Supply Chain Management

Lecture 12
Outline

• Today
– Chapter 7
• Homework 3
– Online tomorrow
– Due Friday February 26 before 5:00pm
• Next week Thursday
– Finish Chapter 7 (forecast error measures)
– Start with Chapter 8
– Network design simulation assignment
Announcements
• What?
– Tour the Staples Fulfillment Center in Brighton, CO
– Informal Lunch-and-Learn
– Up to 20 students with a Operations Management major
• When?
– Weeks of March 15 or March 29
– There is a fair amount of time involved in the activity
• Transit is close to an hour in each direction
• Probably 2 hours onsite 
• Interested?
– Let me know (email) by the end of this week
Time Series Forecasting

Observed demand =
Systematic component + Random component
L Level (current deseasonalized demand)
T Trend (growth or decline in demand)
S Seasonality (predictable seasonal fluctuation)

The goal of any forecasting method is to predict the systematic

component (Forecast) of demand and measure the size and
variability of the random component (Forecast error)
Summary: N-Period Moving Average
Method
1. Estimate level
• Take the average demand over the most recent N periods
• Lt = (Dt + Dt-1 + … + Dt-N+1) / N
2. Forecast
• Forecast for all future periods is based on the current estimate of
level Lt
• Ft+n = Lt

Forecast
Ft+n = Lt
3500
3000
2500

Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Simple Exponential Smoothing
Method
1. Estimate level
• The initial estimate of level L0 is the average of all historical
data
• L0 = (∑i Di)/ n
• Revise the estimate of level for all periods using smoothing
constant 
• Lt+1 = Dt+1 + (1 – )*Lt
2. Forecast
Forecast
• Forecast for future periods is Ft+n = Lt
• Ft+n = Lt
3500
3000
2500

Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Holt’s Method (Trend Corrected
Exponential Smoothing)
1. Estimate level and trend
• The initial estimate of level L0 and trend T0 are obtained using
linear regression
• =INTERCEPT(known_y’s, known_x’s)
• =LINEST(known_y’s, known_x’s)
• Revise the estimates for all periods using smoothing constants 
and 
• Lt+1 = Dt+1 + (1 – )*(Lt + Tt)
• Tt+1 = (Lt+1 – Lt) + (1 – )*Tt
Forecast
2. Forecast Ft+n = Lt + nTt
• Forecast for future periods is 3500
3000

• Ft+n = Lt + nTt
2500

Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Winter’s Model (Trend and
Seasonality Corrected Exp. Smoothing)
1. Estimate level, trend, and seasonality
• The initial estimates of L0, T0, S1, S2, S3, and S4 are obtained from
static forecasting procedure
• Revise the estimates for all periods using smoothing constants
,  and 
• Lt+1 = (Dt+1/St+1) + (1 – )*(Lt + Tt)
• Tt+1 = (Lt+1 – Lt) + (1 – )*Tt
• St+p+1 = (Dt+1/Lt+1) + (1 – )St+1
Forecast
2. Forecast Ft+n = (Lt + nTt)St+n
• Forecast for future periods is
3500
3000
2500
• Ft+n = (Lt + nTt)*St+n
Demand
2000
1500
1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Components of an Observation
3500
3000 Trend (T)
2500
Demand

2000
1500 Forecast(F)
1000
500 Ft+n = Lt + nTt
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter

Holt’s method is appropriate when demand is

assumed to have a level and a trend
Example: Holt’s Method
• An electronics manufacturer has seen demand for its
latest MP3 player increase over the last six months
– 8415, 8732, 9014, 9808, 10413, 11961
Demand Level Trend Forecast Determine initial level
t Dt Lt Tt Ft L0 = INTERCEPT(y’s, x’s)
1 8,415
T0 = LINEST(y’s, x’s)
2 8,732
3 9,014
4 9,808
5 10,413
6 11,961
7
8
9
10
Example: Holt’s Method
• An electronics manufacturer has seen demand for its
latest MP3 player increase over the last six months
– 8415, 8732, 9014, 9808, 10413, 11961
Demand Level Trend Forecast Determine initial level
t Dt Lt Tt Ft L0 = INTERCEPT(y’s, x’s)
7,367 673
1 8,415 8,078 681 8040
T0 = LINEST(y’s, x’s)
2 8,732 8,756 680 8759
3 9,014 9,394 672 9436 Determine levels
4 9,808 10,040 667 10066
5 10,413 10,677 661 10707
Lt+1 = Dt+1 + (1 – )*(Lt + Tt)
6 11,961 11,401 673 11338
7 12074
Tt+1 = (Lt+1 – Lt) + (1 – )*Tt
8 12747
9 13420 Forecast
10 14094
Ft+n = Lt + nTt
 = 0.1,  = 0.2
Example: Tahoe Salt
Example: Tahoe Salt

• Demand forecasting using Holt’s method

50,000 Actual
Forecast (Holt)
40,000
Demand

30,000

20,000

10,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Components of an Observation

3500
3000 Seasonality (S)
2500
Demand

2000
1500
1000
500
Forecast(F)
0
1 2 3 4 5 6 7 8 9
Ft+n = (Lt + Tt)St+n
10 11 12 13 14 15 16
Quarter
Example: Winter’s Model
• A theme park has seen the following attendance over the
last eight quarters (in thousands)
– 54, 87, 192, 130, 80, 124, 265, 171 Determine initial levels
Demand Level Trend Seasonal Forecast

t Dt L T
Factor
Si Ft
L0 = From static forecast
1 54 T0 = From static forecast
2 87
3
4
192
130
Si,0 = From static forecast
5
6
80
124
Determine levels
7
8
265
171 Lt+1 = (Dt+1/St+1)+ (1 – )*(Lt + Tt)
Tt+1 = (Lt+1 – Lt) + (1 – )*Tt
St+p+1 = (Dt+1/Lt+1) + (1 – )*St+1
Forecast
Ft+1 = (Lt + Tt)St+1
Example: Tahoe Salt
Example: Tahoe Salt

