IE500/459:

ENGINEERING
METHODS IN SUPPLY
CHAIN ‘-

TOPIC 1: DEMAND FORECASTING

Instructor: Dr. Seunghan Lee

(Let’s start at 7:02PM)

1
Let’s work on customer side first

What we have is: last year's data

Can you estimate the value in 2019?

‘-

What happened between 2014 and 2015?

https://www.statista.com/statistics/276306/global-apple-iphone-sales-since-fiscal-year-2007/ 2
Forecasting Process (1)
What is good forecast?
1. Timeliness

2. Reliability

3. Accuracy

4. Regular reviews ‘-

5. Equal chance of being over and under

6. Good documentation 1) Unbiased

7. Easy to use 2) Minimum Variance

=> MVUE

3
Qualitative Forecasting Methods

1. Executive Committee Consensus 3. Delphi Method

2. Survey of Sales Force 4. Customer Surveys

‘-

4
Forecasting Methods
Time Series Forecasting : Systematic
components + Random Component

‘-
Constant Level Constant Level + Seasonality

5
Constant Level + Trend
Constant Level + Season + Trend
Straightforward Forecasting Methods

Last Value Method Notations:

𝑫𝒆𝒎𝒂𝒏𝒅: 𝑫𝟏 , 𝑫𝟐 , ⋯ , 𝑫𝒏
Averaging Method
𝑭𝒐𝒓𝒆𝒄𝒂𝒔𝒕: 𝑭𝒏$𝟏

Moving Average Method

‘-

Weighted Moving Average Method

Exponential Smoothing Method

6
Last Value Method

• Naïve Method

• 𝐹!"# = 𝐷!

• Works for new and innovative products

‘-

𝑭𝟕 = 𝑫𝟔 = 𝟑𝟒𝟎

7
Averaging Method

• 𝐹!"# = ∑!$%# 𝐷! /𝑛

• 𝐹& = (270 + 241 + 331 + 299 + 360 + 340)/6

‘-

𝑭𝟕 = 𝟑𝟎𝟕

8
Simple Moving Average Method

• 𝐹!"# = (𝐷! + 𝐷!'# + 𝐷!'( + ⋯ 𝐷!')"# )/𝑚

‘-

𝑭𝟕 = 𝟑𝟑𝟑

9
Weighted Moving Averaging Method

• 𝑊$ : weights in the period 𝑖

‘-

𝑭𝟕
= 𝟎. 𝟓 ∗ 𝟑𝟒𝟎 + 𝟎. 𝟑
∗ 𝟑𝟔𝟎 + 𝟎. 𝟐 ∗ 𝟐𝟗𝟗
= 𝟑𝟑𝟖
10
Summary
Last Value Method 𝑭𝒏$𝟏 = 𝑫𝒏

𝑫𝒕
Averaging Method 𝑭𝒏$𝟏 = ∑𝒏𝒊&𝟏
𝒏

𝟏
Moving Average Method 𝑭𝒏$𝟏 = 𝒎
{𝑫𝒏 + 𝑫𝒏)𝟏 + 𝑫𝒏)𝟐 + ⋯ + 𝑫𝒏)𝒎$𝟏 }

Weighted Moving Average Method ‘-

𝑭𝒏$𝟏 = 𝒘𝒎 𝑫𝒏 + 𝒘𝒎)𝟏 𝑫𝒏)𝟏 + ⋯ 𝑾𝟏 𝑫𝒏)𝒎$𝟏

𝒘𝒎 ≥ 𝒘𝒎)𝟏 ≥ ⋯ ≥ 𝒘𝟏 ≥ 𝟎

𝒘𝒎 + 𝒘𝒎)𝟏 + ⋯ + 𝒘𝟏 = 𝟏

11
Advanced approach: Exponential Smoothing

𝑭𝒏:𝟏 = 𝜶𝑫𝒏 + 𝜶 𝟏 − 𝜶 𝑫𝒏;𝟏 + 𝜶 𝟏 − 𝜶 𝟐 𝑫𝒏;𝟐 + ⋯ (𝟏)

𝜶 ∈ (𝟎, 𝟏]
𝜶>𝜶 𝟏−𝜶 >𝜶 𝟏−𝜶 𝟐

The most recent demand is given the highest weight: 𝜶 (smoothing constant)
‘-
Weights are decreased by a factor: (𝟏 − 𝜶)

𝑭𝒏 = 𝜶𝑫𝒏;𝟏 + 𝜶 𝟏 − 𝜶 𝑫𝒏;𝟐 + 𝜶 𝟏 − 𝜶 𝟐 𝑫𝒏;𝟑 + ⋯ (𝟐)

𝑭𝒏"𝟏 = 𝜶𝑫𝒏 + 𝟏 − 𝜶 {𝜶𝑫𝒏$𝟏 + 𝜶 𝟏 − 𝜶 𝑫𝒏$𝟐 + 𝜶 𝟏 − 𝜶 𝟐 𝑫𝒏$𝟑 + ⋯} (𝟑)

𝑭𝒏"𝟏 = 𝜶𝑫𝒏 + 𝟏 − 𝜶 𝑭𝒏 (𝟒)

12
Exponential Smoothing (2)

𝑭𝒏:𝟏 = 𝜶𝑫𝒏 + 𝜶 𝟏 − 𝜶 𝑫𝒏;𝟏 + 𝜶 𝟏 − 𝜶 𝟐 𝑫𝒏;𝟐 + ⋯ (𝟏)

𝑭𝒏"𝟏 = 𝜶𝑫𝒏 + 𝟏 − 𝜶 𝑭𝒏 (𝟒)

Assumptions: 𝜶 = 𝟎. 𝟐, 𝑭𝟏 = 𝟑𝟎𝟕

‘-

13