PRODUCTION

PLANNING AND
CONTROL
(MEFB 433)
Ts. Zubaidi Faiesal
Email: zubaidi@uniten.edu.my
Room No. BN-1-010
 2- DEMAND
FORECASTING
2- Demand Forecasting
Introduction:
ForecastsNew
Accounting: are a basic cost
product/process input in cash
estimates, the
management, …
decision making processes
Finance: Equipment needs, Amount of funding, …
because
they provide
Human Resource: Hiring andinformation
Layoff activities, … on
FUTURE DEMAND.
Marketing: Pricing and Promotion, e-business
strategies, global competition strategies, …
Why?
Operations: Scheduling, capacity planning, work
Because the primary
assignments, inventory goal
planning, project of the
management,
…
production planners is to match
Product/Service Design: Revision of current features,
supply and
design of new demand.
products or services, …
2- Demand Forecasting
Common Features in All Forecasts:
1. They assume that the same system that
existed in the past, will continue in the
future.
2. Forecasts are not perfect and actual results
usually differ from predicted values
(ERROR).
3. Forecast of groups of items tend to be more
accurate than individuals.
4. Forecast accuracy decreases as the time
period covered by the forecast (Time Horizon)
2- Demand Forecasting
Elements of a Good Forecast:
The forecast should be:
1. Timely
2. Accurate
3. Reliable
4. Meaningful
5. Based on a simple and understandable
method
6. Cost-effective
2- Demand Forecasting
Steps in the Forecasting Process:
1. Determine the purpose of the forecast.

2. Establish a time horizon.

3. Select a forecasting technique.

4. Obtain, clean, and analyze appropriate data.

5. Make the forecast.

6. Monitor the forecast.

2- Demand Forecasting
Forecast Accuracy:
•Accuracy
  of a forecast is minimizing the forecast
error.
Accuracy if one of the factors for choosing a
forecasting technique.
Forecast ERROR is the difference between the actual
and predicted values:

Positive errors happen when forecast is too low.

Negative errors happen when forecast is too high.
Accuracy is based on the historical error
2- Demand Forecasting
Forecast Accuracy:
•Three
  commonly used measures for summarizing historical
errors are:
1. Mean Absolute Deviation (MAD): Average absolute error

2. Mean Squared Error (MSE): Average of squared errors

3. Mean absolute Percent Error (MAPE): Average absolute

percent error
 2- Demand Forecasting
Forecast Accuracy:
Example: Compute MAD, MSE and MAPE for the following
data, showing actual and predicted numbers of accounts
serviced.

1 217 215
2 213 216
3 216 215
4 210 214
5 213 211
6 219 214
7 216 217
8 212 216
 2- Demand Forecasting
Forecast Accuracy:
Example: Compute MAD, MSE and MAPE for the following
data, showing actual and predicted numbers of accounts
serviced.

1 217 215 2 2 4 0.92%

2 213  216 -3 𝟐 3 9 1.41%
3 216 ∑
215
𝒆 1 𝟕𝟔 1
𝐌𝐒𝐄= = =𝟏𝟎 .𝟖𝟔0.46%
1
4 210 214 𝒏−
-4 𝟏 4 𝟕 16 1.90%
5 213 211 2 2 4 0.94%
6 219 214 5 5 25 2.28%
7 216 217 -1 1 1 0.46%
8 212 216 -4 4 16 1.89%
-2 22 76 10.26%
2- Demand Forecasting
Forecast Accuracy:
•Three
  commonly used measures for summarizing historical
errors are:
1. MAD: Weights all errors evenly.

2. MSE: Weights errors according to their squared

values.

3. MAPE: Weights errors according to relative error.

2- Demand Forecasting
Approaches to Forecasting:
There are two general approaches:

QUALITATIVE APPROACHES: For subjective inputs, which

often oppose precise numerical description. Permit inclusion of
SOFT INFORMATION like human factors, personal opinions
and hunches. These information are difficult or impossible to
quantify.

QUANTITATIVE APPROACHES: Involve either the

projection of historical data or the development of associative
models. They use HARD DATA. Usually avoid personal
opinions.

