Demand Management

and
Forecasting
 Demand Management

Independent Demand:
Finished Goods

Dependent Demand:
A Raw Materials,
Component parts,
Sub-assemblies, etc.
B(4) C(2)

D(2) E(1) D(3) F(2)

 15-3

Types of Forecasts

• Qualitative (Judgmental)

• Quantitative
– Time Series Analysis
– Causal Relationships
– Simulation
 Qualitative Methods

Executive Judgment Grass Roots

Qualitative Market Research

Historical analogy
Methods

Delphi Method Panel Consensus

 Delphi Method

l. Choose the experts to participate representing a

variety of knowledgeable people in different areas
2. Through a questionnaire (or E-mail), obtain
forecasts (and any premises or qualifications for
the forecasts) from all participants
3. Summarize the results and redistribute them to the
participants along with appropriate new questions
4. Summarize again, refining forecasts and conditions,
and again develop new questions
5. Repeat Step 4 as necessary and distribute the final
results to all participants
 Simple Moving Average Formula

• The simple moving average model assumes an average is a

good estimator of future behavior
• The formula for the simple moving average is:

A t-1 + A t-2 + A t-3 +...+A t- n

Ft =
n

Ft = Forecast for the coming period

N = Number of periods to be averaged
A t-1 = Actual occurrence in the past period for up to “n”
periods
 15-7

Simple Moving Average Problem (1)

A t-1 + A t-2 + A t-3 +...+A t- n

Ft =
n
Week Demand
1 650 Question:
Question:What
Whatarearethe
the3-week
3-week
2 678 and
and6-week
6-weekmoving
movingaverage
average
3 720 forecasts
4 785
forecastsfor
fordemand?
demand?
5 859 Assume
Assumeyouyouonly
onlyhave
have33weeks
weeks
6 920 and
and66weeks
weeksof ofactual
actualdemand
demand
7 850 data
datafor
forthe
therespective
respective
8 758 forecasts
forecasts
9 892
10 920
11 789
12 844
 15-8
Calculating the moving averages gives us:
Week Demand 3-Week 6-Week
1 650 F4=(650+678+720)/3
2 678
=682.67
3 720 F7=(650+678+720
4 785 682.67 +785+859+920)/6
5 859 727.67 =768.67
6 920 788.00
7 850 854.67 768.67
8 758 876.33 802.00
9 892 842.67 815.33
10 920 833.33 844.00
11 789 856.67 866.50
12 844 867.00 854.83
©The McGraw-Hill Companies, Inc., 2004
 15-9

Simple Moving Average Problem (2) Data

Question:
Question:What
Whatisisthe
the
33week
weekmoving
moving
Week Demand average
averageforecast
forecastfor
for
1 820 this
thisdata?
data?
2 775
Assume
Assumeyouyouonly
onlyhave
have
3 680
4 655
33weeks
weeksand
and55
5 620 weeks
weeksofofactual
actual
6 600 demand
demanddata
datafor
for
7 575 the
therespective
respective
forecasts
forecasts
 15-10

Simple Moving Average Problem (2) Solution

Week Demand 3-Week 5-Week

1 820 F4=(820+775+680)/3
2 775 =758.33
3 680 F6=(820+775+680
+655+620)/5
4 655 758.33 =710.00
5 620 703.33
6 600 651.67 710.00
7 575 625.00 666.00
 15-11

Weighted Moving Average Formula

While
Whilethe themoving
movingaverage
averageformula
formulaimplies
impliesan
anequal
equalweight
weightbeing
beingplaced
placedon
oneach
eachvalue
value
that
thatisisbeing
beingaveraged,
averaged,the
theweighted
weightedmoving
movingaverage
averagepermits
permitsan
anunequal
unequalweighting
weightingon
on
prior
priortime
timeperiods
periods

The
Theformula
formulafor
forthe
themoving
movingaverage
averageis:
is:

Ft = w 1 A t-1 + w 2 A t- 2 + w 3 A t-3 + ...+ w n A t- n

n
w
wt t==weight
weightgiven
occurrence
givento
totime
timeperiod
period“t”
“t” w i =1
occurrence(weights
(weightsmust
mustadd
addtotoone)
one) i=1
 15-12

Weighted Moving Average Problem (1) Data

Question:
Question:Given
Giventhetheweekly
weeklydemand
demandand
andweights,
weights,what
whatisis
the
theforecast
forecastfor
forthe
the44thperiod
th
periodor
orWeek
Week4?
4?

Week Demand
Weights:
1 650
2 678 t-1 .5
3 720 t-2 .3
4 t-3 .2

Note
Notethat
thatthe
theweights
weightsplace
placemore
moreemphasis
emphasison
onthe
the
most
mostrecent
recentdata,
data,that
thatisistime
timeperiod
period“t-1”
“t-1”
 15-13

Weighted Moving Average Problem (1) Solution

Week Demand Forecast

1 650
2 678
3 720
4 693.4

F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
 15-14

Weighted Moving Average Problem (2) Data

Question:
Question:GivenGiventhe theweekly
weeklydemand
demandinformation
informationand
and
weights,
weights,what whatisisthe
theweighted
weightedmoving
movingaverage
averageforecast
forecast
of
ofthe
the55 period
thth
periodor orweek?
week?

