Forecasting

Chapter 13

© 2007 Pearson Education

How Forecasting fits the Operations Management Philosophy

Operations As a Competitive Weapon Operations Strategy Project Management

Process Strategy Process Analysis Process Performance and Quality Constraint Management Process Layout Lean Systems

Supply Chain Strategy Location Inventory Management Forecasting Sales and Operations Planning Resource Planning Scheduling

© 2007 Pearson Education

begins with accurate forecasts.  Forecasts are frequently reviewed and adjusted with point of sale data.  Statistical forecasts are adjusted with planned promotion predictions.Forecasting at Unilever  Customer demand planning (CDP).  Unilever has a state-of-the-art CDP system that blends historical shipment data with promotional data and current order data. which is critical to managing value chains. © 2007 Pearson Education .  This has enabled Unilever to reduce its inventory and improved its customer service.

week. There are five basic patterns of most time series. Seasonal. a. The systematic increase or decrease in the mean of the series over time. The fluctuation of data around a constant mean. Trend.Demand Patterns   Time Series: The repeated observations of demand for a service or product in their order of occurrence. e. or season. month. depending on the time of day. c. b. The unforecastable variation in demand. © 2007 Pearson Education . d. Horizontal. Cyclical. Random. The less predictable gradual increases or decreases over longer periods of time (years or decades). A repeatable pattern of increases or decreases in demand.

Demand Patterns Horizontal Trend Seasonal Cyclical © 2007 Pearson Education .

 Units of measure.  Choosing the type of forecasting method:  Qualitative methods  Judgment  Quantitative methods  Causal  Time-series © 2007 Pearson Education .Designing the Forecast System  Deciding what to forecast  Level of aggregation.

© 2007 Pearson Education .  Level of Aggregation: The act of clustering several similar services or products so that companies can obtain more accurate forecasts.  Forecast the number of units of demand then translate into sales revenue estimates  Stock-keeping unit (SKU): An individual item or product that has an identifying code and is held in inventory somewhere along the value chain. Errors in forecasts for individual items may be much higher.  Units of measurement: Forecasts of sales revenue are not helpful because prices fluctuate.Deciding What To Forecast  Few companies err by more than 5 percent when forecasting total demand for all their services or products.

and replenishment (CPFR): A nine-step process for value-chain management that allows a manufacturer and its customers to collaborate on making the forecast by using the Internet.  Collaborative planning. such as promotional campaigns. © 2007 Pearson Education .  Time-series analysis: A statistical approach that relies heavily on historical demand data to project the future size of demand and recognizes trends and seasonal patterns. economic conditions.  Causal methods: A type of quantitative method that uses historical data on independent variables. expert opinions. and competitors’ actions. consumer surveys. forecasting. to predict demand. and sales force estimates into quantitative estimates.Choosing the Type of Forecasting Technique  Judgment methods: A type of qualitative method that translates the opinions of managers.

Demand Forecast Applications Time Horizon Application Forecast Quality Short Term (0–3 months) • Individual products or services • Inventory management • Final assembly scheduling • Workforce scheduling • Master production scheduling Medium Term (3 months– 2 years) • Total sales • Groups or families of products or services • Staff planning • Production planning • Master production scheduling • Purchasing • Distribution • Causal • Judgment Long Term (more than 2 years) • Total sales Decision Area • Facility location • Capacity planning • Process management Forecasting • Time series Technique • Causal • Judgment © 2007 Pearson Education © 2007 Pearson Education • Causal • Judgment .

 Market research: A systematic approach to determine external consumer interest in a service or product by creating and testing hypotheses through data-gathering surveys.  Executive opinion: A forecasting method in which the opinions.  Delphi method: A process of gaining consensus from a group of experts while maintaining their anonymity.  Executive opinion can also be used for technological forecasting to keep abreast of the latest advances in technology.Judgment Methods  Sales force estimates: The forecasts that are compiled from estimates of future demands made periodically by members of a company’s sales force. and technical knowledge of one or more managers are summarized to arrive at a single forecast. © 2007 Pearson Education . experience.

Adjust quantitative forecasts when they tend to be inaccurate and the decision maker has important contextual knowledge.  Guidelines for the use of judgment to adjust quantitative forecasts to improve forecast quality are as follows: 1. 2. Make adjustments to quantitative forecasts to compensate for specific events. the actions of competitors. such as advertising campaigns. or international developments.Guidelines for Using Judgment Forecasts  Judgment forecasting is clearly needed when no quantitative data are available to use quantitative forecasting approaches. © 2007 Pearson Education .

 It removes the effects of random fluctuation and is most useful when demand has no pronounced trend or seasonal influences. or Forecast = Dt  Simple moving average method: A time-series method used to estimate the average of a demand time series by averaging the demand for the n most recent time periods. … © 2007 Pearson Education .Time Series Methods  Naive forecast: A time-series method whereby the forecast for the next period equals the demand for the current period.

Forecasting Error  For any forecasting method.  Forecast error is the difference found by subtracting the forecast from actual demand for a given period. Et = Dt . it is important to measure the accuracy of its forecasts.Ft where Et = forecast error for period t Dt = actual demand for period t Ft = forecast for period t © 2007 Pearson Education .

