Purpose of Forecasting

Forecasting is an attempt to determine in advance the most likely outcome of an uncertain variable. Logistics requirements to be predicted include customer demand ,raw material prices,labour costs and lead times.

Nature of Demand
No Forecasting method is deemed to be superior then others in every respect .In order to generate a forecast demand must show some sign of regularity. Lumpy Demand When demand is lumpy or irregular there is so much randomness in the demand pattern that no reliable prediction can be made.

Long-term,short-term and mediumterm forecasts

Demand forecasts are organized by periods of time into 3 general categories Long term span a time horizon from one to five years. Medium term forecasts extend over a period from a few months to a year. Short term forecasts cover a time interval from a few days to several weeks.

Role of Logistician in Generating Forecasts

Medium and Long term forecasting are hardly given to logisticians now. Most frequently they are taken up by the marketing managers who try to influence their demand through advertisements and sales. Logisticians look into producing short term forecasts.

Forecast Model

Model spread system Total Company

push distribution to DCs

Product line

Product class
SKUs Central DC (safety stock) Branch/regional DCs SKUs

Derived v/s Independent demand

Demand for certain items cannot be related to the demand of some other items. However demand for some products can be derived from the requirements of some other items.

Principles of Forecasting

Steps in Forecasting

Qualitative Methods
Jury of execution opinion Sales force assessment

Delphi Method
Market Research Naive approach

Quantitative Methods
Casual Methods Time Series Extrapolation Methods

Time Series Extrapolation Methods

Trend Cyclical Variation Seasonal Variation Residual Variation

DEMAND = T X S X C X R Where : T = Trend S = Season C = Cycles R = Random Variables

Moving Averages Method

Moving Average= Demand in previous n periods n

Where n=the number of periods in the moving average

Month

Actual Washing machine sales, units 10 12 13 16 19 23

Three-month moving average

Jan Feb Mar Apr May June

(10+12+13)/3=11.67 (12+13+16)/3=13.67 (13+16+19)/3=16 (16+19+23)/3=19.33

July
Aug Sept Oct

26
30 28 18

(19+23+26)/3=22.67
(23+26+30)/3=26.33 (26+30+28)/3=28 (30+28+18)/3=25.33

Nov
Dec

16
14

(28+18+16)/3=20.67

Weighted Moving Average

Weighted moving Average ={(weight for period n) X (Demand in period n)} Weights

Weights Applied
3 2 1 6

Period
Last Month 2 mths ago 3 mths ago SUM OF WEIGHTS

Month

Actual Washing machine sales, Units 10 12 13 16 19 23

3-mth weighted moving average

Jan Feb Mar Apr May June

(1x10+2x12+3x13)/6=12.16 (1x12+2x13+3x16)/6=14.33 (1x13+2x16+3x19)/6=17 (1x16+2x19+3x23)/6=20.5

July
Aug Sept Oct

26
30 28 18

(1x19+2x23+3x26)/6=23.83
(1x23+2x26+3x30)/6=27.5 (1x26+2x30+3x28)/6=28.33 (1x30+2x28+3x18)/6=23.33

Nov
Dec

16
14

(1x28+2x18+3x16)/6=18.67

Exponential Smoothing
Ft = Ft-1 +(At-1-Ft-1) Where Ft =New forecast Ft-1 = Previous forecast = Smoothing Constant At-1 = Previous periods actual demand

Week 1 2 3 4 5 6

Sales 17 21 19 23 18 16

Exponential Smoothing Forcast. =0.2 17 17+0.2(17-17)=17 17+0.2(21-17)=17.8 17.8+0.2(19-17.8)=18.04 18.04+0.2(23-18.04)=19.03 19.03+0.2(18-19.03)=18.83

7
8 9 10

20
18 22 20

18.83+0.2(16-18.83)=18.26
18.26+0.2(20-18.26)=18.61 18.61+0.2(18-18.61)=18.49 18.49+0.2(22-18.49)=19.19

11
12

15
22

19.19+0.2(20-19.19)=19.35
19.35+0.2(22-19.35)=18.48

MEASURES OF FORECAST ERROR

1.Mean Absolute Deviation (MAD)

MAD= |Forecast Errors| n

Week

Actual Sales

Rounded Forecast

Absolute Deviation 0 4 1 5

1 2 3 4

17 21 19 23

17 17 18 18

5
6 7 8 9 10 11 12

18
16 20 18 22 20 15 22

19
19 18 19 18 19 19 18

1
3 2 1 4 1 4 4

30

MAD= |Forecast Errors| n =30 12

= 2.5

Mean Squared Error

MSE=(Forecast Errors) n

The Least Square Method

y=a+bx
Where; y= Compound value of the variable to be predicted a= y-axis intercept b= slope of the regression line x= independent variable

Also; a=y-bx

The slope b can be found by

b=

(xy nxy)

(x nx )

Year

Time Electrical period(x) power demand (y) 1 2 3 4 5 6 7 x=28 74 79 80 90 105 142 122 y=692

X^2

xy

1990 1991 1992 1993 1994 1995 1996

1 4 9 16 25 36 49

74 158 240 360 525 852 854

x^2=140 xy=3063

x=x =28 = 4
n 7

y=y = 692 = 98.86

n 7

b=(xy nxy) (x nx^2 )

b=295 =10.54 28

Therefore; a=y-bx
=98.86-10.54(4)=56.7

Therefore to predict fpr 1997;

y=a+bx =56.70+10.54(8)

=141.02

Seasonal Variations in Data

Monthly sales of IBM notebook computers at Bangaluru are shown below for 19992000

Month Sales Sales Average 1999Demand Demand 2000 -1999 -2000 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 80 75 80 90 115 110 100 90 85 75 75 80 100 85 90 110 131 120 110 110 95 85 85 80 90 80 85 100 123 115 105 100 90 80 80 80

Average Monthly Demand 94 94 94 94 94 94 94 94 94 94 94 94

Average Seasonal Index 0.957 0.851 0.904 1.064 1.309 1.223 1.117 1.064 0.957 0.851 0.851 0.851

Total average demand

= 1128

Average Monthly Demand= 1128 12

=94

Seasonal Index= Average1999-2000 Demand Average Monthly Demand