FORECASTING ENGINEERING

Instructor:
– Dr. Nguyen V.P. Nguyen
– Email: nguyennvp@hcmut.edu.vn

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FORECASTING ENGINEERING
Textbooks:
1. Business Forecasting – 9th Edition - John E.Hanke and Dean W.
Wichern

 How to get this book?

2. Forecasting: Methods and Applications – 3rd Edition - Spyros G. Makridakis,

etc .
Grading: is a combination of
• Assignments (Reading & take-home): 20%
• Project: 30% (BTL1 20%, BTL2 20%)
• Final + in-class activities: 50% (Writing and multiple
choices)
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Chapter 1_Introduction to Forecasting 1

 Software
1. Minitab 18, is a statistics package, was
developed at the Pennsylvania State University

 how to get this software?

1. SPSS 25, is a computer program used for

statistical analysis. SPSS is among the most
widely used programs for statistical analysis in
social science.
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What is a Forecast?
A prediction of the future
fore = before + cast = throw
theo nghĩa đenLiterally planning before you throw.
sự nhầm lẫn
There is some confusion about this point
Often organizations refer to direct outputs of decisions as
forecasts. (Sometimes it is easier to use this terminology) thuật ngữ
Example – “production forecasts” are not “forecasts”
They are subject to variability but are known to some
degree of accuracy by organization members.

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 Why Forecast?
• It’s fun; To look smarter
• But most importantly: To make better decisions on
– Investments - Logistics decisions
– Inventory tồn kho - Strategic plan
– Staff Recruitment
– Medical treatment timing
• Fact: Forecasts are usually (always?) wrong!
– Why do it then?
– Because you have to!! => That’s why we need to learn.
• Effect of bad forecasts
thặng dư – Excess costs – too much staff or stock
– Poor service –waiting lines and stockouts

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Forecasting and Market Analysis

• For a business to survive, it must meet its customers’ needs least at
quickly as its competitors do. The better management is able to
estimate the future, the better it should be able to prepare for it.
• Many environmental factors influence the demand for an
organization’s products and services. Some major environmental
factors are:
1. General business conditions and the state of the economy.
2. Competitor actions and reactions
3. Governmental legislative actions
4. Marketplace trends
a. Product life cycles
b. Style and fashion
c. Changing consumer demands
5. Technological innovations
• Master forecasting, as illustrated in Figure 1-1, indicates the major
decision categories.
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Chapter 1_Introduction to Forecasting 3

 Dx
Major environmental factors are:
1. General business conditions
and the state of the economy.
2. Competitor actions and
reactions
3. Governmental legislative
Dx’ actions
Dx 4. Marketplace trends
5. Product life cycles
6. Style and fashion
7. Changing consumer demands
8. Technological innovations

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Forecasting and Market Analysis

• Master forecasting, as illustrate in Figure 1-1, indicates the major decision
categories.
Economic, political, social,
Policy decisions and technological conditional

Product lines, services, and

Product decisions markets

Forecasting Process decisions Process and methods

Plant decisions Facility location and layout

Operation decisions Output scheduling and control

Figure 1-1 Master forecasting
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 Forecasting and Market Analysis
Financial planning
bảng cân đối kế toán

Market planning

Forecasting

Production planning
tổng sản lượng

Master scheduling
Figure 1-2 Functional forecasting
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A Case: Forecasting for a

Consumer Product Distribution System

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 The Challenge
• Enhance the performance of the inventory and distribution
system for products in the Vietnamese market
• Highly competitive market with highly seasonal demand
patterns
• Client’s Goal - Get the right product in the right quantity to
the right customer on time!

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The Production/Distribution System

Sai Gon Beer (SGB)

Co-packers

Products

Distribution Centers

Retailers (many)

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 Modeling
• A linear programming based planning tool
• For each SGB it finds for the next 12 months:
- Optimal co-packer production levels
- Optimal distribution and transshipment plans
- Optimal distribution center (DC) inventory levels
• Developed for operational decisions but first used for
tactical/strategic decisions
• Implemented in Excel using Frontline Solver
• User friendly interface

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Using the Model in Practice

Month Date Steps to Take
T–1 20th Provide forecasts for month T to T + 12
T 5th Estimate closing inventory at the end of month T, using
- Opening inventory of month T,
- Production schedule of month T, and
- Actual order from distributors and DC re-order suggestions in month T
Monthly input data check list, including
- Unit costs
- Production and inventory capacity
- Minimum and fixed production
From production and distribution personnel. Document the changes to the data.

