit 3: Demand Forecasting: Forecasting time horizon,


short and long range forecasting, sources of data, types of
forecasting, qualitative forecasting techniques, quantitative
forecasting models- linear regression, moving average,
exponential smoothing, monitoring and controlling forecasting
models, Numerical problems.
SLE:
Forecasting as a planning tool

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Unit -3

Demand Forecasting :
Forecasting as a planning tool,
forecasting time horizon,
Short and long range forecasting,
source of data,
type of forecasting, qualitative forecasting
techniques, quantitative forecasting models- linear regression,
moving average ,
exponential smoothing, monitoring and
controlling forecasting models,
Numerical Problems.

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2013-14

Introduction:
A forecasting is an estimate of an event which will happen in future. The event may
be demand of a product. Rainfall at a particular place , population of a country, or
growth of a technology. The forecast value is not a deterministic quantity. Since , it is
only an estimate based on the past data related to a particular event.

Forecast is a combination of plans for activity in various parts of a company.

Technology forecast: Hardware and software


GOI has Technology Information forecasting and Assessment of council
[TIFAC] under the Ministry of Science and Technology.
Economic Forecasting : 1) Future of revenues 2) Level of business growth 3) level of
employment 4) level of inflation.

Demand forecast: The demand forecast gives the expected level of demand for goods
or service. This is the basic input for business planning and control. Hence, the
decision for all the function of any corporative house are influenced by the demand
forecast.
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Introduction:
In any business, planning done based on the estimation of future events,

In fact, any business action taken today must be based on yesterdays plan and tomorrows
Expectations.
Forecasting is the estimation of future events, with respect to its timing and magnitude.
Demand forecasting is the estimation of likely sales demand for a particular future period.
** activities w r t to investment and inputs
**Quality, timing and location or place of availability of the products.

Forecasting is diff from prediction, ( past data).


Forecasting is a systematic and scientific projection of the future event, Prediction is a purely
based on manager skills, experience and judgment.

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Forecasting

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The Effect of Inaccurate Forecasting

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Forecasting Process
1. Identify the purpose
of forecast

2. Collect historical data

3. Plot data and identify


patterns

6. Check forecast
accuracy with one or
more measures

5. Develop/compute
forecast for period of
historical data

4. Select a forecast
model that seems
appropriate for data

7.
Is accuracy of
forecast
acceptable?

No

8b. Select new forecast


model or adjust
parameters of existing
model

Yes
8a. Forecast over
planning horizon

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9. Adjust forecast based


on additional qualitative
information and insight

10. Monitor results and


measure forecast
accuracy

Forecasting
Predicting the future
Qualitative forecast methods
Subjective
Quantitative forecast methods
based on mathematical formulas

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Forecasting
Quality Management
Accurately forecasting customer demand is a key to
providing good quality service
Strategic Planning
Successful strategic planning requires accurate forecasts of
future products and markets

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Need for Demand Forecasting :


1. Majority of the activities of the industries depend on the future sales
2. Demand forecasting is needed to take decisions with respect to investment in men,,
machinery, materials etc.
3. Forecasting is needed to schedule production activities in order to ensure maximum
utilization of plants capacity.
4. Forecasting is needed for material planning in order to make materials available in
right quantities and at the right time for production.
5. Forecasting is needed to throw light on the future trend of the market.
6. Forecasting is always necessary in the changing and uncertain technical, economical
and market scenario.

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Forecasting objectives and uses


i) Long term objectives
ii) Short term objectives
Long Term Objectives of forecasting :

Long term objectives are those


which do not change In the immediate future. In other words, long term objectives reflect
the companys expectation of magnitude of business for many years to come.
Decisions taken to achieve Long-term objectives are strategic in nature.
1. Deciding Plant Capacity ( Expectation of the demand, Economic requirement, )
If the plant is too small to satisfy the demand. There is loss of business. If the plant is
too big, the total cost on the product increases.
2. Man-power Planning : Reliable and accurate forecast helps the management in
determining manpower requirement and plan for the same.
3. Long- run Production Planning : ( Sales demand, fluctuation in the market)
4. Financial Requirement for Long- run : (Capital and Capital Expenditure)
5. Budgetary Control Over Expenditure : The entire activity of budgeting depending
upon the sale forecast. Sales budget is first prepared followed by capital budget,
materials budget and so on. Budgets helps on in controlling expenditure by indentifying
variation in actual expenditures and planned expenditure.
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Short- term objectives of Forecasting:


1. Formulation of Production Schedules : Forecasting helps to formulate a suitable
production schedule in order to meet the demand. Problems of underproduction
or overproduction must be avoided for better results.
2. Regulate Supply of Raw Materials: ( planned and supplied)

3. Better Utilization of Plant Capacity : ( Expected demand)


4. Regulate Supply of Labour :
5. Forecasting of short-term financial requirement: On the basis of sales forecast, It is
possible to determine the financial requirements of the enterprise required to produce
the desired output and arrange it accordingly well in advance.

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Types of Forecasting Methods


Depend on
time frame
demand behavior
causes of behavior

Time Frame

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Indicates how far into the future is forecast


Short- to mid-range forecast
typically encompasses the immediate future
daily up to two years
Long-range forecast
usually encompasses a period of time longer than two years

Long-term, short term and intermediate Forecasts


Planning Period for future Organization decisions

Individual Decisions

Short term
( 1-5 weeks)

Assignments of orders to
specific
facilities
and
employees.
Dispatching
to
meet
delivery schedules

Arrangement
of
professional and social
appointments. Selection of
a place for a Week-end trip.
Choice of entertainment for
the week-end

Intermediate term
( 1- 24 weeks)

Size of work force to


employ.
Inventories
required. Amount of subcontracting needed.