IN PRACTISE, EITHER OR BOTH

2- Demand Forecasting
Common Forecast Techniques:
There are three classes of forecasting techniques:

 JUDGMENTAL FORECASTS

 TIME-SERIES FORECAST

 ASSOCIATIVE MODELS
2- Demand Forecasting
Common Forecast Techniques:
JUDGMENTAL FORECASTS
Available
In theseapproaches:
approaches,
forecasts rely solely on
 Executive
judgment and opinion. For instance:
Opinion
 If the forecast is needed quickly.
 Salesforce Opinion
 If there are some unclear political or economical
 conditions and new data is not available yet.
Consumer Surveys
 Introduction of new products or redesign of
 Other Approaches: Delphi Method
existing products or packaging where there are no
historical data.
2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES FORECAST
A time series is a time-ordered sequence of
observations taken at regular intervals (e.g.,
hourly, daily, weekly, monthly, quarterly,
annually).
Forecasting techniques based on time-series data
are made on the assumption that future values of
the series can be estimated from past values.
2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES FORECAST
Irregular
Common behaviors of time-series:
variation

1. Trend Trend
2. Seasonality
3. Cycles Cycles
4. Irregular variations
Seasonal variations 90
5. Random variations 89
88
2- Demand Forecasting
Common Forecast Techniques:
•TIME-SERIES
  FORECAST: Naive Methods
A naive forecast uses a single previous value of
a time series as the base of the forecast.
Examples:
- Stable series:
- Seasonal variations:
- Trend: +()
2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES FORECAST: Averaging Methods
These techniques smooth variations in the data where
there are a great amount of random variations or White
Noise.
2- Demand Forecasting
Common Forecast Techniques:
•TIME-SERIES
  FORECAST: Averaging Methods
1. Moving Average Technique:

Example: Compute three and five moving averages for the

following data:

Period 1 2 3 4 5
Demand 42 40 43 40 41
Answer:
2- Demand Forecasting
Common Forecast Techniques:
•TIME-SERIES
  Example: Compute a weighted
FORECAST: Averaging average forecast using a weight
of 0.40 for the most recent
Methods
period, 0.30 for the next most
2. Weighted Moving recent, 0.20 for the next, and
Average Technique: 0.10 for the next:

Answer:
Period 1 2 3 4 5
Demand 42 40 43 40 41

WMA5 = 41.0
2- Demand Forecasting
Common Forecast Techniques:
•TIME-SERIES
  FORECAST: Averaging Methods
3. Exponential Smoothing Technique:
2- Demand Forecasting
Common Forecast Techniques:
•Example:
  Compute the forecast for the following data using exponential
smoothing technique with and .
Actual
Period, Demand Forecast Forecast
(t)
1 42
2 40
3 43
4 40
5 41
6 39
7 46
8 44
9 45
10 38
11 40
12
2- Demand Forecasting
Common Forecast Techniques:
•Example:
  Compute the forecast for the following data using exponential
smoothing technique with and .
Actual
Period, Demand Forecast Forecast
(t)
1 42 - -
2 40 42 42
3 43 41.8 41.2
4 40 41.92 41.92
5 41 41.73 41.15
6 39 41.66 41.09
7 46 41.39 40.25
8 44 41.85 42.55
9 45 42.07 43.13
10 38 42.35 43.88
11 40 41.92 41.53
12 41.73 40.92
2- Demand Forecasting
Common Forecast Techniques:
Example: Compute the error performance of these three forecasting techniques
using the following data:
Naive Two-Period MA ES
Period, t Demand Forecast Error Forecast Error Forecast Error
1 42
2 40
3 43
4 40
5 41
6 39
7 46
8 44
9 45
10 38
11 40
MAD
MSE
MAPE
2- Demand Forecasting
Common Forecast Techniques:
Example: Compute the error performance of these three forecasting techniques
using the following data:
Naive Two-Period MA ES
Period, t Demand Forecast Error Forecast Error Forecast Error
1 42
2 40 42 -2 42 -2
3 43 40 3 41 2 41.8 1.2
4 40 43 -3 41.5 -1.5 41.92 -1.92
5 41 40 1 41.5 -0.5 41.73 -0.73
6 39 41 -2 40.5 -1.5 41.66 -2.66
7 46 39 7 40 6 41.39 4.61
8 44 46 -2 42.5 1.5 41.85 2.15
9 45 44 1 45 0 42.07 2.93
10 38 45 -7 44.5 -6.5 42.36 -4.36
11 40 38 2 41.5 -1.5 41.92 -1.92
MAD 3.11 2.33 2.50
MSE 16.25 11.44 8.73
MAPE 7.49% 5.64% 5.98%
2- Demand Forecasting
Common Forecast Techniques:
•TIME-SERIES
  FORECAST: Trend Methods
1. Linear Trend Technique:
 𝒚

