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Forecasting
Dr Niniet Indah Arvitrida

Department of Industrial Engineering

Institut Teknologi Sepuluh Nopember
2020

In the end of this course students will be able

to
1. Understand the role of forecasting in an enterprise
2. Identify the components of a demand forecast
3. Forecast demand using time-series methodologies
4. Analyze demand forecast error

Main source:

Chopra, S., Meindl, P., (2009) Supply chain Management: Strategy,

Planning, and Operation, New Jersey; Pearson Prentice Hall.

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What is Forecasting ?
Y

Forecasting

n n+1 n+2 Function

of Time
Forecasting is an approach to estimate something
that contains uncertainty and related to time in the
3
future

Forecasting :
 The process of estimating future demand in terms of the
quantity, timing, quality, and location for desired products and
services
 Rely on logical methods of manipulating data that have been
generated by historical events  for quantitative method
 Forecasting is an essential element of capital budgeting.

Sales will be
$200 Million!
Everyone needs
forecasting prior to
planning.

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Characteristics of forecasting
 Forecasts are usually wrong/inaccurate, seldom
correct, and involves error
 find the best method
 Long-term forecasts are usually less accurate than short-
term forecasts.
 Family / grouped / aggregate forecasts are usually more
accurate than item forecast
 The further up the supply chain a company is (the further
they are from the customers), the greater the distortion of
information they receive.
 Forecast should include a measure of forecast error
5

Assumptions of Forecast

 Information (data) about the past is available

 The pattern of the past will continue into the
future (Time Series Models).
 Forecasting methods assume there is some
underlying stability in the system

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Which item should we forecast?

Independent Demand: Dependent Demand:
Finished Goods; spare parts Raw Materials,
Component parts,
Sub-assemblies, etc.

B(4) C(2)

D(2) E(1) D(3) F(2)

Production System

Considering the order fulfilment strategy

1. Engineer To Order (ETO / Project)

2. Make To Order (MTO / Job Order)
3. Assemble To Order (ATO)
4. Make To Stock (MTS / Mass Production)

Each of these production systems requires different forecasting

approach

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Customer Order Decoupling Point

Inventory Raw Work in process (WIP) Finished

Suppliers
location materials Parts and Component goods

Customer
order
decoupling
point

Environment ETO MTO ATO MTS

Manufacturing Lead Time

ETO

MTO

ATO

MTS

Engineering Procurement Fabrication Assembly Delivery

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• MTS – Forecast end items.

• ATO – Forecast product mix and calculate expected

assembly and part requirements.

• MTO –company resources.

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Forecasting Steps
• Decide what needs to be forecast
• Level of detail, units of analysis (weekly, monthly, etc) & time horizon
required
• Evaluate and analyze appropriate data
• Identify needed data & whether it’s available
• Select and test the forecasting model
• Cost, ease of use & accuracy
• Generate the forecast
• Monitor forecast accuracy over time

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Basic approach to demand forecasting

1. Understand the objective of forecasting

2. Integrate demand planning and forecasting throughout the supply
chain
3. Understand and identify customer segments
4. Identify the major factors that influence the demand forecast
5. Determine the appropriate forecasting technique
6. Establish performance and error measures for the forecast

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Characteristics of a Good forecast

• Accuracy  bias (when forecast are persistently too high or

too low) & consistency (concerned with the size of forecast
error)
• Cost
• Response  stability & responsive
• Simplicity  easy to make, understand & use

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Measuring Accuracy, Forecast Errors

To compare different time series techniques or to select the “best” set of
initial values for the parameters, use a combination of the the following 3
metrics (assumption: errors are normally distributed):

n
• Mean Absolute Deviation (MAD)
 Most popular A
i 1
i  Fi
 Standard deviation of errors is assumed MAD =
by 1.25 times MAD
n
 Assumption: error is normally distributed
n

 A  Fi 
2
• Mean Square Error (MSE) i
 Is similar to variance of a random sample (of errors) MSE = i 1
 Should be used in tandem with MAD n
 Assumption: mean of error is zero

• Mean Absolut Percent Error (MAPE) 100 n A i  Fi

MAPE = 
n i 1 A i
Note for this slide: A is actual demand; F is forecasted demand
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Measuring Accuracy, Forecast Errors

Note for this slide: E is error; F is forecasted demand; D is actual demand

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• Forecast error measurements:

If you are working with a low-volume or sporadic item then MAD is a
good choice, while the MAPE should be avoided.
MAPE is good for high volume / fairly consistent and regular demand
pattern.
• Calculating error measurement statistics across multiple items.
One solution is to first segregate the items into different groups
based upon volume (e.g., ABC categorization) and then calculate
separate statistics for each grouping.