Attending an education
course. Painting the house.
Selection of a place summer
vacation.

Long term
(2- 10 years)

Type of Products and


services to offer. Types and
sizes of markets to serve.
Processes and technologies
to employ.
Decision regarding plant
location and plant capacity.

Type and level of education


to
pursue.
Career
consideration. Selection of
an area to buy a site or
house. Choice of a spouse

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Demand Behavior

Trend
a gradual, long-term up or down movement of demand
Random variations
movements in demand that do not follow a pattern
Cycle
an up-and-down repetitive movement in demand
Seasonal pattern
an up-and-down repetitive movement in demand occurring periodically

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Forms of Forecast Movement

Random
movement

Demand

Demand

Demand Behavior

Demand

Time
(c) Seasonal pattern

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Time
(b) Cycle
Demand

Time
(a) Trend

Time
(d) Trend with seasonal pattern

Uses of Forecasting :
1. Helps in Planning future Activity Levels : ( Sales, Production, inventory, supply of capital)
2. Helps Maintaining Good Labour Relation: ( hiring , firing. OT, and Relation)
3. Helps in Better Co-ordination of Resources : ( wastes and inefficiencies)

4. Helps Customers : ( competent pricing of product)


5. Helps in Production, Planning and Control : ( minimize Fluctuation in production)
6. Helps in collective responsibility : (all department)
7. Helps Material Management and Use of Capital :

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Limitations of forecasting
1. You can never plan the future by the past
2. Forecasting are always estimates. They are rarely accurate in practice
3. Usage of assumptions and guess work leads to the possibility of errors
4. Arrival of new products, technological break through, economic slumps, war-like
situations etc. All make forecasts go haywire.
5. Even if the forecasts are good, there may be an inexperienced or inefficient sales
force to push the products.

6. Forecasts of new products are always difficult, in the absence of past data.
7. Forecasting can be tricky business. Bad forecasting can make or break new companies.

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The Effect of Inaccurate Forecasting

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Forecast variable or Factors affecting forecasting


1.
2.
3.
4.

Type of Forecasting
Time horizon being forecast.
Data base available.
Methodology of forecast.

1. Type of Forecast:
Variable : i) Controllable ( Advertisement, budget, inventory levels )
ii) Uncontrollable ( Product demand competition, raw material cost. etc.

Other area where forecasting are made: Technological forecasts, economic forecasts
Environmental forecasts, forecast on natural resources

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2. Time horizon: short term , long term and intermediate term.


Forecast technique can change with changes in time horizon .
3. Data base Quantitative and Qualitative :
Forecast techniques become more dependable if they use quantitative data
rather then qualitative data.
Example. Product price info, Previous demands, stock market index.
4. Forecasting Methodology : Subjective and objective

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Examples

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Classification of Forecasting Methods


Qualitative Techniques:
I.

Opinion and judgmental Methods


1) Opinion survey method
2) Market Trials method
3) Delphi Technique
4) Nominal Group Technique

Quantitative Techniques:
II. Time- Series Methods
1) Simple Average
2) Simple Moving Average
3) Weighted Moving Average
4) Simple Exponential Smoothing
5) Exponential Smoothing with Trend Adjustment

III. Least square or Regression Methods


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Computer

Forecasting Methods
Time series
statistical techniques that use historical demand data to
predict future demand

Regression methods
attempt to develop a mathematical relationship between
demand and factors that cause its behavior

Qualitative
use management judgment, expertise, and opinion to predict
future demand

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I. Opinion and Judgmental Methods


These are commonly used techniques in business and industries. They are subjective
Methods which relay heavily on the past experience and skills of people. Some of the
Judgmental or Qualitative Techniques are :
1. Opinion Survey or Market Research Method: Simple and practical method.
used for new products,
Opinion are collected from the prospective buyers regarding why they buy a
particular product, what they expect from the product and so on.
Surveying by experts

2. Market Trials method: When a product concept is entirely new to the customer
or market, it is very difficult to anticipate the acceptability of the product. In such cases,
a trial-run of the new product in the market is suggested. Such a trial is like a controlled
experiment in which the market area and the method of presentation are carefully selected
and controlled. Usually the cost of a trial-run is high. This method is recommended to
Consumable goods like toothpaste , shaving accessories, cosmetics, software packages etc.

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3. Delphi Technique :
Few experts, Designed for the minimize bias and error of judgment when compared
to other expert opinion methods. Expert panel, experts can be both from inside
and outside the organization, Co-ordinator .
Examples:
1) When could be the petroleum reserves of the country be exhausted?
2) When will the Indian population overtake that of the Chinese?
3) What would be the effect of Internet on E-Commerce in India ten years from now

The Delphi Technique procedure works as follows:

Smart Phone

1) The Co-ordinator prepares a questionnaire in writing and sends it to each experts in the
panel. Each expert makes independent predictions not knowing what others are predicting
2) The co-ordinator brings the written predictions from all the experts together, edits them
and summarizes them.
3) On the basis of summary, the co-ordinator writes a new set of questions and gives them to
the experts. These are answered in writing.
4) Again, the co-ordinator edits and summaries the answers, repeating the process until the
co-ordinator is satisfied at the overall consensus arrived at by the experts.
Thus the Delphi method is an iterative procedure in which revisions are carried out by the
Experts till the co-ordinator gets a stable response.
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Advantages of Delphi Technique:


1) The experts which make up the Delphi panel usually have diverse backgrounds each
contributing in a specialized way.