6-9th - Run the tool with updated data, review the output and re-run if necessary.
- Set production plan for month T + 1
- Document changes of actual plan from tool output and reasons of changes
10th Provide co-packers with production plan for month T+1
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 Forecasts drive the model!

• Key input – Forecasts by sales region by SGB for next 12

months.
– Produced by regional sales representatives
– Accuracy declines over 12 month period
– Not calibrated but good in aggregate!
• But model is used in a rolling horizon approach

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8/17/2021 Company logo

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Chapter 1_Introduction to Forecasting 8

 Model in MS Excel

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Forecasting is NOT a Statistical Topic

• Primary interest is not in hypothesis tests or
confidence intervals.
• Underlying models developed in statistics arena are often
used:
– regression
– time series
– neural networks
– dynamic Bayesian systems and state space models
• Forecasts must be assessed on
– the quality of the decisions that are produced
– their accuracy

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 Types of Forecasting
• Judgemental – Chapter 10
– Based on individual knowledge
– Sales force composites, expert opinion, consensus methods
– Surveys and market research
• Extrapolation – Chapter 2-6 & Chapter 9
– Based on previous data patterns
• Assumes past patterns hold in future
– Exponential Smoothing, Trend Models, ARIMA models
• Causal – Chapter 7, 8
– Based on factors that might influence the quantity being forecasted
• Assumes past relationships hold in the future
– Regression
• Collaborative
– Based on information available to supply chain partners
– Information sharing and partnerships
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Forecasting Considerations
• Forecasts    Targets
• Time interval, Unit of measure
• Forecast horizon: Short Term or Medium Term or Long term
• One Series   Many
• Forecast component: Seasonal vs. Non-seasonal, Trend vs.
• Forecast accuracy
• Simple vs. Advanced
• Others:
– One-Step Ahead vs. Many Steps Ahead
– Automatic vs. Manual
– Exceptions (Exception reporting and special situation)
– When to update models (Revision of forecasting model parameters)
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 The Forecasting Function
• The forecasting function includes the specific techniques and models,
but it also highlights the inputs and outputs (see the following) to the
subject of forecasting

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The forecasting model

• To develop the forecasting function, it is first necessary to identify its
outputs.
• Forecasting is a model-based information system, and there are many
models from which to choose. Forecasting model can be classified
several ways, qualitative or quantitative, formal or informal,
intrinsic or extrinsic, statistical or nonstatistical, and descriptive
or explanatory. By knowing the desire outputs and significant inputs
(variables), different forecasting model can be analyzed.
• Many models require a substantial amount of historical data. The
choice of a forecasting technique is often constrained by the available
data.
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 The Forecasting Function
• There are four basic demand forecasting models-time: series analysis,
economic indicator, econometric models, soliciting opinion.

• The final forecast usually requires and additional input in the form of
judgment, intuition, and experience.

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Forecasting Horizons
 Short term
 a few days or weeks
 Medium term
 usually a few months to 1 or 2 years
 Long term
 usually more than 2 year
 Why distinguish between these?
 Different methods are more suitable in each case.

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 Forecasting Challenges
• Technical Issues
– What is the best approach
• Organizational Issues
– reporting structures
– accountability
– incentive systems
• Information
– historical data not available
– timeliness and reliability
– what information is required when
• Users
– conflicting objectives

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Top Down vs. Bottom Forecasting

Top Down - Forecast at central office
Bottom up - Forecast by sales force

Top-down Bottom Up
Strengths Aggregate market information included Detailed customer info
Marketing plans Responsibility clear for sales
Competitive viewpoint Motivation
Weaknesses No responsibility accepted by sales Aggregated forecast may not reflect market
force plans
Confuses forecasts with aggregate No easy reconciliation with corporate
target setting financial projections
Politically motivated May be biased due to sales force
compensation schemes
Costs – more staff time and slower process

Questions – which is more accurate? which should be used?

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Chapter 1_Introduction to Forecasting 13

 Assignment 1
• Dịch tóm tắt Các điểm chính trong bài đọc:
Chapter
1_Review_of_basic_statisticsfor_forecasting_Co
vid19Year

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