Forecasting PPT

14e
Operations and
Supply Chain
Management
CHASE | SHANKAR | JACOBS
18–1
FORECASTING
Chapter 3
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
18–2
Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Learning Objectives
• LO–1: Understand how forecasting is essential to supply
chain planning
• LO–2: Evaluate demand using quantitative forecasting

models
• LO–3: Apply qualitative techniques to forecast demand
• LO–4: Apply collaborative techniques to forecast demand

18–3
The Role of Forecasting
• Forecasting is a vital function and affects every significant
management decision.
– Finance and accounting use forecasts as the basis for budgeting and cost
control.
– Marketing relies on forecasts to make key decisions such as new product
planning and personnel compensation.
– Production uses forecasts to select suppliers; determine capacity
requirements; and drive decisions about purchasing, staffing, and inventory.
• Different roles require different forecasting approaches.

– Decisions about overall directions require strategic forecasts.
– Tactical forecasts are used to guide day-to-day decisions.
18–4
Forecasting and Decoupling
Point
• Decoupling point: Point at which inventory is stored, which
allows SC to operate independently.
• The choice of the decoupling point in a SC is strategic.
• Forecasting helps determine the level of inventory needed at the

decoupling points.
• The decision will be affected by the error produced in the

forecast and the type of product (easily inventoried or easily
perishable).
18–5
Types of Forecasting
• There are four basic types of forecasts.
– Qualitative
– Time series analysis (primary focus of this chapter)
– Causal relationships
– Simulation
• Time series analysis is based on the idea that

data relating to past demand can be used to
predict future demand.
18–6
Components of Demand
Average demand
for a period of Trend
time
Seasonal element Cyclical elements
Random variation Autocorrelation

Excel: Components o
f Demand
For the Excel template visit

www.mhhe.com/sie-chase14e
18–7
Trends
• Identification of trend lines is a common starting
point when developing a forecast.
• Common trend types include linear, S-curve,
asymptotic, and exponential.
18–8
Time Series Analysis
• Using the past to predict the future
Short term – forecasting less than 3 months
• Used mainly for tactical decisions
Medium term – forecasting 3 months to 2 years
• Used to develop a strategy that will be implemented over the next 6 to

18 months (e.g., meeting demand)
Long term – forecasting greater than 2 years
• Useful for detecting general trends and identifying major turning points
18–9
Model Selection
• Choosing an appropriate forecasting model

depends upon
– Time horizon to be forecast
– Data availability
– Accuracy required
– Size of forecasting budget
– Availability of qualified personnel
18–10
Forecasting Method Selection Guide
Amount of Historical Forecast

Forecasting Method Data Pattern
Data Horizon
Stationary (i.e., no
6 to 12 months; weekly
Simple moving average trend or Short
data are often used
seasonality)
Weighted moving
5 to 10 observations
average and simple Stationary Short
needed to start
exponential smoothing
5 to 10 observations
Exponential smoothing Stationary and
needed to start Short
with trend trend
Stationary, trend, Short to

Linear regression 10 to 20 observations
and seasonality medium
18–11
Simple Moving Average
• Forecast is the average of a fixed number of past periods.
• Useful when demand is not growing or declining rapidly

and no seasonality is present.
• Removes some of the random fluctuation from the data.
• Selecting the period length is important.

– Longer periods provide more smoothing.
– Shorter periods react to trends more quickly.
18–12
•
Formula
Simple Moving Average
18–13
Example
Simple Moving Average –
18-14
18–14
Weighted Moving Average
• The simple moving average formula implies equal
weighting for all periods.
• A weighted moving average allows unequal
weighting of prior time periods.
– The sum of the weights must be equal to one.
– Often, more recent periods are given higher weights than
periods farther in the past.
𝐹 𝑡=𝑤 1 𝐴𝑡 −1+𝑤 2 𝐴𝑡 −2+…+𝑤𝑛𝐴𝑡−𝑛
18–15
Selecting Weights
• Experience and/or trial-and-error are the simplest
approaches.
• The recent past is often the best indicator of the future,

so weights are generally higher for more recent data.
• If the data are seasonal, weights should reflect this

appropriately.
18–16
Exponential Smoothing
• A weighted average method that includes all past data
in the forecasting calculation
• More recent results weighted more heavily
• The most used of all forecasting techniques
• An integral part of computerized forecasting
18–17
• Well accepted for six reasons
– Exponential models are surprisingly accurate
– Formulating an exponential model is relatively
easy
– The user can understand how the model works
– Little computation is required to use the model
– Computer storage requirements are small
– Tests for accuracy are easy to compute
18–18
Model
18-19
18–19
9
8
7
6
5
4
3
2
1
10
Week
820
Demand
820
Forecast
18–20
Example
Week Demand Forecast
1 820 820
2 775 820
3 680 811
4 655 785
5 750 759
6 802 757
7 798 766
8 689 772
9 775 756
10 760
18-21
18–21
Exponential Smoothing – Effect of Trends
• The presence of a trend in the data causes the exponential

smoothing forecast to always lag behind the actual data
• This can be corrected by adding a trend adjustment
– The trend smoothing constant is delta (δ)
18–22
Example – Exponential Smoothing with
Trend Adjustment
• Calculate the new forecast, assuming the following:
– The previous forecast including trend (FITt-1) is 110 and the
previous estimate of the trend (Tt-1) is 10
– α = 0.2 and δ = 0.3
– Actual demand for period t-1 is 115
Ft = Ft-1 + α(At-1 – FITt-1) = 110 + 0.2(115-110) = 111.0
Tt = Tt-1 + δ(Ft-1 – FITt-1) = 10 + 0.3(111-110) = 10.3
FITt = Ft + Tt = 111.0 + 10.3 = 121.3