2) The experts do not meet each other. Therefore there will not be any conflicts between them
3) There is no domination of one man over others
Disadvantages:

1) It is a tedious and time- consuming method.


2) If the co-ordinator is not talented enough to summarize wide-ranging predictions form
the experts, the technique would fail.
3) Deadlocks are difficult to resolve.

Many groups
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4. Nominal Group Technique:


Like in the Delphi Technique, Nominal Group technique also comprises of a panel of experts
But here they work together in a meeting to arrive at a consensus through discussion.
The co-ordinator chairs and conducts the meeting giving ample opportunity for everybody
to speaks and answer to the questions posed. The success of the Nominal Group process
lies in clearly identifying questions , allowing creativity and innovation, encouraging discussion
and ultimately arriving at a consensus.

Work together

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II. Time- Series Methods


Time series methods are extensively used for forecasting purposes in the industry. In Time
Series analysis, sales demand is consider to be a function of time. In other words, Time
Series refers to all the previous demands arranged in a chronological order as a dependent
Variable and time as an independent variable.
Example : Sales of refrigerators

Components of Time Series


The time series analysis consists of determining the trend underlying the demand and
Extrapolating the future trend. Statistical methods are actually used to determine the trend.

Y = f { TCSR }

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Y = Forecasted value
T = Trend
C = Cyclic Variations
S = Seasonal Variations
R = Irregular fluctuations

Trend
a gradual, long-term up or down movement of demand
Ex
Random variations
movements in demand that do not follow a pattern
Ex. Aviation industry and tourism industry, stock market
index
Cycle
an up-and-down repetitive movement in demand
Ex. Demand of gold
Seasonal pattern
an up-and-down repetitive movement in demand occurring
periodically
Ex. Sales of Umbrella during monsoon and summer, air
cooler during summer.
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Random
movement

Demand

Demand

Forms of Forecast Movement

Demand

Time
(c) Seasonal pattern

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Time
(b) Cycle
Demand

Time
(a) Trend

Time
(d) Trend with seasonal pattern

II. Time- Series Methods


1) Simple Average
2) Simple Moving Average
3) Weighted Moving Average
4) Simple Exponential smoothing
5) Exponential Smoothing with trend Adjustment

1) Simple Average:

a simple average is the average of the demands occurring in all


previous periods. The demands for all periods are equally weighted.
SA = Sum of demands for all periods/ Numbers of periods
n

SA =
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Di
i 1

= (D1 + D2 + D3+ Dn)/n

Where
n = number of periods
Di = demand in the i th period

2) Simple Moving Average : This is nothing but the average of demands occurring is a
fixed number of recent periods. This is known as moving average and is
forecast as the future demand.
MA = Sum of demands for periods / Chosen number of periods
n

Di

MA =

t 1

n
MA =
Where

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1
N

D1 + 1 D2 + 1 D3+ ------- 1 Dn
N

N= the chosen number of periods


t = 1 is the oldest period in the n period average
i = n is the most recent period
Di = the demand in the ith period.

Problem. 3-month Simple Moving Average

MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov

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ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
-

MOVING
AVERAGE

103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0

i=1

MA3 =

Di

3
=

90 + 110 + 130
3

= 110 orders for Nov

Problem. 5-month Simple Moving Average

MONTH

Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov

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ORDERS
PER MONTH

120
90
100
75
110
50
75
130
110
90
-

MOVING
AVERAGE

99.0
85.0
82.0
88.0
95.0
91.0

MA5 =

i=1

Di

90 + 110 + 130+75+50
5
= 91 orders for Nov

Result plot. Smoothing Effects


150
5-month

125

Orders

100
75
3-month

50
Actual

25
0

|
Jan

|
Feb

|
Mar

|
Apr

|
May

|
June

Month

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|
July

|
Aug

|
Sept

|
Oct

|
Nov

3) Weighted Moving Average : In Simple Average and simple moving average methods, equal
is given to all the previous periods but sometimes the forecaster would like to attach
more importance to more recent periods and lesser importance to older periods.
In other words, the more recent demands are considered to be more indicative of
the future demands than older demands. Weighted moving average is done by
assigning different weights to different periods but whose sum is equal to one.
WMA = Sum of demands for the chosen number of periods each multiple by
its respective weightage.
n

Ct Dt

WMA =

Where 0

Ct

t 1

Ct
t 1

Ct = Weightage to the time period t


Dt = Demand in the time period t
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1 and

Problem.1
1) The past data for the sales of wet grinder of a particular company in an area is shown below
Forecast the demands for the month of july 2001 using
a) Simple average for all previous months
b) A-three-month moving average
c) A three month moving average where the weights are 0.5 for the latest month, 0.3 and
0.2 for the months previous to that respectively.