 𝒕
Where n=Number of periods and y=Value of the time series
2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES FORECAST: Trend Methods
1. Linear Trend Technique: Example
Using the following data, determine the equation of the trend line and predict for
weeks 11 and 12.
800
Week (t) Unit Sales (y)
1 700 780
2 724
760
3 720
4 728 740
Sales

5 740 720
6 742
700
7 758
8 750 680
9 770 660
10 775 1 2 3 4 5 6 7 8 9 10 11 12
Week
2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES FORECAST: Trend Methods
1. Linear Trend Technique: Example
Using the following data, determine the equation of the trend line and predict for
weeks 11 and 12.
800
Week (t) Unit Sales (y) ty  
1 700 700 780

2 724 1448
760
3 720 2160
4 728 2912 740
5 740 3700
Sales

6 742 4452 720

7 758 5306
700
8 750 6000
9 770 6930 680
789.52
10 775 7750
660
7407 41358 0 2 4 6 8 10 12
Week
2- Demand Forecasting
Common Forecast Techniques:
Associative Forecasting Techniques:
Identification of related variables that can be
used to predict values of the variable of interest.
The essence of associative techniques is the
development of an equation that summarizes the
effect of predictor variables.
The primary method of analysis is known as
Regression.
2- Demand Forecasting
Common Forecast Techniques:
Associative Forecasting Techniques:

Linear Regression:
Obtain a equation of
a straight line that
Minimizes the sum of
squared vertical
Deviations of data
points from the line
(Least Squares Error)
2- Demand Forecasting
Common Forecast Techniques:
•Associative
  Forecasting Techniques:

Linear Regression:
2- Demand Forecasting
Common Forecast Techniques:
•Associative
  Forecasting Techniques:
Linear Regression: Example: Based on the following data
about a company unit sales and profits, obtain a regression line
and predict profit when sale is $10 million.

,
2- Demand Forecasting
Common Forecast Techniques:
•Associative
  Forecasting Techniques:
Linear Regression:
How accurate a prediction might be for a linear
regression line:

Standard Error of Estimates:

2- Demand Forecasting
Common Forecast Techniques:
Associative Forecasting Techniques:
Linear Regression:
Indicator: Uncontrollable variables that tend to lead or precede
changes in a variable of interest.
Condition for a valid indicator:
1. There should be a logical explanation for the relations.
2. Movement of the indicator must precede movement of the
dependent variable.
3. A fairly high correlation should exist between the two
variables.
2- Demand Forecasting
Common Forecast Techniques:
•Associative
  Forecasting Techniques:
Linear Regression:
Correlation: Measures the strength and direction of relationship
between two variables.

Percentage of the changes in the dependent variable that can be explained by

the independent variable.
2- Demand Forecasting
Common Forecast Techniques:
Associative Forecasting Techniques: Linear
Regression
60
Example: Sales of new houses and three-month lagged
unemployment
50 are shown in the following
  table. Determine if
unemployment
40 levels can be used to predict demand for new
Unit Sold, Y

houses and if so, derive a predictive equation and explain the

30
relationship.
20

10

0
3 4 5 6 7 8 9 10

Level of Unemployment (%), x