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Operations Management: Chapter 4 - Forecasting
Operations Management: Chapter 4 - Forecasting
Management
Chapter 4 -
Forecasting
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 6e
Operations Management, 8e
© 2006
© 2006 Prentice
Prentice Hall, Inc. Hall, Inc. 4–1
Outline
Global Company Profile:
Tupperware Corporation
What Is Forecasting?
Forecasting Time Horizons
The Influence of Product Life Cycle
Types Of Forecasts
Internet Drive-through
restaurants
Color printers
Sales
3 1/2”
Floppy
Flat-screen disks
monitors DVD
Figure 2.5
© 2006 Prentice Hall, Inc. 4 – 18
Product Life Cycle
Introduction Growth Maturity Decline
Product design Forecasting Standardization Little product
and critical Less rapid differentiation
development Product and product changes Cost
OM Strategy/Issues
Figure 2.5
© 2006 Prentice Hall, Inc. 4 – 19
Types of Forecasts
Economic forecasts
Address business cycle – inflation rate,
money supply, housing starts, etc.
Technological forecasts
Predict rate of technological progress
Impacts development of new products
Demand forecasts
Predict sales of existing product
Trend Cyclical
Seasonal Random
Seasonal peaks
Actual
demand
Average
demand over
Random four years
variation
| | | |
1 2 3 4
Year Figure 4.1
© 2006 Prentice Hall, Inc. 4 – 35
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
© 2006 Prentice Hall, Inc. 4 – 38
Random Component
Erratic, unsystematic, ‘residual’
fluctuations
Due to random variation or
unforeseen events
Short duration and
nonrepeating
M T W T F
© 2006 Prentice Hall, Inc. 4 – 39
Naive Approach
Assumes demand in next period is
the same as demand in most
recent period
e.g., If May sales were 48, then June
sales will be 48
Sometimes cost effective and
efficient
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
Ft = Ft – 1 + (At – 1 - Ft – 1)
Weight Assigned to
Most 2nd Most 3rd Most 4th Most 5th Most
Recent Recent Recent Recent Recent
Smoothing Period Period Period Period Period
Constant () (1 - ) (1 - ) 2 (1 - ) 3 (1 - )4
Actual = .5
200 – demand
Demand
175 –
= .1
150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
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
© 2006 Prentice Hall, Inc. 4 – 65
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
© 2006 Prentice Hall, Inc. 4 – 66
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
© 2006 Prentice Hall, Inc. 4 – 67
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 + T1
8 28 FIT2 = 12.8 + 1.92
9 36
10 = 14.72 units
Table 4.1
© 2006 Prentice Hall, Inc. 4 – 68
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
© 2006 Prentice Hall, Inc. 4 – 69
Exponential Smoothing with
Trend Adjustment Example
35 –
25 –
20 –
15 –
5 –
0 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Figure 4.3
Time (month)
© 2006 Prentice Hall, Inc. 4 – 70
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
© 2006 Prentice Hall, Inc. 4 – 71
Values of Dependent Variable
Least Squares Method
Deviation5 Deviation6
Deviation3
Deviation4
Deviation1
Deviation2
Trend line, y^ = a + bx
Deviation5 Deviation6
Deviation1
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 –
| | | | | | | | |
1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
© 2006 Prentice Hall, Inc. 4 – 77
Seasonal Variations In Data
The multiplicative seasonal model can
modify trend data to accommodate
seasonal variations in demand
110 –
100 –
90 –
80 –
70 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Time
© 2006 Prentice Hall, Inc. 4 – 84
San Diego Hospital
Trend Data
10,200 –
10,000 –
Inpatient Days
9,800 – 9745
9659 9702
9573 9616 9766
9,600 – 9530 9680 9723
9594 9637
9,400 – 9551
9,200 –
9,000 – | | | | | | | | | | | |
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.6
© 2006 Prentice Hall, Inc. 4 – 85
San Diego Hospital
Seasonal Indices
1.06 –
Index for Inpatient Days
1.04 1.04
1.04 – 1.03
1.02
1.02 – 1.01
1.00
1.00 – 0.99
0.98
0.98 – 0.99
0.96 – 0.97 0.97
0.96
0.94 –
0.92 – | | | | | | | | | | | |
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.7
© 2006 Prentice Hall, Inc. 4 – 86
San Diego Hospital
Combined Trend and Seasonal Forecast
10,200 –
10068
10,000 – 9911 9949
Inpatient Days
9,000 – | | | | | | | | | | | |
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.8
© 2006 Prentice Hall, Inc. 4 – 87
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
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
© 2006 Prentice Hall, Inc. 4 – 92
Standard Error of the
Estimate
A forecast is just a point estimate of a
future value
This point is 4.0 –
actually the 3.25
mean of a 3.0 –
Sales
probability 2.0 –
distribution
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Figure 4.9
© 2006 Prentice Hall, Inc. 4 – 93
Standard Error of the
Estimate
∑(y - yc)2
Sy,x =
n-2
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
© 2006 Prentice Hall, Inc. 4 – 96
Correlation
How strong is the linear
relationship between the
variables?
Correlation does not necessarily
imply causality!
Coefficient of correlation, r,
measures degree of association
Values range from -1 to +1
n∑xy - ∑x∑y
r=
[n∑x 2 - (∑x)2][n∑y2 - (∑y)2]
(a) Perfect positive x (b) Positive x
correlation: correlation:
r = +1 0<r<1
y y
y^ = a + b1x1 + b2x2 …
Tracking RSFE
signal =
MAD
∑(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
15% –
10% –
5% –