Month
Jan 2001
Feb
March
April
May
June
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Sales
585
610
675
750
860
970

Solution:
A)

Simple Average (SA) = Sum of demands for all periods/Number of periods


= (585+610+657+750+860+970)/6 = 741.667
SA = 741.667 units

B) 3-months Moving Average (MA) =


= (Sum of demands of periods)/ Chosen number of periods
MA = (750 + 860 + 970 )/3 = 860

MA = 860 units
Forecast for july 2001 using 3- months Moving Average = 860 units
C) 3-month weighted moving average where weight are
June = 0.5 , May = 0.3, April = 0.2
n

Weighted Moving Average

Ct Dt

WMA =
t 1

WMA = (0.5 X 970 + 0.3 X 860 + 0.2 X 750 )


WMA = 893 units
Forecast for july 2001 using a 3 month
Weighted moving average = 893 units
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Since different methods give


different forecast, it is obvious
that a certain method selected
based on its performance as a
forecast.

Problem . 2
Compute four- months moving average and weighted moving average for the data given below.
Assume the weight for the most recent period is 3 times as that of the previous two periods.
Month Jan Feb
Sales
250 210
in 100s

Mar
223

Apr
270

May
245

June
261

July
212

Aug
212

Sept
246

Oct
252

Nov
261

Dec
224

Solution :
i) Four-month moving average (MA) = ( 246 + 252 + 261 + 224)/ 4 = 245.75
MA = 245.75 x 100 = 24575 units
ii) Four- month Weighted moving average:
( If the weight for December has to three times the weight of October or November, then
by trial and error, weight for)
Dec
= 0.54
4-month weighted moving average :
Nov
= 0.18
WMA = 100(0.54 x 224 + 0.18 x 261 + 0.18 x 252 + 0.10 x 246)
Oct
= 0.18
WMA = 100 x 237.9
September = 0.10
WMA = 23,790 units.

Total = 1.00
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Problem 3.
1) A food processor uses a moving average to forecast next months demand. Past actual
demand ( in units) is as shown in the accompanying table.
i) Compute a simple 5-month moving average to forecast demand for month 52
ii) Compute a weighted a weighted 3-month moving average where the weight are highest
for the latest months and descend in order 3,2,1

Month
43
44
45
46
47
48
49
50
51
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Actual Demand
105
106
110
110
114
121
130
128
137

[Hint : Take weight for latest months as 3/6


And for the 2 preceding months as 2/6 and
1/6 respectively.
5-month MA = 126 units
Weighted 3-month Moving average:
= ( .5 x 137 + .33 x 128 + .16 x 130) =131.54 units

Simple Exponential Smoothing


SES is nothing but a weighted moving average which weighs the past data in an exponential
manner so that the most recent data carry more weight than the older data in the moving
average. In other words, the weights given to older demands decreases progressively
In the moving average. A SES techniques considers only trend values and does not take
Into account seasonal indexes or seasonal adjustments.

Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
Ft = Ft-1 +

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( Dt-1-Ft-1)
Ft = Forecast for the time period t
Ft-1 = Forecast for the time period t-1 ( Previous forecast)
= Smoothing constant (0
1)
Dt-1 = Actual demand for the time period t-1

Selection of a smoothing constant(coefficient) (alpha)


1) The smoothing constant is a numerical parameter that determines the weighting of old
demands

2) assumes values between 0 and 1. When is 1, the forecast is equal to the previous
actual demand. When is equal to zero, the forecast is the same as the forecast for the
previous period.

3) Higher values places heavy weight on the most recent demand. In other words, higher
values gives more imp to the recent demands and tends to place the new forecast nearer to the
recent demands. For example, higher values are taken in case of products which register
rapid and dramatic growth, in which case the forecast for the next period is more likely to be in
terms of the recent actual demands, Higher values are also assumed in case of new products.

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4) Lower values weights recent demand less heavily. In other words, lesser values
gives almost as much imp to older demands as it does to recent demands, Lower values
tends to place the forecast nearer to previous forecast than nearer to recent to recent demand.
Lower values are considered for those products which have been in the market for a long
time and whose demand is quite stable. The value of is often kept in the range of 0.005 to
0.30 in order to smooth any sudden changes. Products like colegate toothpaste, Life buoy
soap or other consumer items which have a long- standing stability have typical lower
values.

5) In some cases, values are assumed based on the Length of the moving average in
other words, can be calculated using the relation = 2/(n+1)
For example, a 12-month moving average has a value or 0.153 obviously, longer the length
of the moving average lower are the value.

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Problem
1) The demand for a disposable plastic tubing in a hospital for September was 300 units
and for October was 350 units. Using 200 units as the September forecast and a
Smoothing coefficient of 0.7 to weight recent demand more heavily, forecast the
demand in November.
Solution:
Month
Sept
Oct
Nov
Demand
300
350
?

= 0.7 , Fsept = 200


Ft = Ft-1 + ( Dt-1 Ft-1 )
t = November then t-1 = October
Dt-1 = Demand for October = 350

Ft-1 = Forecast for October ?


If t = Oct then t-1 = Sep
Dt-1 = Demand for Sep = 300
Ft-1 = Forecast for September = 200
Ft = Forecast for October
Therefore Ft = Ft-1 + ( Dt-1 Ft-1 )
Foct = 200 +0.7 (300-200)
Foct = 270

FNov = Foct +

( Doct Foct) = 270 + 0.7 (350 -270)

Fnov = 326 units ( This is the forecast for November)


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Problem.
A firm uses simple exponential smoothing with
= 0.2 to forecast demand. The forecast
For the first week of January was 400 units, where as actual demand turned out to be 450
Units.
a) Forecast the demand for the second week of January.
b) Assume that the actual demand during the second week of January turned out to be 460
units. Forecast the demand up to February third week, assuming the subsequent demands
as 465, 434, 420, 498, and 462 units.

