Production Planning

and Control
DR\ Wessam Mohsen Abdel Aziz

1
 Chapter 1

Demand Forecasting

2
Production planning:
Planning for the needs of:
✓ Labor
✓ Materials
✓ Equipment
✓ Time
During a specific period of time.
Production control:
Monitoring the performance of the production function to ensure that
the objectives are achieved and taking corrective actions when
necessary , which may include changing the plan its self.
Production control aims at:
❖ Achieving the desired level of output
❖ Quality assurance
❖ Using resources with no waste

3
Note that:
✓ Before planning the needs of the production process of labor\
materials\ equipment \ time , demand forecasting is carried
out.
✓ Forecasting the future expected demand of the products\
services provided by the business is the responsibility of the
marketing department
✓ According to which the production department will estimate
its needs to achieve the desired level of output.
✓ Forecasts are never 100 5 accurate
✓ Forecasting for a short period of time is more accurate than
forecasting for a long period of time.

4
Demand Forecasting:
✓ Estimating the future expected demand on a particular product or a
group of products. Over a specific period of time usually 1 year.
The process of demand forecasting is difficult for a number of
reasons:
1. The period covered by demand forecast
2. the degree of Political\economic\social stability
3. The degree of complexity
The period covered by demand forecast:
✓ Forecasting for short period is much more accurate than developing
long term forecasts.
Because:
1- the factors influencing product demand are less likely to change in
the short run than the long run
2- over the long run new variable s that can influence the demand on
the product can take place

5
the degree of Political\economic\social stability :
✓ holding all over factors constant, The more stable are the
political\lsocial\economic conditions in a particular country,
the more easy it is to estimate the future demand on a
particular product and vice versa.
Note that:
✓ The demand on some products increase during social\
political and economic instability : as the demand for
weapons and surveillance cameras
✓ the demand on some products increase with good economic\
political and social conditions : as the demand for perfumes
The degree of complexity :
✓ Which refers to the number of factors that influences the
demand on the product

6
✓ The demand on the product is influenced by a number of
factors:
• The price of product
• Degree of product quality
• Advertising campaigns
• Packaging
• Distribution outlets
• Level of competition
• Availability of product substitutes
The importance of demand forecasting:
✓ Demand forecasting is important for:
1. Long term planning
2. Intermediate term planning
3. Short term planning
7
Demand forecasting and long term planning:
✓ Demand forecasting is important for long term planning to
undertake long term decisions related to:

1. Facility location
2. Size of the facility
3. The level of technology employed
4. The types of products verities offered (e.g. Molto)
5. The nature and size of markets served by the business
Demand Forecasting and intermediate term planning:
✓ Demand forecasting is important for intermediate term planning to
undertake intermediate term decisions related to:
1. The size of labor force
2. Inventory level
3. Outsourced operations
4. Required overtime

8
Demand Forecasting and short term planning:
✓ Demand forecasting is important for short term planning to
undertake short term decisions related to:
1. Deciding on product delivery time.
Demand forecasting techniques:
✓ Demand forecasting techniques are both qualitative and
quantitative
Qualitative demand forecasting techniques :
✓ The forecasting techniques that rely on judgment and opinion
Quantitative demand forecasting techniques:
✓ The forecasting techniques that rely on hard quantitative data
There are two types of quantitative forecasting techniques:
1. Time series forecasting
2. Causal forecasting

9
Time series analysis:
✓ Relying on historical sales data to predict future sales
There are four time series forecasting techniques:
1. Naïve forecasting
2. Moving average
3. Weighted moving average
4. Exponential smoothing
Example 1:
Italiano pasta has the following information about actual sales
during the last three years
year 2020 2021 2022
Quantity 1200 1350 1470

10
Naïve forecasting:
✓ Using previous year actual sales figure as the forecasted
sales figure for the next year.
The forecasted sales figure for 2023 using naïve forecasting =
1470 units
Moving average technique:
Using 3 years moving average , develop a forecast for 2023
sales
= (1200+ 1350 + 1470 )\3 = 1340 units
Using 2 years moving average, develop a forecast for 2023
sales:
= (1350 + 1470 ) \ 2 = 1410 units

11
Weighted moving average:
use 3 years weighted moving average to develop a forecasted
sales figure for 2023:
The relative weights are 20%, 30%, and 50 % respectively
The forecasted sales figure for 2023:
(1200 *0.2) + (1350*0.3) +(1470*0.5) = 1380 units
Use 2 years weighted moving average to develop a forecasted
sales figure for 2023:
The relative weights are 40% and 60 % respectively
The forecasted sales figure for 2023:
(1350 * 0.4) + ( 1470 * 0.6) = 1422 units
Exponential smoothing:
Ft = Ft-1 + α (At-1 - Ft-1)

