Unit –II

FORECASTING IN SUPPLY CHAIN

SRIPRIYAN KARUTHAPANDI
PSG COLLEGE OF TECHNOLOGY, COIMBATORE
 Role of Forecasting in a Supply Chain
• The basis for all strategic and planning decisions in a supply chain
• Used for both push and pull processes
• Examples:
• Production : scheduling, inventory, aggregate planning
• Marketing : sales force allocation, promotions, new production introduction
• Finance : plant/equipment investment, budgetary planning
• Personnel : workforce planning, hiring, layoffs

• All of these decisions are interrelated

Characteristics of Forecasts
• Forecasts are always wrong. Should include expected value and measure of error.
• Long-term forecasts are less accurate than short-term forecasts (forecast horizon is important)
• Aggregate forecasts are more accurate than disaggregate forecasts
* FORECASTING IN SUPPLY CHAIN 2
 Forecasting Methods
• QUALITATIVE METHODS – judgmental methods
– Forecasts generated subjectively by the forecaster
– Educated guesses
Type Characteristics Strengths Weaknesses
A group of managers meet & come up Good for strategic or One person's opinion can
Executive opinion
with a forecast new-product forecasting dominate the forecast
Uses surveys & interviews to identifyGood determinant of It can be difficult to develop a
Market research
customer preferences customer preferences good questionnaire
Excellent for forecasting
Seeks to develop a consensus among a long-term product demand,
Delphi method Time consuming to develop
group of experts technological changes, and
scientific advances

• QUANTITATIVE METHODS – based on mathematical modeling:

– Forecasts generated through mathematical modeling
Time Series Models:
❖Assumes information needed to generate a forecast is contained in a time series of data
❖Assumes the future will follow same patterns as the past
❖Statistical Time Series Models are very useful for short range forecasting problems such as weekly sales.
Causal Models or Associative Models
❖Explores cause-and-effect relationships
* ❖Uses leading indicators to predict the future 3
❖Housing starts and appliance sales
 Some common methods
Methods Forecast values Remarks
Simple Average F = 27
Average F = 26.25 Only last four values
Average F = 28 Increasing trend in last two values
Average F = 26 Decreasing trend in last two values
Average F = 27 Avg. of last three values
Weighted F = 26.833
Weighted Average on last three values
average method
Average F = 26 Remove 32, Avg. rest of values
-- F=30 Other methods

Constant
Noise
Level (constant)

F=a+ε
K – period moving average (0, σ^2)

2-period moving average

* 4
4-period moving average
 Time Series Models
Types
▪ Moving average
Exponential smoothing
▪ Exponential smoothing
▪ Method for date with trends For period t + 1
For period t For period t

Ft+1 = αDt + (1-α)Ft

F – Forecast
D – Demand
α(Alpha) – Smoothing constant

Forecast in the year 2021

F7 (2021) = αD6 + (1-α)F6
F6 (2020) = αD5 + (1-α)F5
F1 = ?
*
---------------------------------------- α=? 5
-----------------------------------------
Forecast in the year 2021
F7 (2021) = αD6 + (1-α)F6
Assume F1 = 27 (From simple average)
F6 (2020) = αD5 + (1-α)F5 Smoothing constant (α) = 0.2
----------------------------------------
F2 = 26.6 F3 = 27.68 F4 = 26.944
-----------------------------------------
F2 (2016) = αD1 + (1-α)F1 F5 = 27.1552 F6 = 26.92416
F7 = 26.97

Equation The smoothing factor “α” is a

value between 0 and 1, where α
closer to 1 means more weigh to
F7 (2021) = αD6 + (1-α)F6 the recent observations and hence
more rapidly changing forecast.

=
αD6 + (1-α) [αD5 + (1-α) F5]
= αD6 + (1-α) αD5 + (1-α)^2 F5

= αD6 + (1-α) αD5 + (1-α)^2 D4 + ………….. α(1-α)^5 D1 + (1-α)^6 F1

=
α + (1-α) α + α (1-α)^2 + ………….. α(1-α)^(n-1)

* 6
0.2+ 0.128 + 0.1028 + ………….. 0.05
 Seasonal models problem
(Seasonal Series with Increasing Trend)

Winter’s Method
Increasing in trend
------ Level

------ Trends
(slope)
1 2 3
53 58 62 ------ Seasonality
22 25 27
37 40 44
Forecast made in period t for any future period t + p
45
157
50
173
56
189
Ft+1 = (at + bt) x ct+1
Seasonal index
a2 = 0.2 x 156 + 0.8 (156 + 4) = 159.43
C1 = 0.34
C2 = 0.14
b2 = 0.3 x 159.43 – 156) + 0.7 x 4 = 3.829
C3 = 0.24 c3 = 0.25 x (22/159.43) + 0.75 x 0.14 = 0.1395
a1 = 156
*
C4= 0.29 b1 = 4 F3 = (159.43 + 3.829) x 0.24 = 39.18 F 7
67.29
13 =
 Causal method

Independent variable

Y = a + bx

6 7
F7 = a + bx7
 Goodness of a forecast
• Simple average
• Moving average Levels
• Exponential smoothing
• Linear regression
• Holts Levels + trends
• Basic model
• Winters model Levels + trends + smoothing

* FORECASTING IN SUPPLY CHAIN 9

 30 MAD = 30 – 30.75 + 32 – 30.75 + 31 – 30.75 + 30 – 30.75
= 0.75 + 1.25 + 0.25 + 0.75
32
=3
31
MSD = (30–30.75)2 + (32–30.75)2 + (31–30.75)2 + (30– 0.75)2
30 = 0.5625 + 1.5625 + 0.625 + 0.5625
µ= 30.75 = 2.75

M%D = (0.75/30)*100 + (1.25/32)*100 + (0.25/31)*100 + (-0.75/30)*100

= 2.5 + 3.91 + 0.8065 – 2.53
= 4.7165

* FORECASTING IN SUPPLY CHAIN 10