Solution :

a) The forecast for the second week of January is computed as


shown below.
Ft = Ft-1 +

( Dt-1 Ft-1

F2 = 400 + 0.2 ( 450 -400)

= 410 units.
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b) The working for the remaining weeks are shown in tabular form.
Week

Demand Dt-1

Old Forecast
( Ft-1)

Jan. week 1
Jan. week 2
Jan. week 3
Jan. week 4
Feb. week 1
Feb. week 2
Feb. week 3

450
460
465
434
420
498
462

400
410
420
429
430
428
442

New Forecast (Ft)


Ft = Ft-1 + ( Dt-1 Ft-1 )

410
420
429
430
448
442
446

In table initial forecast was available. If no previous forecast value is known. The old forecast
Starting point many be estimated or taken to be an average of the values of some preceding
Periods.

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Problem
A firm uses simple exponential smoothing with = 0.1 to forecast sales. The forecast for
week ending Feb 1 was 500 units where as actual demand turned out to be 450 units.
i) forecast the demand for week ending Feb 8
ii) Assume the actual demand during the week ending Feb 8 turned out to be 505 units.
Forecast the demand for week ending Feb 15. Continue the forecast through March 15,
assuming that the assuming that the subsequent demands were actually 516, 488, 467, 554
and 510 units.

Solution:

t = week ending Feb 8


Then t-1 = Previous week ( i.e , week ending Feb 1)
Given

= 0.1 , Ft-1 = 500 , Dt-1 = 450

There fore Ft = Ft-1 +

( Dt-1 - Ft-1 )

Ft = 500 + 0.1 ( 450 -500) = 495


There fore , forecast for week ending Feb 8
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Week
ending
Feb 1
Feb 8
Feb 15
Feb 22
March 1
March 8
March 15

Old
forecast
500
495
496
498
497
494
500

Actual
demand
450
505
516
488
467
554
510

New
forecast
495
496
498
497
494
500
501

It is observed from the above solution table that every forecast becomes the old
Forecast for the succeeding new forecast.

RB/NIE/Mech

Problem
Using SES technique, determine the forecast for period 2 through 12 for which the actual figures
are given below
Period
1
Actual
200
Demand

2
3
4
211 190 198

5
210

6
230

7
195

8
200

9
215

10
198

11
200

12
212

Assume that the first period forecast is equal to actual demand in that period given =0.2
. Also graphically compare your forecast demand with actual demand.
Solution: In the following solution table, the new forecasts are started to be calculated
From period 2 onwards. Therefore period 1 becomes t-1 in the first row and so on it
continues
Period
Old forecast
Actual Demand
New Forecast

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Ft-1

Dt-1

Ft = Ft-1 +

( Dt-1 -Ft-1 )

1
2

200
200

200
211

F2 = 200 +0.2(200-200) =200


F3 = 200 +0.2(211-200) = 202.20

3
4
5
6
7
8
9
10
11
12

202.20
199.76
199.40
201.51
207.20
204.76
203.80
206.03
204.42
203.52

190
198
210
230
195
200
215
198
200

199.76
199.40
201.51
207.20
204.76
203.80
206.03
204.42
203.52

Problem.
Wockhard hospital has used a 9-month moving average forecasting method to predict their
Drug requirements. The actual demand for one of the drugs is shown in the accompanying
Table. Using the 9-month moving average data as the fresh forecast , convert the problem
Into exponential smoothing and find the forecast for month 33

Month
Demand
Solution
Month

24
25
26
27
28
29
30
31
32
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24
78

25
65

Actual Demand
Dt-1
78
65
90
71
80
101
84
60
73

26
90

27
71

Old forecast
Ft-1

28
80

29
101

30
84

New Forecast
Ft = Ft-1 + ( Dt-1 -Ft-1 )

31
60

32
73

Hint = 2/(n+1)

Ans = 77.08 units

Problem.
Sales of Television sets of a particular brand have been tabulated below

Year
Sales (Rs in
lakhs)

1990 1991
15
16

1992
22

Using initial forecast = 25 and


Smoothing technique.
year

1990
1991
1992
1993
1994
1995
1996
1997
1998
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Actual
Demand
Dt-1

1993
24

1994
21

1995
30

1996
31

1997
38

= 0.01. determine the forecast for 1998 by exponential

Old forecast
Ft-1

New Forecast
Ft = Ft-1 + ( Dt-1 -Ft-1 )

Ans :24.03

Problem.
The following information gives the sales of a water pump manufacturing company for
10 months. If a smoothing coefficient or 0.5 is used, forecast the demand for February 2001

Month
April 2000
May
June
July
August
September
October
November
December
January 2001

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Sales
700
1280
840
920
1020
900
1276
1440
1610
1500

Ans : 1471

5. Exponential Smoothing with Trend Adjustment


When the exponential smoothing technique takes into account seasonal effects along
With regular trend forecasts, we get exponential smoothing with trend adjustment or
Adjusted exponential smoothing.
Adjusted exponential smoothing models actually project into the future ( for example to
Time period t+1 ) by adding a trend correction increment, Tt, to the current period
smoothed average, Ft.)

Trend adjusted forecast = New forecast + Trend Correction

Fta = Ft + Tt
Where

Ft = Ft-1 +

(Dt-1-Ft-1)

Tt = (Ft Ft-1 ) + ( 1- ) T t-1

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Tt-1 = Smoothed trend for previous period


= Smoothing constant for trend adjustment.
Ft-1 = Forecast of previous period.