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Examples of Production Resource Forecasts

Forecast Units of
Time Span Item Being Forecast
Horizon Measure
• Product lines
• Factory capacities
• Planning for new products Dollars, tons,
Long-Range Years • Capital expenditures etc.
• Facility location or expansion
• R&D
• Product groups
• Department capacities
Medium- Dollars, tons,
Months • Sales planning
Range • Production planning and etc.
budgeting
• Specific product quantities
• Machine capacities
• Planning
• Purchasing Physical units
Short-Range Weeks • Scheduling of products
• Workforce levels
• Production levels
• Job assignments
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Demand Behavior
 Trend
◦ a gradual, long-term up or down movement of demand
◦ Due to population, technology etc

 Random variations
◦ movements in demand that do not follow a pattern

 Cycle
◦ an up-and-down repetitive movement in demand
◦ Non-annual; multi-year
◦ Due to interactions of factors influencing economy

 Seasonal pattern
◦ an up-and-down repetitive movement in demand occurring periodically
◦ Occurs within one year
◦ Due to weather, customs etc

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Forms of Forecast Movement

often regarded
as part of the
trend
Demand
Demand

Random
movement

Time Time
(a) Trend (b) Cycle
Demand
Demand

Time Time
(c) Seasonal pattern (d) Trend with seasonal pattern
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Forecasting Technique

Forecasting
Models

Extrinsic Qualitative Quantitative Intrinsic

Sales force Consumer Delphi

Jury of
method
Time series
Causal Simulation
composite survey executive

Moving Exponential
ARIMA Neural Regression Econometrics
average smoothing Decomposition
networks

Holt’s + Winter’s
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Types of Forecasts
 Qualitative (Extrinsic) :
◦ requiring no manipulation of data,
◦ used only judgment of the forecaster,
◦ Evaluating factors other than historical data
◦ concern with identifying various factors that can influence
demand
◦ suitable for long term forecasting

 Quantitative (Intrinsic) :
◦ no input of judgment,
◦ mechanical procedure that produce quantitative result,
◦ Rely on historical information
◦ using statistical techniques
◦ suitable for short term forecasting

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1. Qualitative Methods (Extrinsic)

 Applications: New product Development, new

technology  An unusual product or a unique project
is being contemplated
 Technique :
◦ Management Decision – Jury of executive opinion
◦ Delphi Technique
◦ Sales Force Composite
◦ Growth curve
◦ Scenario writing
◦ Market Research
◦ Historical Analogies
◦ Life Cycle Curves
◦ Focus groups

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Qualitative Methods : Example

Type Characteristics Strengths Weaknesses
Executive A group of managers Good for strategic or One person's opinion
opinion meet & come up with new-product can dominate the
a forecast forecasting forecast

Market Uses surveys & Good determinant of It can be difficult to

research interviews to identify customer preferences develop a good
customer preferences questionnaire

Delphi Seeks to develop a Excellent for Time consuming to

method consensus among a forecasting long-term develop
group of experts product demand,
technological
changes, and

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1. Qualitative Methods
-in general -

Drawbacks :
Advantages :
– No historical data is
required.
– Involving experts for
modeling, so the results
are quite accurate.
– High cost  for paying
labour time of the
experts
– Time consuming,
particularly in building
the models and selecting
appropriate methods for
validation

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2. Quantitative methods (Intrinsic)

Used when sufficient historical data are available and when

these data values are judged to be representative of the
unknown future

Assumption : Future pattern following past pattern

Can be categorized :
 Time series methods : focus entirely on pattern, pattern
change, disturbance caused by random influence
◦ Moving average, exponential smoothing, Holts, winter
 causal methods : identification and determination of
relationship between the variable to be forecast and other
influencing variable
◦ Regression
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Demand Components :
Observed demand (O) =
Systematic component (S) + Random component (R)

