Forecasting Methods

Materials Management
Introduction To forecasting
 Demand Management
 Order Processing (Production planning and Master production
Schedule)
 Forecasts are usually wrong
 Every forecast should include an estimate of error
 Forecasts are more accurate for families or groups
 Forecasts are more accurate for nearer time period
Behavioural Patter of Forecasting
 Trend
 Random variations
 Cycle
 Seasonal patter
Trend
25000
Chart Title

20000

15000

10000

5000

0
Collection and Preparation of Data
 Record data in the same terms as needed for the forecast.
 Record the circumstances relating to the data.
 Record the demand separately for different customer
groups.
Forecast technique
 Qualitative Technique
 Quantitative
 Extrinsic Techniques
 Intrinsic Techniques
Intrinsic Techniques
 Average Demand
 Moving averages
 Exponential Smoothing
Time Series
 Moving Average
 Single Exponential Smoothing
 Double Exponential Smoothing
 Holt-Winter’s Method
 ARIMA (Auto Regressive Integrated Moving Average)
Trend Line
 Exponential
 Linear
 Logarithmic
 Polynomial
 Power
 Moving Average
Tracking the Forecast
 Forecast Error
 Bias : A systematic error in which the actual demand is
consistently above or below the forecast demand.
 Random Variation
 Mean Absolute Deviation
Forecast Control
 Tracking signal
 monitors the forecast to see if it is biased high or low

 1 MAD ≈ 0.8 б
 Control limits of 2 to 5 MADs are used most frequently
(Dt - Ft) E
Tracking signal = =
MAD MAD

11-12 Copyright 2006 John Wiley & Sons, Inc.

Regression Methods
 Linear regression
 a mathematical technique that relates a dependent variable to an
independent variable in the form of a linear equation
 Correlation
 a measure of the strength of the relationship between
independent and dependent variables

11-13 Copyright 2006 John Wiley & Sons, Inc.

 Linear Regression
y = a + bx a = y-bx
xy - nxy
b =
x2 - nx2
where
a = intercept
b = slope of the line

x = x = mean of the x data

n
y = y = mean of the y data
n
11-14 Copyright 2006 John Wiley & Sons, Inc.
Summary
 Remember it is almost impossible to predict exact market
requirement
 Shorter the prediction time period better the accuracy.
 Time duration of prediction depends on supply chain to
make and deliver the product
 Shorter time of predictions requires short lead-time for
product manufacturing and delivery
 Always, watch the data for bullwhip effects