1. A Manufacture of printed circuit boards uses exponential smoothing with trend to forecast
monthly demand of its products. At the end of December the company wishes to forecast sales
for January . The estimate of trend through November has been 200 addition boards sold per
month . Average sales have been around 1000 units per month. The demand for December
was 1100 units. The company uses =0.2 and = 0.1. Make a forecast for the month of
January.

Solution;
Given
Trend for November , Tnov = 200 units
Forecast for every month, F = 1000 units
Demand for December Ddec = 1100 units
=0.2 and = 0.1 Fjan = ?
Trend adjusted forecast FTA = Ft + Tt
Or Fjan (TA) = Fjan + Tjan
Fjan = Fdec + ( Ddec Fdec)
= 1000 + 0.2(1100-1000) =1020 units
Tjan = ( Fjan Fdec ) + (1- ) TDec
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We do not know Tdec, So we have to find it first.


Tdec = ( Fdec Fnov ) + (1- ) Tnov

Tdec = 0.1 (1000-1000) + (1-0.1)200


Tdec = 180
Therefore, Tjan = 0.1(1020-1000) + (1-0.1)180
Tjan = 164

Fjan (trend) = 1020 +164 = 1184 units.


Therefore the trend adjusted forecast for the month of
January is 1184 units.
RB/NIE/Mech

Quantitative forecasting models- linear regression,


Least Square is widely used mathematical method of obtaining line of best fit between
the dependent variable ( usually demand) and an independent variable. This method is called
least square method since the sum of the square of the deviations of the various points
from the line of best fit is minimum or least. It gives the equation of the line for which
the sum of the square of vertical distance between the actual values and the line values are
at minimum
Y = a + bX

The least squares concept


Is also used for Regression
Analysis between any set
Of dependent and independent
Variables.

Slope Y/X = b

X
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Fig. Least Squares Method.

Forecast the demand, using Regression Method.


a straight line can be fit having demand as the dependent variable on the Y-axis and the
independent variable ( time or any other quantity ) on the X-axis
( If demand is the function of time or any other quantity)

Y=a+bX

Where a & b = constant

For any value of X ( independent variable ) the value of Y ( demand) can be found out.
Case (i) : When time is the dependent variable i.e. When sum of deviations can be made
Zero ( X 0 )
Case (ii) When any other quantity is the independent variable i.e. When the sum of
deviation cannot be made zero (
X 0 )

Case (i)

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When time is the independent variable, the sum of deviations can be made
Equal to zero statistically.
XY
Y
b
Y = a + bX a =
X2
n

1) With the help of Least-Square Methods, develop a linear trend equation for the data shown
in the table and
( i ) Compute the constants a and b in the regression equation
( ii ) forecast a trend value for the year 2002 and 2008
Year
Shipments
( tons)

1991
2

Solution:
In an Odd years
Median may
Become Zero

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1992
3

1993
6

1994
10

1995
8

1996
7

1997
12

1998
14

1999
14

2000
18

2001
19

Year X year coded Y shipments (tons)


XY
X2
1991
-5
2
-10
25
1992
-4
3
-12
16
1993
-3
6
-18
9
1994
-2
10
-20
4
1995
-1
8
-8
1
1996
0
7
0
0
1997
1
12
12
1
1998
2
14
28
4
1999
3
14
42
9
2000
4
18
72
16
2001
5
19
95
25
n = 11
X=0
Y = 113
XY = 181
X2 = 110
IMP: the difference between any two successive periods must be the same.

i)

The straight line equation is Y = a + b X

Y = a + bX, a =

n
a = 113/11 = 10.3

XY
X2

b = 181/110 = 1.6

Y = 10.3 + 1.6 X
ii) To Forecast for the years 2002 and 2008
It is observed from the table that if year 2001 is coded as +5 , year 2002 be +6 and
Year 2008 would be +12
For year 2002 . Put X =6

Y = 10.3 + 1.6 x 6 = 19.9


For year 2008 . Put X =12

Y = 10.3 + 1.6 x 12 = 29.5


Forecast for the year 2008 = 29.5 tons of shipment.
RB/NIE/Mech

1) The table below gives the sales record of a firm. Using Regression Analysis forecast the sales
in the month of January and February next year.

Month Jan

Feb

Sales

111

90

Solution.

Month
January
February
March
April
May
June
July
August
September
October
November
December
n = 12

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Marc April
h
99
89

X month coded
-5.5
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
4.5
5.5
X=0

May

June

July

Aug

Sept

Oct

Nov

Dec

87

84

104

102

95

114

103

113

Y sales (units)
90
111
99
89
87
84
104
102
95
114
103
113
Y = 1191

XY
-495
-499.5
-346.5
-222.5
-130.5
-42
52
153
237.5
399
463.5
621.5
XY = 190.5

X2
30.25
20.25
12.25
6.25
2.25
0.25
0.25
2.25
6.25
12.25
20.25
30.25
X2 = 143

IMP: n = even number. Therefore equally deviate in a X month column

Y = a + bX, a =

a = 1191/12 = 99.5

XY
X2

b = 190.5/143 = 1.332

Y = 99.25 + 1.332 X
Forecast for the month of January and February Next year
From the table, it the value of X for December is + 5.5, the value of X for January
Would be +6.5 and that of February would be +7.5
Therefore,