Level (current deseasonalized demand)

Trend (growth or decline in demand)

Seasonality (predictable seasonal fluctuation)

• Systematic component: Expected value of demand
• Random component: The part of the forecast that deviates
from the systematic component
• Forecast error: difference between forecast and actual demand
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The systematic component may take various

forms
• Multiplicative :
Systematic component = level x trend x seasonal factor

• Additive :
Systematic component = level + trend + seasonal factor

• Mixed :
Systematic component = ( level + trend ) x seasonal factor

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1. Moving Average (MA)

How it works approach :

If the number of period used is 3 years (MA = 3 years), forecasted
demand for next year will be the average demand of the total
demand over the past 3 years.
• Naive forecast (N=1)
• demand the current period is used as next period’s
forecast
• Simple moving average (N>1)
• stable demand with no pronounced behavioral patterns
• Weighted moving average (N>1)
• weights are assigned to most recent data
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Example : MA(1)
• MA (1)  N=1, the more popular term for this is NAIVE METHOD

ORDERS
MONTH PER MONTH FORECAST

Jan 120 -
Feb 90 120
Mar 100 90
Apr 75 100
May 110 75
June 50 110
July 75 50
Aug 130 75
Sept 110 130
Oct 90 110
Nov - 90

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Simple Moving Average

n
 Di
i=1
MAn =
n
where

n = number of periods in
the moving average
Di = demand in period i

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Example : MA(3)

ORDERS MOVING 3
MONTH PER MONTH AVERAGE  Di
i=1
Jan 120 – MA3 =
Feb 90 – 3
Mar 100 –
Apr 75 103.3 90 + 110 + 130
= 3
May 110 88.3
June 50 95.0
July 75 78.3 = 110 orders
Aug 130 78.3
for Nov
Sept 110 85.0
Oct 90 105.0
Nov - 110.0

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Example : MA(5)

ORDERS MOVING
MONTH PER MONTH AVERAGE 5

Jan 120 –

i=1
Di

Feb 90 – MA5 =
Mar 100 –
5
Apr 75 –
90 + 110 + 130+75+50
May 110 – =
June 50 99.0
5
July 75 85.0
Aug 130 82.0 = 91 orders
Sept 110 88.0 for Nov
Oct 90 95.0
Nov - 91.0

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Smoothing Effects

150 –

125 – 5-month

100 –
Orders

75 –

50 – 3-month

Actual
25 –

0– | | | | | | | | | | |
Jan Feb Mar Apr May June July Aug Sept Oct Nov
Month
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2. Weighted Moving Average

Adjusts moving average method to more closely

reflect data fluctuations

WMAn =  Wi Di
i=1

where
Wi = the weight for period i,
between 0 and 100
percent

 Wi = 1.00
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Weighted Moving Average Example

MONTH WEIGHT DATA

August 17% 130
September 33% 110
October 50% 90
3
November Forecast WMA3 =  Wi Di
i=1

= (0.50)(90) + (0.33)(110) + (0.17)(130)

= 103.4 orders
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Disadvantages of M.A. Methods

• Increasing “n” makes forecast

less sensitive to changes
• Do not forecast trends well
• Require sufficient historical
data

Maka, dikembangkanlah metode

EXPONENTIAL SMOOTHING
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3. Exponential Smoothing (ES)

• Moving average treats all period similarly, but ES considers the
newer data to be more important than the previous ones.
• ES has a constant - α
• α represents the importance weight of the newest actual data,
while 1 – α (damping factor) is the weight for the forecasted
demand of the current period.
• damping factor is a correction factor of the forecasting value to
minimize the effect of data instability/variation.
• α is set between 0 and 1.
• The selection of alpha is a trade off between stability and
responsiveness.

Ft = Dt-1 + (1 - )Ft-1
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Exponential Smoothing (cont.)