12
 Ft: the forecasted sales figure for period T
At-1 : the actual sales figure for the previous period
Ft-1: the forecasted sales figure for the previous period
α : the percentage of the forecast error that that has a value of
zero as a minimum limit and a value of 1 as a maximum limit.
(At-1 – Ft-1): the forecast error
Use exponential smoothing to develop a forecast for 2023 sales
use α = 0.6
year Actual sales Forecast Calculations
2020 1200 0 0
2021 1350 1200 -
2022 1470 1260 1200+ 0.4 (1350-
1200) = 1260
2023 1344 1260+ 0.4(1470-
1260) = 1344
13
Example 2:
The following are the actual sales figures for Lipton tea during the last
six months

Month January February March April May June

Sales 17 21 19 23 18 16

Required:
Estimate the sales of July using:
1- naïve forecasting
2- 4 months moving average
3- 4 months weighted moving average using the following weights
respectively (10%, 20%, 30%, 40%)
4- exponential smoothing at α = 0.2

14
Solution:
1- naïve forecasting: 16
2- 4 months moving average :
(16+ 18+ 23+ 19) \ 4 = 19
3- 4 months weighted moving average:
(16* 0.4) + (18*0.3) + (23* 0.2) + (19*0.1) = 18.3
4- exponential smoothing at α = 0.2:
Period Actual sale forecast Calculations
1 17 - -
2 21 17 -
3 19 17.8 17+ 0.2(21-17)
4 23 18.04 17.8 +0.2 (19 -17.8)
5 18 19.03 18.04 + 0.2(23-18.04)
6 16 18.82 19.03 + 0.2 (18 -19.03)
7 - 18.26 18.82 +0.2 (16 -18.82)
15
There are different patterns that can be detected from time
series data:
1. Trend
2. Seasonality
3. Cycles
4. Irregular variations
Trend:
➢ Refers to a long term upward or downward movement in the
data.
➢ Cultural changes and income changes are examples of trends
Seasonality:
➢ Short term regular variations related to the calendar or time
of the day (restaurants and cinemas have seasonal variations
during the day).

16
Cycles:
Wave like variations lasting for more than one year (economic
conditions)
Irregular variations:
They are caused by unusual circumstances (severe weather
conditions, strikes) that don’t reflect the typical behavior. They
must be removed from the time series.
Dealing with trend and seasonality:
Example 3:
You are given the following information about the sales of
Crunchy. The sales consists of both trend and seasonality . The
trend component of demand is forecasted is forecasted using
the following equation : Ft = 1500 + 5t

17
Quarter Sales in units Seasonal relative
1 1600 0.5
2 1530 0.85
3 1890 1.2
4 2475 1.5

18
Based on the trend equation:
Forecast the demand for the 7th quarter:
1500 + 5(7) = 1535 units
Forecast the demand for the 8h quarter:
1500 + 5(8)= 1540 units
Forecast the demand for the 9th quarter:
1500 + 5(9) = 1545 units
De-seasonalized sales :
✓ It refers to removing the effect of seasonality from data
Quarter sales De-sasonalized sales
1 1600 (1600\0.5) = 3200
2 1530 (1530\0.85)= 1800
3 1890 (1890\1.2)= 1575
4 2475 (2475 \1.5)= 1650

19
The forecasted sales figure based on both trend and seasonality:
Forecast the demand for the 7th quarter:
= 1535* 1.2 = 1842 units
Forecast the demand for the 8h quarter:
=1540 * 1.5= 2310 units
Forecast the demand for the 9th quarter:
= 1545*0.5 =773 units
Causal forecasting:
✓ Forecasting the demand on the product based on the factor (s) that
influence such demand
the demand forecasting models used in this respect are :
1- simple linear regression
2- multiple linear regression
3- curvilinear regression
4- multiple curvilinear regression

20
Simple linear regression:
✓ Used when the demand on the product is influenced by one
factor only and the relationship is linear
✓ E.g.,: the demand on Nutella is influenced by the level of
income
Multiple linear regression:
✓ There are multiple factors that can influence the demand on
the product and the relation ship is linear
✓ E.g.,: the demand on any product is influenced by a number of
factors as: price\ level of income\ product quality\
Curvilinear regression:
✓ There is only one factor that can influence the demand on the
product , but the relationship is non linear