Week Demand Weights:

1 820 t-1 .7
2 775 t-2 .2
3 680
t-3 .1
4 655
 15-15

Weighted Moving Average Problem (2) Solution

Week Demand Forecast

1 820
2 775
3 680
4 655
5 672

F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
 15-16

Exponential Smoothing Model

FFtt == FFt-1
t-1
+
+ a(A
a(A t-1
t-1
-
- F
F )
t-1)
t-1
Where :
Ft  Forcast value for the coming t time period
Ft - 1  Forecast v alue in 1 past time period
At - 1  Actual occurance in the past t tim e period
  Alpha smoothing constant
• Premise: The most recent observations might have the
highest predictive value
• Therefore, we should give more weight to the more
recent time periods when forecasting
 15-17

Exponential Smoothing Problem (1) Data

Week Demand Question:

Question:Given
Giventhethe
1 820 weekly
weeklydemand
demanddata,
data,
2 775 what
whatare
arethe
the
3 680
exponential
exponential
4 655
smoothing
smoothingforecasts
forecasts
5 750
for
forperiods
periods2-10
2-10
6 802
7 798 usinga=0.10
using a=0.10and and
8 689 a=0.60?
a=0.60?
9 775 Assume
AssumeFF11=D
=D11
10
 15-18

Answer:
Answer:The
Therespective
respectivealphas
alphascolumns
columnsdenote
denotethe
theforecast
forecastvalues.
values. Note
Note
that
thatyou
youcan
canonly
onlyforecast
forecastone
onetime
timeperiod
periodinto
intothe
thefuture.
future.

Week Demand 0.1 0.6

1 820 820.00 820.00
2 775 820.00 820.00
3 680 815.50 793.00
4 655 801.95 725.20
5 750 787.26 683.08
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28
 15-19

Exponential Smoothing Problem (2) Data

Week Demand Question:

Question: What
What are
are
1 820 the
the exponential
exponential
2 775 smoothing
smoothing forecasts
forecasts
3 680 for
for periods
periods 2-5
2-5 using
using
4 655 aa =0.5?
=0.5?
5
Assume
Assume FF11=D
=D11
 15-20

Exponential Smoothing Problem (2) Solution

F1=820+(0.5)(820-820)=820 F3=820+(0.5)(775-820)=797.75

Week Demand 0.5

1 820 820.00
2 775 820.00
3 680 797.50
4 655 738.75
5 696.88
 15-21

The MAD Statistic to Determine Forecasting Error

n
1 MAD  0.8 standard deviation
A
t=1
t - Ft
1 standard deviation  1.25 MAD
MAD =
n

• The ideal MAD is zero which would mean there

is no forecasting error

• The larger the MAD, the less the accurate the

resulting model
 15-22

MAD Problem Data

Question:
Question: What
What isis the
the MAD
MAD value
value given
given
the
the forecast
forecast values
values inin the
the table
table below?
below?

Month Sales Forecast

1 220 n/a
2 250 255
3 210 205
4 300 320
5 325 315
 15-23

MAD Problem Solution

Month Sales Forecast Abs Error

1 220 n/a
2 250 255 5
3 210 205 5
4 300 320 20
5 325 315 10

40

n
Note
Notethat
thatby
byitself,
itself,the
theMAD
A
t=1
t - Ft
40 only
onlylets
letsus
usknow
knowthe
MAD
themean
mean
MAD = = = 10 error
errorininaaset
setof
offorecasts
forecasts
n 4
 15-24

Simple Linear Regression Model

The
Thesimple
simplelinear
linearregression
regression Y
model
modelseeks
seeksto
tofit
fitaaline
line
through
throughvarious
variousdata
dataover
over
time
a
time
0 1 2 3 4 5 x (Time)

Yt = a + bx Is
Isthe
thelinear
linearregression
regressionmodel
model

Yt is the regressed forecast value or dependent

variable in the model, a is the intercept value of the the
regression line, and b is similar to the slope of the
regression line. However, since it is calculated with the
variability of the data in mind, its formulation is not as
straight forward as our usual notion of slope.
 15-25

Simple Linear Regression Formulas for Calculating “a” and “b”

a = y - bx

 xy - n(y)(x)
b= 2 2
 x - n(x )
 15-26

Simple Linear Regression Problem Data

Question:
Question:Given
Giventhe
thedata
databelow,
below,what
whatisisthe
thesimple
simplelinear
linear
regression
regressionmodel
modelthat
thatcan
canbe
beused
usedto
topredict
predictsales
salesin
infuture
future
weeks?
weeks?

Week Sales
1 150
2 157
3 162
4 166
5 177