Compute a three-week moving average forecast for the arrival of medical clinic patients in week 4. If the actual number of patient arrivals in week 4 is 415. What is the forecast for week 5? © 2007 Pearson Education . The numbers of arrivals for the past 3 weeks were: Week 1 2 3 Patient Arrivals 400 380 411 b. what is the forecast error for week 4? c.Moving Average Method Example 13.2 a.

2 Solution The moving average method may involve the use of as many periods of past demand as desired. The stability of the demand series generally determines how many periods to include.Example 13. 450 — 430 — Patient arrivals 410 — 390 — 370 — Actual patient arrivals 0 © 2007 Pearson Education | 5 | 10 | 15 Week | 20 | 25 | 30 .

2 Solution continued a.3 and 4 . (415 – 397 = 18) © 2007 Pearson Education c. Week 1 2 3 4 5 Arrivals Average 400 380 411 397 415 402 ? Forecast for week 4 is the average of the arrivals for weeks 1. Forecast error for week 4 is 18. Forecast for week 5 is the average of the arrivals for weeks 2.Example 13.2 and 3 F4 = 411 + 380 + 400 3 b. It is the difference between the actual arrivals (415) for week 4 and the average of 397 that was used as a forecast for week 4.

and 6-Week MA Forecasts 3-week moving average forecast Patient Arrivals 6-week moving average forecast Actual patient arrivals Week © 2007 Pearson Education .Comparison of 3.

Application 13.1  We will use the following customer-arrival data in this moving average application: © 2007 Pearson Education .

1a Moving Average Method F5  D4  D3  D2 790 810 740   780 3 3 780 customer arrivals  F6  D5  D4  D3 805  790  810   801.667 3 3 802 customer arrivals © 2007 Pearson Education  © 2007 Pearson Education .Application 13.

the sum of the weights equals 1.Weighted Moving Averages  Weighted moving average method: A time-series method in which each historical demand in the average can have its own weight. Ft+1 = W1Dt + W2Dt-1 + …+ WnDt-n+1 © 2007 Pearson Education .0.

30810  0.5 802 customer arrivals © 2007 Pearson Education  © 2007 Pearson Education .1b Weighted Moving Average F5  W1D4  W2 D3  W3D2  0.Application 13.50790  0.50805  0.30790  0.20810  801.20740  786 786 customer arrivals  F6  W1D5  W2D4  W3D3  0.

0 Exponential smoothing is the most frequently used formal forecasting method because of its simplicity and the small amount of data needed to support it. Ft+1 = (Demand this period) + (1 – )(Forecast calculated last period) =  Dt + (1–)Ft Or an equivalent equation: Ft+1 = Ft + (Dt – Ft ) Where alpha (is a smoothing parameter with a value between 0 and 1.Exponential Smoothing  Exponential smoothing method: A sophisticated weighted moving average method that calculates the average of a time series by giving recent demands more weight than earlier demands. © 2007 Pearson Education .

1) = 394.10(411) + 0.10.4 © 2007 Pearson Education . It is now the end of week 3. What is the forecast error for week 4 if the actual demand turned out to be 415? E4 = 415 .Exponential Smoothing Example 13. Ft+1 =  Dt + (1-)Ft F4 = 0.1 Week 1 2 3 4 5 Arrivals 400 380 411 415 ? b.90(392.392 = 23 c. What is the forecast for week 5? F5 = 0. a. calculate the exponential smoothing forecast for week 4.10(415) + 0. Using  = 0.90(390) = 392.3 Reconsider the medical clinic patient arrival data.

Application 13.1c Exponential Smoothing Ft1  Ft  Dt  Ft   783 0.4 784 customer arrivals  Ft1  Ft  Dt  Ft   784.52 789 customer arrivals © 2007 Pearson Education © 2007 Pearson Education  .4  788.4  0.20790 783  784.20805 784.

The method used for each item may change from period to period. © 2007 Pearson Education .  The forecasts are compared to actual demand. and the method that produces the forecast with the least error is used to make the forecast for the next period.  Combination forecasts: Forecasts that are produced by averaging independent forecasts based on different methods or different data or both.  Focus forecasting: A method of forecasting that selects the best forecast from a group of forecasts generated by individual techniques.Using Multiple Techniques  Research during the last two decades suggests that combining forecasts from multiple sources often produces more accurate forecasts.

They often are facilitated by someone who might be called a demand manager. © 2007 Pearson Education . consists of structured steps. typically done on a monthly basis. or demand/supply planner. forecast analyst.Forecasting as a Process The forecast process itself.

economic outlook. • The best way to improve forecast accuracy is to focus on reducing forecast error.Some Principles for the Forecasting Process • Better processes yield better forecasts. © 2007 Pearson Education © 2007 Pearson Education . strive for zero bias. market share. • Far more can be gained by people collaborating and communicating well than by using the most advanced forecasting technique or model. • Whenever possible. forecast at higher. as well as better relationships with suppliers and customers. • Better forecasts result in better customer service and lower costs. Forecast in detail only where necessary. The challenge is to do it better than the competition. • Bias is the worst kind of forecast error. • The forecast can and must make sense based on the big picture. and so on. • Demand forecasting is being done in virtually every company. aggregate levels.

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