21
Multiple curvilinear regression:
✓ Is the most realistic case
✓ The demand on the product is influenced by many factors and
the relationship is non linear.
Simple Linear regression:
Y = a + b x (equation 1)
y: the demand on the product
a: the intercept, the minimum demand on the product when
the value of (x) equals zero
b: the slope of the line representing the relationship between
(x) and (y). It measures the change in the demand on the
product due to the change in (x) by one unit.
X: the independent variable that influences the demand

22
Equation (2):
Σy = na + Σxb
Equation (3):
Σ xy = Σxa + Σ X2 b
Example 4:
The following table shows the sales of tea in thousands of kilos
and the sales of sugar in thousands of kilos in five different large
retail outlets
Required:
Estimate the demand on sugar when the demand on tea
reaches 90, 000 kilos in any retail outlet using simple linear
regression

23
 City 1 2 3 4 5

Tea 77 75 72 73 71
(thousands
of kilos)
Sugar 5.5 5.1 4.7 4.8 4.6
(thousands
of kilos)

24
Solution:
Y=a+bx
Y: the demand on sugar
X: the demand on tea
Retail outlet x y xy X2

1 77 5.5 423.5 5929

2 75 5.1 382.5 5625

3 72 4.7 338.4 5184

4 73 4.8 350.4 5329

5 71 4.6 326.6 5041

total 368 24.7 1821.4 27,108

25
Equation (2):
Σy = na + Σxb
24.7 = 5a +368 b
Equation (3):
Σ xy = Σxa + Σ X2 b
1821.4 = 368 a + 27,108 b
Multiply equation (2) by 73.6
1817.92 = 368 a+ 27,084 b (equation 4)
Subtract equation (4) from equation (3)
1821.4 = 368 a + 27,108 b
(-)
1817.92 = 368 a+ 27,084 b
3.48 = 24 b

26
b= 3.48 \ 24 = 0.15
By substitution in equation (3):
1821.4 = 368 a + 27,108 (0.15)
1821.4 – 4066.2 = 368 a
- 2244.8 = 368 a
a= - 2244.8 \368 = -6.1
By substitution in equation (1):
Y=a+bx
Y = -6.1 + 0.15 (90)
Y = 7.4 thousands tons
Example 5:
You are given the following information about the sales of coffee
and coffee creamer during the last 4 years

27
Required:
Estimate the future expected demand on coffee creamer using
simple linear regression when the sales of coffee reaches 1650
boxes

Solution:
Y=a+bx
Y: the demand on coffee creamer
X: the demand on coffee

28
year x y xy X2

2019 1200 950 1,140,000 1,440,000

2020 1350 1050 1,417,500 1,822,500
2021 1400 1110 1,554,000 1,960,000
2022 1570 1230 1,931,100 2,464,900
total 5520 4340 6,042,600 7,687,400

29
Equation (2):
Σy = na + Σxb
4340 = 4 a + 5520 b
Equation (3):
Σ xy = Σxa + Σ X2 b
6,042,600 = 5,520 a + 7,687,400 b
Multiplying equation (2) by 1380:
5,989,200 = 5520 a + 7,617,600 b (equation 4)
Subtract equation (4) from equation (3):
6,042,600 = 5,520 a + 7,687,400 b
(-)
5,989,200 = 5520 a + 7,617,600 b
53400 = 69800 b

30
b= 53400 \69800 = 0.77
By substituting in equation (3):
6,042,600 = 5,520 a + 7,687,400 (0.77)
123,302 = 5520 a
a= 22.34
By substituting in equation (1):
Y=a+bx
Y = 22.34 + (0.77 * 1650) = 1,293 boxes
Note that:
✓ There is no “perfect forecasting”, which means that
forecasting can never be 100 % accurate.
What are the types of forecasting errors?
• Random error
• Bias error

31
Random errors:
✓ They are those type of errors that can not be explained
through the forecasting model.
✓ These errors are random in nature, which means that the
forecasting figures are some times higher and sometimes
lower than the actual sales figures.
Bias error:
✓ They are those types of errors that have one direction.
✓ Actual figures are higher than the forecasted figures all the
time or lower than the forecasted sales figures all the time.
The reasons behind bias errors:
1. Using inappropriate forecasting model
2. Using inappropriate relationship between the variables
3. Ignoring trends and seasonality

