Saurav Chakravorty

Friday, July 23, 2010

Demand Planning
In Supply Chain Context
2
Agenda
1. Demand Planning Process
2. Forecasting Models
3. Tools and Functionalities
4. Best Practices
5. KPIs
3
Demand Planning Process
To try to make the future happen is risky; but it is a
rational activity. And it is less risky than coasting
along on the comfortable assumption that nothing is
going to change.
Peter F. Drucker
5
First level bullet goes here and can be
quite long
Second level bullet goes here
Another second level bullet goes here
Try to keep bulleted lists simple
No more than you need to explain your
point

Demand Planning Process
6
Forecasting Methods
7
Conditional Distribution of
t+l
given Y
1
, Y
2

, Y
t

Point Prediction

Prediction Interval PI




What is Forecasting?
) , ( ) (
1 1 1
y Y y Y Y l Y
t
l t
t
= = E =
+

o
o
> = = s s P

+
) (
] , [ erval int
t t
l t
y Y y Y B Y A
B A the is At

1 1
1
8
Qualitative
Time Series
Static
Adaptive
Causal
Simulation
Forecasting Methods
9
Qualitative
Capital items
Little information is available
Still used the most
Time series
Elegant
Based on past is the reflection of future
Causal
Association not causation
Leading indicators
Simulation
Dynamism
Can be distribution-independent

Forecasting Methods
10
Level Model

Trend Model

Seasonal Model
Time Series Forecasting
t t
u a x + =
t t
u t b a x + + =
( ) y seasonalit additive
t t t
u c t b a x + + + =
( )
indices seasonal the are c c c where
u c t b a x
t t t
t t t

t t 2
y seasonalit tive multiplica

= =
+ + =
11
Simple Moving Average
Good for Linear Trends
Exponential Smoothing
ARIMA
GARCH (eGARCH, mGARCH)
Holtzs Model
Winters Model
Models in time series forecasting
12
F
t+1
= (L
t
+ lT)S
t+1
= forecast for period t+l in period t
L
t
= Estimate of level at the end of period t
T
t
= Estimate of trend at the end of period t
S
t
= Estimate of seasonal factor for period t
F
t
= Forecast of demand for period t (made period t-1 or
earlier)
D
t
= Actual demand observed in period t
E
t
= Forecast error in period t
A
t
= Absolute deviation for period t = |E
t
|
MAD = Mean Absolute Deviation = average value of A
t

Basic Formula for Adaptive Forecasting
13
Used when demand has no observable trend or seasonality
Systematic component of demand = level
The level in period t is the average demand over the last N
periods (the N-period moving average)
Current forecast for all future periods is the same and is based
on the current estimate of the level
L
t
= (D
t
+ D
t-1
+ + D
t-N+1
) / N
F
t+1
= L
t
and F
t+n
= L
t

After observing the demand for period t+1, revise the
estimates as follows:
L
t+1
= (D
t+1
+ D
t
+ + D
t-N+2
) / N
F
t+2
= L
t+1

Moving Average
14
Used when demand has no observable trend or seasonality
Systematic component of demand = level
Initial estimate of level, L
0
, assumed to be the average of all
historical data
L
0
= [
i=1 to n
D
i
]/n
Current forecast for all future periods is equal to the current
estimate of the level and is given as follows:
F
t+1
= L
t
and F
t+n
= L
t

After observing demand Dt+1, revise the estimate of the level:
L
t+1
= oD
t+1
+ (1-o)L
t

L
t+1
=
n=0 to t+1
[o(1-o)
n
D
t+1-n
]
a is empirically determined typically between 0.2 and 0.3
Simple Exponential Smoothing
15
Include all past observations
Weight recent observations much more
heavily than very old observations:
Exponential Smoothing
weight
today
Decreasing weight given
to older observations
0 1 < < o
) ( o o 1
o
2
1 ) ( o o
16
Complicating Factors
Simple Exponential Smoothing works well with
data that is moving sideways (stationary)
Must be adapted for data series which exhibit a
definite trend
Must be further adapted for data series which
exhibit seasonal patterns
17
Holts Method:
Double Exponential Smoothing
Ideas behind smoothing with trend:
``De-trend'' time-series by separating base from trend effects
Smooth base in usual manner using o
Smooth trend forecasts in usual manner using |
Smooth the base forecast B
t



Smooth the trend forecast T
t



Forecast k periods into future F
t+k
with base and trend
) )( (
1 1
1

+ + =
t t t t
T B D B o o
1 1
) 1 ( ) (

+ =
t t t t
T B B T | |
t t k t
kT B F + =
+
18
Initial Estimates
Run Linear Regression
D
t
= at + b
T
0
= a
L
0
= b
In period t, the forecast for future periods is
expressed as follows:
F
t+1
= L
t
+ T
t

F
t+n
= L
t
+ nT
t


Holtzs Model
19
L
t+1
= o(D
t+1
/S
t+1
) + (1-o)(L
t
+T
t
)
T
t+1
= |(L
t+1
- L
t
) + (1-|)T
t

S
t+p+1
= (D
t+1
/L
t+1
) + (1-)S
t+1

o = smoothing constant for level
| = smoothing constant for trend
= smoothing constant for seasonal factor
P = period of seasonality
Winters Model
20
Winters Model
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1 3 5 7 9 11
Demand
Deseasonlized
Demand
21
Winters Model
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Demand
Forecast
22
Moving to Causal Models
Regression using Predictors
23
One-dimensional regression
Ordinary Least-Squares a
b
24
One-dimensional regression
Ordinary Least-Squares
C bX Y + =
Find a line that represent the
best linear relationship:
a
b
25
Problem: the data does not
go through a line


One-dimensional regression
Ordinary Least-Squares
i i i
i i i
y C Bx e
y y e
+ =
=

i i
y C Bx +
a
b
26
Minimize e
i
2

Least Square Method
( )( )
( )
x B y C
S
S
r
x x
y y x x
B
x
y
y x
n
i
i
n
i
i i
=
=

=
=
,
1
2
1
27
Forecasting Tools & Functionalities
28
First level bullet goes here and can be
quite long
Second level bullet goes here
Another second level bullet goes here
Try to keep bulleted lists simple
No more than you need to explain your
point

Forecasting Tools and Functionalities
29
Best Practices
30
First level bullet goes here and can be
quite long
Second level bullet goes here
Another second level bullet goes here
Try to keep bulleted lists simple
No more than you need to explain your
point

Best Practices
31
KPIs