Ft = Dt-1 + (1 - )Ft-1
where:
Ft = forecast for next period
Dt-1 = actual demand for present period
Ft-1 = previously determined forecast for
present period
 = weighting factor / smoothing constant /
level smoothing parameter

Ft = Dt-1 + (1 - ) Dt-1 + (1 - )2 Ft-1

And soon
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Exponential Smoothing: Concept

• Include all past observations
• Weight recent observations much more
heavily than very old observations:
0  1
weight
Decreasing weight given 
to older observations
 (1   )
 (1   ) 2
 (1   ) 3
today

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Exponential Smoothing (α=0.30)

Ft = Dt-1 + (1 - )Ft-1
PERIOD MONTH DEMAND F2 = D1 + (1 - )F1
1 Jan 37 = (0.30)(37) + (0.70)(37)
2 Feb 40 = 37
3 Mar 41
4 Apr 37 F3 = D2 + (1 - )F2
5 May 45 = (0.30)(40) + (0.70)(37)
6 Jun 50
= 37.9
7 Jul 43
8 Aug 47
F13 = D12 + (1 - )F12
9 Sep 56
10 Oct 52 = (0.30)(54) + (0.70)(50.84)
11 Nov 55 = 51.79
12 Dec 54

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Exponential Smoothing (cont.)

FORECAST, Ft + 1
PERIOD MONTH DEMAND ( = 0.3) ( = 0.5)
1 Jan 37 37 37
2 Feb 40 37.00 37.00
3 Mar 41 37.90 38.50
4 Apr 37 38.83 39.75
5 May 45 38.28 38.37
6 Jun 50 40.29 41.68
7 Jul 43 43.20 45.84
8 Aug 47 43.14 44.42
9 Sep 56 44.30 45.71
10 Oct 52 47.81 50.85
11 Nov 55 49.06 51.42
12 Dec 54 50.84 53.21
13 Jan – 51.79 53.61

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Exponential Smoothing (cont.)

70 –

60 – Actual  = 0.50

50 –

40 –
Orders

 = 0.30
30 –
Larger , more responsive forecast; Smaller ,
20 – smoother forecast
“Best”  can be found by Solver
10 – Suitable for relatively stable time series

0– | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Month
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Similarities between MA and ES

• Both techniques assume demand pattern to be stationary.

• Both methods rely on a single parameter: N (number of
periods) for MA, and α (smooting parameter) for ES.
• Both MA and ES are less sensitive towards trend, so both of
them will be late in identifying trend.
• Both methods have a similar error distribution when the α =
2 / (N+1)

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• What happens when there is a definite trend?

A trendy clothing boutique has had the following sales

over the past 6 months:
1 2 3 4 5 6
510 512 528 530 542 552

560
550
Actual
540
Demand 530
Forecast
520
510
500
490
480
1 2 3 4 5Month
6 7 8 9 10

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4. Holt’s – Trend Corrected

(double exponential smoothing)
Level  St+1 = Dt+1 + (1-)(St + Gt)
Trend Gt+1 = b(St+1 – St) + (1-b)Gt

Ft+τ = St + τGt

D = Actual Demand
S = Intercept (level)
G = Slope (trend)
• More stability is given to the slope estimate which
implies β ≤ α.
• τ is the amount of step ahead forecast

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The larger the Beta value leads to a more progressive

forecasting results, in terms of modeling trend.

350

300

250 Demand
Holt B(0.1)
200 Holt B(0.3)

150

100
1 2 3 4 5 6 7 8 9 10 11 12
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Holt’s – Trend Corrected

• alfa = 0,1 ; beta = 0,1

Year Quarter Black Plastic Level Trend Forecast

2042,737 286,606
1998 I 2250 225 76,17173 301,1717
II 1737 444,7546 90,53001 535,2846
III 2412 722,9561 109,2972 832,2533
IV 7269 1475,928 173,6646 1649,593
1999 I 3514 1836,033 RAW
192,3087
DATA2028,342
/
II 2143 2039,808 ACTUAL
193,4553DATA
2233,263
III 3459 2355,837 205,7127 2561,549
IV 7056 3010,995 250,6572 3261,652
2000 I 4120 3347,487 259,2406 3606,727
II 2766 3522,654 250,8334 3773,488
III 2556 3651,739 238,6585 3890,398
IV 8253 4326,658 282,2845 4608,94248

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Holt’s – Trend Corrected

S0 = intercept, G0 = slope

Please note, 2 digits after decimal points should be appropriate

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Holt’s – Trend Corrected

St+1 = Dt+1 + (1-)(St + Gt)

