IE 459/500:

ENGINEERING
METHODS IN SUPPLY
CHAIN
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Topic 1: Demand Forecasting –
Trend

Instructor: Dr. Seunghan Lee

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Incorporating Trend

Disadvantage of moving average and exponential smoothing:

- Forecasts obtained by them lag behind the trend

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Increasing Trend
Decreasing Trend

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Incorporating Trend: Linear Regression

Linear Regression: Find the best linear line to explain the data

Step 0: Plot the data!!!!

Step 1: Observe the linear

pattern
Slope
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Intercept

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How to quantify ”accuracy” : Error (!6 )

Error(!! ): Forecast Value ("! ) – Demand Value (#! )

We want to minimize the sum of errors

Okay, think about this example.

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7! 120 150 180 395 415 440

8! -100 -100 -100 +100 +100 +100
9" + 9# + 9$ + 9% + 9& + 9' = :‼‼‼

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Simple Linear Trend Model: Sum of Squared Errors

Demand Forecast !! = # + %&

Forecast Error '! = !! − )!
Unconstrained Minimization Problem
(1): ∑$!"# '%! = ∑$!"# # + %& − )! %

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How to find " and #? (2): ∑$!"# )! = +# + % ∑$!"# &
Least Square Methods
(3): ∑$!"# &)! = # ∑$!"# & + % ∑$!"# &%

Two unknown variables (a, b) with two equations (2), (3)

Prediction Results (4): !$&# = # + %(+ + -)

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 Example: Liner Trend Model
(2): (2)-1:
∑$!"# "! = $% + ' ∑$!"# ( )*++ = ,% + -)'
(3): (3)-1:
∑$!"# ("! = % ∑$!"# ( + ' ∑$!"# (% ,.// = -)% + 0)'

Solve: % = -+-. ..., ' = -.. )3.

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Prediction:
4& = -+-. ... + * ⋅ -.. )3. = .,3

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Summary: Incorporating Trend

Disadvantage of moving average and exponential smoothing:

- Forecasts obtained by them lag behind the trend

Two ways for considering trend

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: Simple Linear Trend (Linear Regression)

: Holt’s model

Seasonality and Trend: Static Seasonality Indices Method

Stay tuned: on next live

sesion 16