• Demand forecast using Winter’s method

50,000 Actual
Forecast (Winter)
40,000
Demand

30,000

20,000

10,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Static Versus Adaptive Forecasting Methods

• Static • Adaptive
– Dt: Actual demand – Dt: Actual demand

– L: Level – Lt: Level

– T: Trend – Tt: Trend
– S: Seasonal factor – St: Seasonal factor

– Ft: Forecast – Ft: Forecast

Components of an Observation

3500
3000 Seasonality (S)
2500
Demand

2000
1500
1000
500
Forecast(F)
0
1 2 3 4 5 6 7 8 9
Ft+n = (Lt + Tt)St+n
10 11 12 13 14 15 16
Quarter
Example: Static Method
• A theme park has seen the following attendance over the
last eight quarters (in thousands)
– 54, 87, 192, 130, 80, 124, 265, 171
Determine initial level
Demand Level Trend Deseason. Seasonal Seasonal Forecast
L = INTERCEPT(y’s, x’s)
t Dt L T
Demand Factor
Dt_bar Si_bar
Factor
Si Ft T = LINEST(y’s, x’s)
59.3 17.3
1
2
54
87
76.6
93.9
0.70
0.93
0.63
0.84
48.0
79.2 Determine deason. demand
3
4
192
130
111.2
128.5
1.73
1.01
1.60
0.94
177.7
120.6 Dt = L + Tt
5 80 145.8 0.55 91.4
6
7
124
265
163.1
180.4
0.76
1.47
137.6
288.2 Determine seasonal factors
St = Dt / Dt
8 171 197.7 0.86 185.5

Determine seasonal factors

Si =AVG(St)
Forecast
Ft = (L + T)Si
Example: Tahoe Salt
Static Forecasting Method

45,000
40,000
35,000
30,000
Demand
Demand

25,000
20,000
15,000
10,000 Demand
Demand
Lin. Reg.
5,000
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Quarter
Static Forecasting Method

• Deseasonalize demand
– Demand that would have been observed in the
absence of seasonal fluctuations
• Periodicity p
– The number of periods after which the seasonal cycle
repeats itself
• 12 months in a year
• 7 days in a week
• 4 quarters in a year
• 3 months in a quarter
Deseasonalize demand
Deseasonalize demand
• Periodicity p is odd • Periodicity p is even
Demand Deseason. Demand Deseason.
Demand Demand
t Dt t Dt

1 8,000 1 8,000
2 13,000 14,667 2 13,000
3 23,000 15,333 3 23,000 19,750
4 10,000 17,000 4 34,000 20,625
5 18,000 17,000 5 10,000 21,250
6 23,000 17,667 6 18,000 21,750
7 12,000 16,000 7 23,000 22,500
8 13,000 19,000 8 38,000 22,125
9 32,000 9 12,000 22,625
10 10 13,000 24,125
11 11 32,000
12 12 41,000
Example: Tahoe Salt
Static Forecasting Method

45,000
40,000
35,000
30,000
Demand

25,000
20,000
15,000 Demand
10,000 Demand
Deseason.
5,000 Deseason.
Deseason. Lin. Reg.
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Example: Tahoe Salt

• Demand forecast using Static forecasting method

50,000 Actual
Forecast (Static)
40,000
Demand

30,000

20,000

10,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Summary: Static Forecasting Method

1. Estimate level and trend

• Deseasonalize the demand data
• Estimate level L and trend T using linear regression
• Obtain deasonalized demand Dt
2. Estimate seasonal factors
• Estimate seasonal factors for each period St = Dt /Dt
• Obtain seasonal factors Si = AVG(St) such that t is the same
season as i Forecast
Ft+n = (L + nT)St+n
3. Forecast 3500
3000

• Forecast for future periods is 2500

Demand
2000

• Ft+n = (L + nT)*St+n 1500

1000
500
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarter
Time Series Forecasting

Observed demand =
Systematic component + Random component
L Level (current deseasonalized demand)
T Trend (growth or decline in demand)
S Seasonality (predictable seasonal fluctuation)

Forecast Forecast error

The goal of any forecasting method is to predict the systematic

component (Forecast) of demand and measure the size and
variability of the random component (Forecast error)
1) Characteristics of Forecasts

• Forecasts are always wrong!

– Forecasts should include an expected value and a
measure of error (or demand uncertainty)
• Forecast 1: sales are expected to range between 100 and 1,900 units
• Forecast 2: sales are expected to range between 900 and 1,100 units
Examples
1000000 10000
Demand Demand
Forecast Forecast

900000 9000

800000 8000
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

50000 Demand 40000 Demand

Forecast Forecast
40000
30000
30000
20000
20000

10000
10000

0 0
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Measures of Forecast Error

Measure Description
Error Forecast – Actual Demand

Mean Square Error (MSE) Estimate of the variance

Mean Absolute Deviation Estimate of the standard

(MAD) deviation of the random
component
Mean Absolute Percentage Absolute error as a
Error (MAPE) percentage of the demand
Tracking signal Ratio of bias and MAD