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If X = 6.5

Y = 99.25 + 1.332 x 6.5 = 107.9 units

If X = 7.5

Y = 99.25 + 1.332 x 7.5 = 110 units

1) The data given below refers to the past sales of a production unit for the last eleven years.
Using Least Square Method. Estimate sales forecast for the next two years.
Plot the graph of the sales data and draw the regression line on it.
Year
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
Sales
35
50
48
47
53
58
68
79
92
85
96
( x 1000)
Month

X month coded

Y sales (units)

XY

X2

ANS:
a = 64.63
b = 5.96

n = 11

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X =0

1992
Y = Rs 100.39 x 1000

Y = 711

XY = 656

X2 = 110

1993
Y = Rs106.39x 1000

Problem : The data given below refers to the past sales of a helmet manufacturing unit for
the last 11 years. Using least squares method estimate sales forecast for the next two year.
Year
Sales Rs
(10000)

1990
35

Solution:
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
n = 11
RB/NIE/Mech

1991
50

1992
48

X year coded
-5
-4
-3
-2
-1
0
1
2
3
4
5
X=0

1993
47

1994
53

1995
58

Y shipments (tons)
35
50
48
47
53
58
68
79
92
85
96
Y=

Y = a + bX, a =

Y
n

1996
68

1997
79

1998
92
X2

XY

1999
85

2000
96

a=
b=

Forecast for
The year 2002
?

X2 =

XY =
b

XY
X2

Case ( ii ) : When any quantity (other than time) is the independent variable
Normally the demand of any product would vary with time but in reality it depends on a
Variety of factors like quality of the product, effectiveness of sales force, advertisement
Strategies and budget , distribution efficiencies , and so on. In such a case we consider
Demand to be dependent on a quantity other than time. The procedure followed is the
Same as the previous case, but only the formulae used to calculate the constants a and b
Are different .

Y = a + bX,

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X 2.

Y) (

(n

X 2) (

(n
(n

XY ) (
X 2) (

X.

XY )

X )2

Y)
X )2

1) A manufacture of childrens cycle believes that the demand for the cycles is correlated to
the birth of babies in the area during the previous year.
The data given below shows this relationship.
Year No. of
birth in the
previous
year
1
40,000
2
48,000
3
66,000
4
78,000
5
92,000
6
1,05,000
7
1,25,000
8
1,40,000

Cycles sold
during
the year
3,000
3,200
4,000
5,200
7,900
7,900
9,000
10,000

Compute the probable sales of cycles in the 9th year given the no. of birth in the
previous year as 1,66,000.

RB/NIE/Mech

VTU June 2006

Solution:
Year

1
2
3
4
5
6
7
8
n=8

No. of birth in
the previous
year
40,000
48,000
66,000
78,000
92,000
1,05,000
1,25,000
1,40,000
X = 694 x 103

X2 x 106

Cycles sold
during
the year
3,000
3,200
4,000
5,200
7,900
7,900
9,000
10,000
Y = 502x 102

XY x 105

1600
2304
4356
6084
8464
11025
15625
19600
X2 = 69058 x 106

1200
1536
2640
4056
7268
8295
11250
14000
XY =
5
50245x10

i) To find co-efficients a and b in the regression equation.


Y = a + bX,
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X 2.
(n

Y) (
2

X ) (

X.
X)

XY )
2

(n
(n

XY ) (
X 2) (

Y)
X )2

X 2.

Y) (

(n

X 2) (

X.

XY )

X )2
2

3 2

a = [( 69058 x 10 x 502x 10) - ( 694 x 10 x 50245x 10)]/[ (8 x 69058 x 10)-(694 x 10) ]

a = - 286

If number of birth is X = 166000


6

(n

XY ) (

(n

X 2) (

Y)
X )2

Number of cycles sold , Y = ?

Y = - 286 + 0.075 X

Y = -286 + 0.075 x 166000 = 12164


b = 0.075
Y = a + bX,

12164is corresponding expected sales of cycles in the 9th


Year when number of births touches 166000.

Y = - 2.86 + 0.75 X
Note : cross check the values.
RB/NIE/Mech

Correlation Co-efficient
Regression Analysis basically tries to express the relation between two variable in the form
of a straight line. The Extent to which the two variables are related to each other is
explained by correlation analysis.
correlation is a means of expressing the degree of relation between two or more variables.

A single value (figure) which expresses the degree and direction of correlation is called the
Co-efficient of correlation ( r ).

r value always between -1 and +1


+ve if Y increases with increases in X
-ve if Y decreases with increases in X.
r = 0 this indicates the lack of relationship between the two variables
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Correlation coefficient ( r )

[n

XY

X2 (

X ) 2 ][n

Y
Y2 (

Co-efficient of Determination
2
Coefficient of determination = [ correlation co-efficient ]
2
= [ r ]
Standard Deviation of Regression

S XY
RB/NIE/Mech

Y2 a

Y b
n 2

XY

Y )2 ]

Problem.
The following table gives five months of average monthly temperatures and corresponding
monthly resort attendance.
Month
Average temp
Resort attendance (1000)

1
24
43

2
41
31

3
32
39

4
30
38

5
38
35

Compute linear regression equation of the relationship between the two, if next months
average temperature is forecast to be 45 degrees.
Use linear regression equation to develop a forecast
Compute a correlation coefficient for the above data and determine the strength of the linear
relationship between average temperature and attendance. How good a predictor is temperature
for attendance ?
VTU June 2006

RB/NIE/Mech

Solution:
Months
1
2
3
4
5
n =5

Average
Temp
X
24
41
32
30
38
X=165

a = 58650

b = -650

Resort
Attendance Y

X2

Y2

43
31
39
38
35
Y=186x1000 X2 =5625

Y2
6
=7000x10

Y = 58650 650 X

a
If next months temp is 45 ,
the resort attendance would become
Y = 58650 650 x 45 = 29400 will be the attendance

b
r = -0.97
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XY

XY
3
=6021x10

X 2.