S1 = 0,12250 + [(0,9)(2042.74 +286.61)

Gt+1 = b(St+1 – St) + (1-b)Gt

G1 = 0,1(2321.41 – 2042.74) + Ft+τ = St + τGt
(0,9)286.61 F1 = 2042.74
+(1)286.61

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Holt’s – Trend Corrected

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5. Accommodating Seasonality (No Trend)

w1 w2 w3 W4

M 162 173 146 161

T 122 115 131 118

W 142 150 130 129

TH 173 176 169 166

F 225 235 219 243

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300

250

200

150

100

50

0
M T W T F M T W T F M T W T F M T W T F

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Procedures

• Compute the sample mean of all the data

• Calculate seasonal factor for each period by dividing
each observation by the sample mean.

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From the Above Data

• Average of all w1 w2 w3 w4 AVR

observations is M 0.99 1.05 0.89 0.98 0.98

164.25.
T 0.74 0.70 0.80 0.72 0.74
• Divide each
W 0.86 0.91 0.79 0.79 0.84
observation by the
mean value
T 1.05 1.07 1.03 1.01 1.04

• Average factors
F 1.37 1.43 1.33 1.48 1.40
corresponding to the
same period of the
season

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Forecasts for Next Week

• Average multiplied by those factors

M = 0.98 x 164.25 = 161
T = 0.74 x 164.25 = 121
W = 0.84 x 164.25 = 138
T = 1.04 x 164.25 = 171
F = 1.40 x 164.25 = 230

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6. Winter’s – Trend and Seasonality Corrected

This method is appropriate when the systematic

component of demand has a level, a trend, and a
seasonal factor.

In this case we have

or

Ft+τ = (St+ τ Gt)(ct +1)

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St+1 = (Dt+1/ct+1) + (1-)(St+Gt)

Gt+1 = b(St+1 – St) + (1-b)Gt
ct+p+1 = g(Dt+1/St+1) + (1-g)ct+1
Ft+τ = (St+ τ Gt)(ct +1)

• S = time series (level)

• G = trend
• c = seasonal factor
• p = the number of periods after which the seasonal cycle
repeats

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Winter’s – Trend and Seasonality Corrected

The three steps:

• Step 1: Deseasonalize demand and run linear regression to

estimate level and trend
• Step 2: Estimate seasonal factors
• Step 3: Forecast the demand

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Winter’s – Trend and Seasonality Corrected

• Step 1: Deseasonalize the data

p is the number of periods after which the seasonal cycle repeats

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Deseasonalized data (for Winter’s)

Year Quarter Black Plastic Deseasonalized
N = 20, p = 4, so use the “even” equation
1998 I 2250
II 1737
III 2412 3575
IV 7269 3783,75
1999 I 3514 3965,375
II 2143 4069,625
III 3459 4118,75
IV 7056 4272,375
2000 I 4120 4237,375

1 II 2766 4274,125
III 2556 4595,125
IV 8253 4968,5
2001 I [22505491
+ 3514 + 5390,375
(2*(1737+2412+7269))]/(2*4)
II 4382 6083
III 4315 6575,375
IV 12035 6509,25
2002 I 5648 6489,5
II 3696 6688,25
III 4843
IV 13097 61

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Deseasonalized data (for Winter’s)

Deseasonalized Pooled Seasonal
Year Quarter Black Plastic Deseasonalized Seasonal Factor
Regression Factor

1998 I 2250 2819,603493 0,797984541 0,899279159

II 1737 3046,459375 0,570170085 0,598875319
III 2412 3575 3273,315257 0,736867613 0,697570004
IV 7269 3783,75 3500,17114 2,076755596 1,800289582
1999 I 3514 3965,375 3727,027022 0,942842641
II 2143 4069,625 3953,882904 0,541998853
III 3459 4118,75 4180,738787 0,82736573
IV 7056 4272,375 4407,594669 1,600873159
2000 I 4120 4237,375 4634,450551 0,888994273
II 2766 4274,125 4861,306434 0,568982852
III 2556 4595,125
3 5088,162316 0,502342465
IV 8253 4968,5 5315,018199
Y = A1,552769848
+ B*t
2001 I 5491 5390,375 5541,874081 0,990820058
II 4382 6083
Y t = 2592,75
5768,729963
+ (226,85) 1
0,759612606
III 4315 6575,375 (where t = the
5995,585846 sequence number of
0,719696142
IV 12035 6509,25 data ; A = intercept
6222,441728 ; B = slope)
1,934128197
2002 I 5648 6489,5 6449,29761 0,875754282
II 3696 6688,25 6676,153493 0,553612197
III 2
4843 6903,009375 0,701578071
IV 13097 7129,865257 1,83692111
intercept 2592,74761
slope 226,8558824 63

