Professional Documents
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Figure 2.5
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Forecasting Approaches
Qualitative Methods
Used when little data exist
New products
New technology
Involves intuition, experience
e.g., forecasting sales on
Internet
1. Naive approach
2. Moving averages
time-series
3. Exponential models
smoothing
4. Trend projection
5. Linear regression associative
model
Trend Cyclical
Seasonal Random
Seasonal peaks
Actual demand
line
Average demand
over 4 years
Random variation
| | | |
1 2 3 4
Time (years)
Figure 4.1
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Trend Component
Persistent, overall upward or
downward pattern
Changes due to population,
technology, age, culture, etc.
Typically several years
duration
0 5 10 15 20
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Random Component
Erratic, unsystematic, ‘residual’
fluctuations
Due to random variation or unforeseen
events
Short duration
and nonrepeating
M T W T F
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Naive Approach
Assumes demand in next
period is the same as
demand in most recent period
e.g., If January sales were 68, then
February sales will be 68
Sometimes cost effective and
efficient
Can be good starting point
22 –
20 –
18 –
16 –
14 –
12 –
10 –
| | | | | | | | | | | |
J F M A M J J A S O N D
20 – Actual
sales
15 –
Moving
10 – average
5 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Figure 4.2
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Exponential Smoothing
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
Requires smoothing constant ()
Ranges from 0 to 1
Subjectively chosen
Involves little record keeping of past
data
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Exponential Smoothing
New forecast = Last period’s forecast
+ (Last period’s actual demand
– Last period’s forecast)
Ft = Ft – 1 + (At – 1 - Ft – 1)
Actual = .5
200 – demand
Demand
175 –
= .1
150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
Actual = .5
200
Chose
– high values
demandof
Demand
n
∑100|Actuali - Forecasti|/Actuali
MAPE = i=1
n
Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1)
Tt = b(Ft - Ft - 1) + (1 - b)Tt - 1
Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
Table 4.1
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Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24 Step 1: Forecast for Month 2
6 21
7 31 F2 = A1 + (1 - )(F1 + T1)
8 28 F2 = (.2)(12) + (1 - .2)(11 + 2)
9 36
10 = 2.4 + 10.4 = 12.8 units
Table 4.1
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Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80
3 20
4 19
5 24 Step 2: Trend for Month 2
6 21
7 31 T2 = b(F2 - F1) + (1 - b)T1
8 28 T2 = (.4)(12.8 - 11) + (1 - .4)(2)
9 36
10 = .72 + 1.2 = 1.92 units
Table 4.1
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Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80 1.92
3 20
4 19
5 24 Step 3: Calculate FIT for Month 2
6 21
7 31 FIT2 = F2 + T2
8 28 FIT2 = 12.8 + 1.92
9 36
10 = 14.72 units
Table 4.1
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Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80 1.92 14.72
3 20 15.18 2.10 17.28
4 19 17.82 2.32 20.14
5 24 19.91 2.23 22.14
6 21 22.51 2.38 24.89
7 31 24.11 2.07 26.18
8 28 27.14 2.45 29.59
9 36 29.28 2.32 31.60
10 32.48 2.68 35.16
Table 4.1
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Exponential Smoothing with
Trend Adjustment Example
35 –
25 –
20 –
15 –
0 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Figure 4.3
Time (month)
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Trend Projections
Fitting a trend line to historical data points
to project into the medium to long-range
Linear trends can be found using the least
squares technique
y^ = a + bx
^ = computed value of the variable to
where y
be predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
Deviation5 Deviation6
Deviation3
Deviation4
Deviation1
(error) Deviation2
Trend line, y^ = a + bx
Deviation5 Deviation6
Deviation1
(error) Deviation2
Trend line, y^ = a + bx
y^ = a + bx
Sxy - nxy
b=
Sx2 - nx2
a = y - bx
130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
2006 2007 2008 2009 2010 2011 2012 2013 2014
Year
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Seasonal Variations In Data
The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand (jet skis,
snow mobiles)
110 –
100 –
90 –
80 –
70 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Time
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Associative Forecasting
Used when changes in one or more
independent variables can be used to predict
the changes in the dependent variable
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
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Associative Forecasting
Example
Sales, y Payroll, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
∑y = 15.0 ∑x = 18 ∑x2 = 80 ∑xy = 51.5
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Figure 4.9
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
y y
y^ = a + b1x1 + b2x2 …
∑(Actual demand in
period i -
Forecast demand
Tracking in period i)
signal = (∑|Actual - Forecast|/n)
0 MADs Acceptable
range
–
Lower control limit
Time
1 90-10/10
100= -1 -10 -10 10 10 10.0
2 95
-15/7.5
100= -2 -5 -15 5 15 7.5
3 115 0/10
100
= 0 +15 0 15 30 10.0
4 100-10/10
110= -1 -10 -10 10 40 10.0
5 125
+5/11110
= +0.5+15 +5 15 55 11.0
6 140
+35/14.2
110= +2.5
+30 +35 30 85 14.2