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Chapter 13
Demand Management
OBJECTIVES
Demand Management
Qualitative Forecasting
Methods
Simple & Weighted Moving
Average Forecasts
Exponential Smoothing
Simple Linear Regression
Web-Based Forecasting
Demand Management
Independent Demand:
Finished Goods
A Dependent Demand:
Raw Materials,
Component parts,
B(4) C(2) Sub-assemblies, etc.
Independent Demand:
What a firm can do to manage it?
Types of Forecasts
Qualitative (Judgmental)
Quantitative
– Time Series Analysis
– Causal Relationships
– Simulation
Components of Demand
Average demand for a period of
time
Trend
Seasonal element
Cyclical elements
Random variation
Autocorrelation
Seasonal
Seasonalvariation
variation
x
x x Linear
Linear
x x
x x Trend
x x Trend
Sales
x x x
x
x
xx
x xx x x
x
x
x x x x x x
x x x x x x
x x x
x xxxxx
x
x x
1 2 3 4
Year
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
10
Qualitative Methods
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
A
A t-1 +
+ A
A t-2 +
+ AAt-3 +...+A
+...+At-n
FFtt == t-1 t-2 t-3 t-n
nn
Plotting
Plottingthe
themoving
movingaverages
averagesandandcomparing
comparing
them
themshows
showshow
howthe
thelines
linessmooth
smooth out
outto
toreveal
reveal
the
theoverall
overallupward
upwardtrend
trendin
inthis
thisexample
example
1000
900
Demand
800
Demand
3-Week
700
6-Week
600
500 Note
Notehow
howthethe
1 2 3 4 5 6 7 8 9 10 11 12 3-Week
3-Weekisis
Week smoother
smootherthan
than
the
theDemand,
Demand,
and
and6-Week
6-Weekisis
even
evensmoother
smoother
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
17
Question:
Question: WhatWhat is is the
the 33
week
week moving
moving average
average
forecast
forecast forfor this
this data?
data?
Week Demand Assume
Assume you you only
only have
have 33
1 820 weeks
weeks and and 55 weeks
weeks of of
2 775 actual
actual demand
demand data data
3 680 for
for the
the respective
respective
4 655 forecasts
forecasts
5 620
6 600
7 575
FFt t == w
w11A
At-1 + w A t-2 ++ w
t-1 + w22 At-2 w33A
At-3 +...+w A t-n
t-3 +...+wnn At-n
nn
wt = weight given to time period “t”
occurrence (weights must add to one)
ww ==11
i=1
ii
i=1
Note
Notethat
thatthe
theweights
weightsplace
placemore
moreemphasis
emphasison
onthe
the
most
mostrecent
recentdata,
data,that
thatisistime
timeperiod
period“t-1”
“t-1”
F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
Question:
Question:Given
Giventhe theweekly
weeklydemand
demandinformation
informationand
and
weights,
weights,what
whatisisthe
theweighted
weightedmoving
movingaverage
averageforecast
forecast
of
ofthe
the55thperiod
th
periodor orweek?
week?
F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
FFtt == FFt-1
t-1
+
+ (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 value in 1 past time period
At - 1 Actual occurance in the past t time 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
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
25
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
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
27
900
800 Demand
Demand
700 0.1
600 0.6
500
1 2 3 4 5 6 7 8 9 10
Week
Question:
Question: What
What are
are the
the
Week Demand
exponential
exponential smoothing
smoothing
1 820
forecasts
forecasts for
for periods
periods 2-5
2-5
2 775 using a =0.5?
using a =0.5?
3 680
4 655
5 Assume
Assume FF11=D
=D11
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?
40
nn
Note
Notethat
thatby
byitself,
itself,the
theMAD
AA --FF
tt tt
40 only
onlylets
letsus
usknow
knowthe
MAD
themean
mean
MAD
MAD==
t=1
t=1 == 40 ==10 error
errorininaaset
setof
offorecasts
nn 44 10 forecasts
RSFE
RSFE Running
Running sum
sum of
of forecast
forecast errors
errors
TS
TS == ==
MAD
MAD Mean
Mean absolute
absolute deviation
deviation
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
34
Yt = a + bx Is
Isthe
thelinear
linearregression
regressionmodel
model
aa == yy-- bx
bx
xy
xy -- n(y)(x)
n(y)(x)
bb == 22 22
xx -- n(x
n(x))
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
McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
37
Answer:
Answer: First,
First, using
using the
thelinear
linear regression
regressionformulas,
formulas, we
we
can
can compute
compute“a” “a”and
and“b”
“b”
Week Week*Week Sales Week*Sales
1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885
3 55 162.4 2499
Average Sum Average Sum
bb==
xy
xy--n( n(y)(x)
y)(x) 2499
= 2499 --5(162.4)(3)
5(162.4)(3)
63
63= 6.3
= 10 = 6.3
x - n(x )
x 22
- n(x ) 22
55 5( 9
55 5(9 ) ) 10
aa== yy--bx
bx==162.4
162.4--(6.3)(3)
(6.3)(3)==143.5
143.5
38
155 Forecast
150
145
140
135
1 2 3 4 5
Period
39
Web-Based Forecasting:
Steps in CPFR
End of Chapter 13