Professional Documents
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Chapter 5
Umar Farooq
Introduction – Demand Driven
Economy
• Organizations are moving from
supply driven to demand-driven
supply chain.
• Customers dictating to the
supplier
what products they desire and
when they need them delivered.
• Consumers have become more
demanding and discriminating.
Where to invest?
How much to invest?
When to invest?
Demand Forecasting
• PREDICTIONS ABOUT THE FUTURE ARE DIFFICULT,.
• A forecast is an estimate of future demand & provides the basis
for planning decisions.
• The goal is to minimize forecast error (Supply-Demand errors).
• The benefits of better forecasts are
lower inventories,
reduced stock-outs,
smoother production plans,
reduced costs
improved customer service.
• Disadvantages
The statistics are not collected from the market.
If one member’s views dominate the discussion, then the
value and reliability of the outcome can be diminished
Forecasting Techniques
Delphi method
Very similar to jury of executives method
but this time members are both from inside
and outside of the company
One coordinator is chosen by members of
the jury
Group members do not physically meet.
A questionnaire is given to each member of
the team which asks question.
Translate opinion into some conclusion for
forecast.
The summary of responses is then sent out
to all the experts
2 to 3 cycles are undertaken
Convergence and diversion is acceptable.
Forecasts are revised until a consensus is
reached by all.
Forecasting Techniques (Cont.)
Forecasting Techniques (Cont.)
• Advantages
Eliminates need for group meetings
Participants can change their opinions anonymously
• Disadvantages
Time consuming –reaching a consensus takes a lot of
time.
Participants may drop out.
Forecasting Techniques (Cont.)
• Sales Force Composite
• Each sales-person makes a product-by-product forecast for their particular sales
territory.
• It is generated based on the sales personal’s knowledge of the market and
estimates of customer needs.
• Advantages
Due to the proximity of the sales personnel to the consumers, the forecast tends
to be reliable
• Disadvantages
Individual biases could negatively impact the effectiveness of forecast.
some agents may give a lower forecast than the actual potential of sales
to easily achieve their target and get the money bonus from the company
on the extra sales generated.
Forecasting Techniques (Cont.)
• Consumer Survey
• Involves asking consumer about there buying habits, new product
ideas and opinions about existing products.
• The survey is administered through telephone, mail, Internet, or
personal interviews.
• Data collected from the survey are analyzed using statistical tools
and judgment.
Ft+1 = At
Ft+1 = αAt + (1 – α) Ft
Exponential Smoothing Forecast
Calculate the forecast for period 3 using the exponential smoothing
method. Assume the forecast for period 1 is 1600. Use a smoothing
constant (α) of 0.3.
F11600
= A1 1-α = 1-0.3 = 0.7
Ft+1 = αAt + (1 – α) Ft
1600
1780
Y = mx + b
x = ∑x / n =3.5
y = ∑y / n =2233.4
Example: Linear Trend Forecast
x = 3.5
y = 2233.4
m = 285
Y = mx + b
Example: Linear Trend Forecast
y = mx + b x = 3.5
Y = 2233.4
b = y - mx = 1235.9
M = 285
Y = mx + b
Y = 285x + 1235.9
Y = mx + b
where
Ŷ = forecast or dependent variable
xk = kth explanatory or independent variable
b0 or m = intercept of the line
bk or mk = regression coefficient of the independent
variable xk
Forecast Error
Forecast error, et = At - Ft
where
et = forecast error for Period t
At = actual demand for Period
Ft = forecast for Period t
Forecast Error
• There are several measures of forecasting accuracy
follow:
where et = At -Ft
et = forecast error for period t
At = actual demand for period t;
n = number of periods of evaluation
Forecast Error
The difference between actual values and their average value.
Forecast Error
• Mean absolute percentage error (MAPE)-Provides a perspective
of the true magnitude of the forecast error.
where
et = forecast error for period t
At = actual demand for period t;
n = number of periods of evaluation
Forecast Error
• Mean squared error (MSE)-
• The mean squared error tells you how close a regression line is to a
set of points.
• It does this by taking the distances from the points to the
regression line (these distances are the “errors”) and squaring them.
• The squaring is necessary to remove any negative signs.
Where
et = forecast error for period t
n = number of periods of evaluation
Forecast Error
• Running Sum of Forecast Errors (RSFE)-
• Indicates bias in the forecasts or the tendency of a forecast to be
consistently higher or lower than actual demand.
• The RSFE tells us whether our forecast is biased to always be too
high, or always be to low.
n
Running Sum of Forecast Errors, RSFE = e
t =1
t
Where
et = forecast error for period t
RSFE
Tracking Signal =
MAD
Given the following data, compute the tracking
signal and decide whether or not the forecast
should be reviewed.
Actual Forecast
Month Sales Sales
1 8 10
2 11 10
3 12 10
55
Forecast errors for April is the difference between its actual
and forecast sales. RSFE for April is equal to the
cumulative forecast errors of January, February, March
and April.
Forecast Error =
RSFE = 1 + 4
Actual – Forecast =
= 5
14 -10 = 4
56
Actual Forecast Absolute Tracking
Month Sales Sales RSFE Error MAD Signal
1 8 10 -2 2 2 -1
2 11 10 -1 1 1.5 -0.67
3 12 10 1 2 1.67 0.6
4 14 10 5 4 2.25 2.22
Absolute Error =
TS = RSFE/MAD
Absolute (Actual – Forecast) =
MAD = (2+1+2+4)/4 = 5/2.25 = 2.22
Absolute(14 -10) = 4
= 2.25
57
Since the tracking signals for months January to April are
within +/- 4, the forecast needs not be reviewed.
Tracking
Month Signal
1 -1
2 -0.67
3 0.6
4 2.22
58
Tracking signal
Tracking signal
Upper control limit = +4MAD
+
0 0 MAD
-
Lower control limit = -4MAD
Time