32
Measuring the forecasting error:
One technique that could be used to measure the forecasting
error is the “Mean absolute deviation (MAD)”
Mean absolute deviation (MAD):
MAD = Σ letl \n
Σ letl: summation of the absolute value of the forecasting error
et: the forecasting error at period T = (At – Ft)
n: number of periods Non zero
Note that:
✓ MAD is a measure of random error (two direction error), since
it captures the cases when At > Ft and At < Ft

33
✓ To measure bias error ( I direction error) we use mean
deviation . Since it captures on case only that is At > Ft or At
<Ft
MD = Σ et\n
Example 6:
you are given the following information about the actual and
forecasted sales figures for Atlas. Required:
1- calculate MAD
2- calculate MD
3- forecast the demand for the 7th period using exponential
smoothing at α = 0.2
Period 1 2 3 4 5 6
Actual 17 21 19 23 18 16
forecaste 17 17 17.8 18.04 19.03 18.83
d

34
MAD = Σ letl \n
MD = Σ etl\n
Period actual forecasted et letl
1 17 17 0 0
2 21 17 4 4
3 19 17.8 1.2 1.2
4 23 18.04 4.96 4.96
5 18 19.03 -1.03 1.03
6 16 18.83 -2.83 2.83
total 6.3 14.02

MAD = 14.02|5 = 2.804

MD = 6.3 |5 = 1.26

35
3- Exponential smoothing:
Ft = Ft-1 + α (At-1 - Ft-1)
Ft = 18.83 + 0.2( 16 – 18.83) = 18.26 units
Note that :
✓ MAD can be used to determine the most suitable
forecasting technique
✓ The most suitable forecasting technique is the one associated
with the lowest MAD
Example 7:
You are given actual sales figures for the following 5 periods

Period 1 2 3 4 5
actual 20 25 22 24 18

36
Required:
1- use 2 years moving averaging to forecast sales for 6 periods
2- forecast sales of the 6th period using exponential smoothing
at α = 0.4
3- calculate MAD under each forecasting technique
4- which of the two forecasting techniques is better?
Solution:
1- Period Actual sales Forecasted sales
1 20 0
2 25 0
3 22 22.5
4 24 23.5
5 16 23
6 - 21

37
2- exponential smoothing at α =0.4
Exponential smoothing:
Ft = Ft-1 + α (At-1 - Ft-1)
Period Actual Forecasted Calculations

1 20 - -

2 25 20 -

3 22 22 20+0.4 (25-20)

4 24 22 22+0.4(22-22)

5 18 22.8 22+0.4(24-22)

6 - 20.9 22.8+0.4(18-22.8)

38
3- MAD for 2 years moving average forecast:

Period Actual Forecasted et letl

1 20 - - -
2 25 - - -
3 22 22.5 -0.5 0.5
4 24 23.5 0.5 0.5
5 18 23 -5 5
6 - 21 0 -
Total 6

MAD = 6\3 = 2

39
MAD using exponential smoothing:
Period Actual Forecasted et letl
1 20 - - -
2 25 20 5 5
3 22 22 0 0
4 24 22 2 2
5 18 22.8 -4.8 4.8
6 - 20.9 - -
total 11.8

MAD = 11.8 \3 = 3.93

4- it is preferable to use 2 years moving average as the
forecasting technique , because it is associated with lower MAD

40
Note that:
Demand forecasting gives a point estimation , but sometimes the
decision maker wants interval estimation that has an upper limit
and a lower limit to deal with uncertainty
Upper limit demand = average + ẟ Z
Lower limit demand = average - ẟ Z
Average: expected demand for the required period
ẟ: standard deviation = 1.25 * MAD
Z: the Z value at the given confidence level
Example 8:
If MAD = 2.804
The forecasted demand for the 7th period = 18.27
Z value at 90% confidence level = 1.64

41
Required: calculate
1. Standard deviation
2. Upper level of demand
3. Lower level of demand
Solution:
1- standard deviation (ẟ) = 1.25 * MAD
= 1.25 * 2.804 = 3.505
2- upper level demand :
Average + ẟ Z
18.27 + 3.505 (1.64) = 24 units
3- lower level demand:
Average - ẟ Z
18. 27 - 3.505 (1.64) = 12.5 units

42
Required: calculate
1. Standard deviation
2. Upper level of demand
3. Lower level of demand
Solution:
1- standard deviation (ẟ) = 1.25 * MAD
= 1.25 * 2.804 = 3.505
2- upper level demand :
Average + ẟ Z
18.27 + 3.505 (1.64) = 24 units
3- lower level demand:
Average - ẟ Z
18. 27 - 3.505 (1.64) = 12.5 units

43