18–23
Choosing Alpha and Delta
• Relatively small values for α and δ are common
– Usually in the range 0.1 to 0.3
• α depends upon how much random variation is
present
• δ depends upon how steady the trend is
• Measurement of forecast error can be used to
select values of α and δ to minimize overall
forecast error
18–24
Linear Regression Analysis
• Regression is used to identify the functional relationship
between two or more correlated variables, usually from
observed data.
• One variable (the dependent variable) is predicted for given
values of the other variable (the independent variable).
• Linear regression is a special case that assumes the
relationship between the variables can be explained with a
straight line.

Y = a + bt
18–25
Time Series Decomposition
• Chronologically ordered data are referred to as
a time series.
• A time series may contain one or many
elements.
– Trend, seasonal, cyclical, autocorrelation, and
random
• Identifying these elements and separating the
time series data into these components is known
as decomposition.
18–26
Seasonal Variation
• Seasonal variation may be either additive or
multiplicative (shown here with a changing
trend).
18–27
Determining Seasonal Factors :
Simple Proportions Example 18.3
• The seasonal factor (or index) is the ratio of the
amount sold during each season divided by the
average for all seasons.
Average Sales for

Season Past Sales Seasonal Factor
Each Season
Spring 200 = 250 = 0.8
Summer 350 = 250 = 1.4
Fall 300 = 250 = 1.2
Winter 150 = 250 = 0.6

Total 1000
18–28
Example 18.3 (Continued)
Expected Average Next
Demand Sales for Seasonal Year’s
for Each Season Factor Seasonal
Next Year (1,100y4) Forecast
Spring 275 X 0.8 = 220
Summer 275 X 1.4 = 385
Fall 275 X 1.2 = 330
Winter 275 X 0.6 = 165
1100
18–29
Causal Relationship
Forecasting
• Causal relationship forecasting uses independent
variables other than time to predict future demand.
– This independent variable must be a leading indicator.
• Many apparently causal relationships are actually just

correlated events – care must be taken when selecting
causal variables.
18–30
Multiple Regression
Techniques
• Often, more than one independent variable
may be a valid predictor of future demand.
• In this case, the forecast analyst may utilize

multiple regression.
– Analogous to linear regression analysis, but with
multiple independent variables.
– Multiple regression supported by statistical
software packages.
18–31
Qualitative Forecasting
Techniques
• Generally used to take advantage of expert knowledge.
• Useful when judgment is required, when products are
new, or if the firm has little experience in a new market.
• Examples
– Market research
– Panel consensus
– Historical analogy
– Delphi method
18–32

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14e

• LO–2: Evaluate demand using quantitative forecasting

• LO–3: Apply qualitative techniques to forecast demand

• LO–4: Apply collaborative techniques to forecast demand

• Different roles require different forecasting approaches.

• The choice of the decoupling point in a SC is strategic.

• Forecasting helps determine the level of inventory needed at the

• The decision will be affected by the error produced in the

• Time series analysis is based on the idea that

Seasonal element Cyclical elements

Random variation Autocorrelation

For the Excel template visit

• Used mainly for tactical decisions

Medium term – forecasting 3 months to 2 years

• Used to develop a strategy that will be implemented over the next 6 to

Long term – forecasting greater than 2 years

• Choosing an appropriate forecasting model

Amount of Historical Forecast

Stationary, trend, Short to

• Useful when demand is not growing or declining rapidly

• Removes some of the random fluctuation from the data.

• Selecting the period length is important.

𝐹 𝑡=𝑤 1 𝐴𝑡 −1+𝑤 2 𝐴𝑡 −2+…+𝑤𝑛𝐴𝑡−𝑛

• The recent past is often the best indicator of the future,

• If the data are seasonal, weights should reflect this

• More recent results weighted more heavily

• The most used of all forecasting techniques

• An integral part of computerized forecasting

• The presence of a trend in the data causes the exponential

Ft = Ft-1 + α(At-1 – FITt-1) = 110 + 0.2(115-110) = 111.0

Tt = Tt-1 + δ(Ft-1 – FITt-1) = 10 + 0.3(111-110) = 10.3

FITt = Ft + Tt = 111.0 + 10.3 = 121.3

Average Sales for

Spring 200 = 250 = 0.8

Summer 350 = 250 = 1.4

Fall 300 = 250 = 1.2

Winter 150 = 250 = 0.6

• Many apparently causal relationships are actually just

• In this case, the forecast analyst may utilize

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