63

Deseasonalized data (for Winter’s)

Deseasonalized Pooled Seasonal
Year Quarter Black Plastic Deseasonalized Seasonal Factor
Regression Factor

1998 I 2250 2819,603493 0,797984541 0,899279159

II 1737 3046,459375 0,570170085 0,598875319
III 2412 3575 3273,315257 0,736867613 0,697570004
IV4 7269 3783,75 3500,17114 2,076755596 1,800289582
1999 I 3514 Seasonal
3965,375Factor = 3727,027022 0,942842641
II Actual Data/Deseasonalized Regression 0,541998853
2143 4069,625 3953,882904
III 3459 4118,75 4180,738787 0,82736573
Ex. SF1 = 2250/2819,6
IV 7056 4272,375 4407,594669 1,600873159
2000 I 4120 4237,375 4634,450551 0,888994273
II 2766 4274,125 4861,306434 0,568982852
5
III 2556 4595,125 5088,162316 0,502342465
Pooled Seasonal Factor =
IV 8253 4968,5 5315,018199 1,552769848
2001 I 5491 5390,375The average of seasonal
5541,874081 factor for
0,990820058 the
II 4382 6083 similar quarter
5768,729963 0,759612606
III 4315 6575,375 5995,585846 0,719696142
IV 12035 6509,25 6222,441728 1,934128197
2002 I
II
5648
3696
6489,5
6688,25
Step 2: Estimate seasonal factors
6449,29761
6676,153493
0,875754282
0,553612197
III 4843 6903,009375 0,701578071
IV 13097 7129,865257 1,83692111
intercept 2592,74761
64
slope 226,8558824

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Winter’s – Trend and Seasonality

Corrected (using Seasonal Factor)
Step 3: Forecast the demand

These
constants
are from
the
We obtain the initial estimates of level and trend exactly previous
as in the static case when we deseasonalized the step
demand (deseaso
(S0 = intercept, G0 = slope) nalized
demand-
step)

Note: the Winter’s method can be started from this step, if S0, G0, c1, c2, c3,
and c4 are known in advance 65

65

Winter’s – Trend and Seasonality

Corrected (using Seasonal Factor)

These
constants
are from
the
previous
St+1 = (Dt+1/ct+1) + (1-)(St+Gt) step
S1 = 0,12250/0,899 + (deseaso
(0,9)(2592.75+226.86) nalized
demand-
step)

Gt+1 = b(St+1 – St) + (1-b)Gt

G1 = 0,1(2787.84–2592.75)
+ (0,9)226.86

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 12/10/2020

Winter’s – Trend and Seasonality

Corrected (using Seasonal Factor)

Ft+τ = (St+ τ Gt)(ct +τ-p)

F2 = (2787.84+223.68)0.599

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67

Winter’s – Trend and Seasonality

Corrected (using Seasonal Factor)

ct+p+1 = g(Dt+1/St+1) + (1-g)ct+1

c0+4+1 = g(D0+1/S0+1) + (1-g)c0+1
c5 = (0,1(2250/2787.84) + (0,9)0,899
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 12/10/2020

Symbol adjustment – a little note …

St = Lt  represents level
Gt = Tt  represents trend
Ct = St  represents seasonal
τ = n  the amount of step ahead forecast

In these slides In Chopra’s book

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69

STATIC VS ADAPTIVE FORECAST

• A static method assumes that the estimates of level, trend, and

seasonality within the systematic component do not vary as new
demand is observed.
• In this case, we estimate each of these parameters based on
historical data and then use the same values for all future forecasts.

• In adaptive forecasting, the estimates of level, trend, and seasonality

are updated after each demand observation.

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