Y) (

(n

X 2) (

(n
(n

XY ) (
X 2) (

X.

XY )

X )2

Y)
X )2

Control of Forecasts ( or Forecast Error)


When a forecast is made, the actual demand that follows may or may not be equal to
the forecasted demand. The numerical difference between the forecasted demand
and the actual demand is then known as Forecast Error.
Forecast error= Actual Forecast demand
It is desirable to keep the forecast errors as minimum as possible in order to increase
the effectiveness of the forecasting techniques.
Measure the forecast errors occurring in various techniques and should control them.

Forecast control helps in finding a measure of the deviation of actual demand from
Forecasted demand and helps us to take to corrective action.

By Forecasting technique or by activities in the business organization.

RB/NIE/Mech

Control for Forecast Errors for Simple Averages


Simple average is a method of Time series forecasting technique. A Simple measure of
Forecast error in this method is to compute the deviation of the actual demand from
the forecasted demand and then find the standard Deviation ( SF ). The deviation from
the forecasted demand will vary from plus to minus, but they should tend to average
out near zero if the forecast is on target.
A number of ways of establishing control limits about the forecast values have been
developed. Some of these are based on the range of difference and others on the standard
deviation of values. Variations of actual values from the mean or average value can be
Quantified in terms of the standard deviation of forecast errors SF

(actual

SF
hkhk

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forecast )

n 1
When

__

SF

X = Actual individual demand value


_
X = Average or forecast demand value
n = number of periods in the average

(X

X )2

n 1

Much variation tends to be normally distributed about the mean. In such a case it might
expect about 95.5 % of the actual demand values to be within two standard deviation
of the average value and 99.7% within three standard deviations. When demand values
occur outside these limits, it might indicate an unusual event or a substantial change,
which needs to be investigated if there are several points outside the limits, then the
validity of the model has to be questioned and may have to be changed.

RB/NIE/Mech

Control for Forecast Errors in Exponential Smoothing


Widely used systems are MAD and BIAS
1) Mean Absolute Deviation ( MAD):
MAD is a measure of forecast error in which the average forecast error is calculated
without giving a regard to the direction of error. It is calculated as the sum of the
absolute value of the forecast error for all periods divided by the total number of
periods.
Sum of the absolute value of forecast error for all periods
MAD =
Number of periods
n

MAD

| forecasterrorj |

j 1
n

MAD
j 1

n
| forecasdemand j

Actualdemand j |
n

MAD is an average of the absolute value of forecast errors where errors are measured
Without regard to sign, MAD expresses the magnitude but not the direction of error.
This measure of absolute values is called absolute deviation.

RB/NIE/Mech

2) Bias
BAIS is a measure of forecast error in which the average forecast error is calculated
giving regarding to the direction of error. It is calculated as the sum of the actual
value of forecast errors for all periods divided by the total number of periods
evaluated.
Sum of forecast errors for all periods
Bias =
Number of periods
n

Bais
j 1

Bais
j 1

Forecasterror
n

( Forecastdemand j

Actualdemand j )

Thus BAIS is an average of the actual value of forecast errors where errors are measured
With due regard to sign. BAIS basically shows any tendency to over forecast or under
Forecast consistently. Unlike MAD, BAIS indicates the direction tendency of forecast
Errors. If the forecast repeatedly over estimates the actual demand, BAIS will have a
Positive value and for a consistent underestimation, BAIS will have a negative (-ve) Value.

RB/NIE/Mech

Generally Bias is a less commonly used error measure than MAD

Problem.
A dealer for carrier Air-cooler forecasted the demand for his air-cooler at the rate of 500
Per month for each of the next three months. The actual demands turned out to be
400, 560 and 700. Calculate the forecast error measures ( I ) MAD and
(ii ) Bias and interpret the same.
Solution :

Forecasted Demand = 500 for all months


Actual Demands = 400, 560 & 700
( a)

MAD =

Sum of the absolute value of forecast error for all periods

Number of periods
MAD =

MAD

500 400

MAD = 120 units /period


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500 560
3

500 700

( 100+60+200) = 360

MAD expressed as a percentage


Average error from the forecast
demands

Number of Periods X MAD


=
Sum of forecast demands
120 X 3

= 0.24

500 + 500 + 500


= 24 %
Sum of forecast errors for all periods

b)

Bias =

Number of periods
(500 400) (500 560) (500 700)
3

= -53 Units /Period

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Bias Expressed as percentage


Average error from the actual
demands

Bais X No. of periods


Sum of actual demands

= (-53 x 3)/1660 = - 0.0957


= -9.57 %

Comparison of value of MAD and Bias


1) The MAD value of 120 units/period means , the forecaster was wrong to the extent of
120 units from the actual demand, in making his forecast. MAD is expressed as an
average absolute error of 24% from the forecast demands, which is quite high.
2) The Bias value of -53 units/period means that there is an average underestimation of
actual demand to the extent of 53 units /period. Bias expressed as an average actual
error of -9.6 % shows that there is a consistent underestimation of the actual demand
to the extent of 9.6 %.

All the Best


RB/NIE/Mech