FORECASTING

Manufacturing Planning & Control Overview

Forecasting
(independent
demand)

1 2 3
Resource Sales and operations Demand
Manufacturing Planning & Control (1-9) planning planning management
Enterprise Resource Planning (1-9) 4
Demand Management (3) Master production
scheduling Front End
Forecasting (3)
Sales & Operations Planning (1-5)
5 6
Master Production Scheduling (4) Detailed capacity Detailed material
Capacity Planning & Management (6-7) planning planning
Production Activity Control (5-9) Engine
7
Advanced Scheduling (8) Material and
Just-In-Time (1-9) capacity plans
Distribution Requirements (6, 9)
Management of Supply Chain Logistics (6,9) 8 9
Shop-floor Supplier Back End
Order Point Inventory Control Methods (3,6)
systems systems
 (Demand) Forecasting
 Process of predicting a future event
 Underlying basis of all business decisions:
 Production
 Inventory
 Personnel
 Facilities
 Qualitative Forecasting Approaches
 Jury of Executive Opinion
 Delphi Method
 Sales Force Composite
 Consumer Market Survey
Trend Projection
Naïve Approach
 Quantitative Forecasting Methods Averages Methods
 Time Series Exponential Smoothing
 Associative Models

Linear Regression
• Forecast Accuracy Evaluation Correlation Analysis
3-3
Forecasts common features:

1) Current factors/conditions may influence the future

2) Past factors/conditions may influence the future
3) Forecasts are rarely perfect because of randomness
4) Forecasts are more accurate for groups vs. individuals
5) Forecast accuracy decreases as time horizon increases

3-4
Quantitative Approaches
TREND PROJECTIONS (PATTERNS)
• based on sequence of evenly spaced data points
• models that base predictions on historical patterns of numerical
data.
• Data can be represented via a TREND PATTERN, SEASONALITY
PATTERN, CYCLE PATTERN, AUTOCORRELATION, RANDOM
VARIATION

?
 Non-Linear Trend
TREND PATTERNS
• Develop an equation that describes the trend
• Look at historical data
• Linear vs Non-Linear Trends

Linear Trend
SEASONALITY PATTERN
• models that base predictions on historical patterns of numerical data but
incorporate amplitude of seasonal variation
• Last less than one year
 Forecasting with Seasonality
The components of a time series:

Time Series

Trend Seasonal Cyclical Random

Component Component Component Component

• A seasonal component is present in a time series if a

consistent pattern associated with a calendar can be
observed in the data
 Multiplicative Decomposition
of a Time Series
• Decomposition procedures are used in time series to describe
the trend and seasonal factors in a time series.Formula for the
Multiplicative Decomposition Model

yt  Tt  S t  Rt
where:
yt = The time series value at period t
Tt = The trend component at period t
St = The seasonal component at period t
Rt = The random component at period t
 Multiplicative Decomposition
of a Time Series
Use these steps for the multiplicative decomposition
technique for a forecast:

1. Identify the seasonal components

2. Deseasonalize the original data using the seasonal
components
3. Identify the trend component with the
deseasonalized data
4. Use the trend and seasonal components to forecast
future periods
Random variation is excluded by following these steps.
 Multiplicative Decomposition
of a Time Series
1. Identify the Seasonal Components
• The number of seasonal components equals the
number of seasons within a calendar year
• Example: Car sales data is quarterly data
• Since there are 4 quarters per year, start with a 4-period
moving average
• Averaging the values for periods 1, 2, 3, and 4 gives a value
centered at period 2.5
• Averaging the values for periods 2, 3, 4, and 5 gives a value
centered at period 3.5
• etc…
 Multiplicative Decomposition
of a Time Series
4-Quarter
Average Moving
Quarter Sales Period Average
1 97 2.5 120.50
1 2  3  4
2 142 3.5 126.25 2.5 
4
3 108 4.5 131.75
4 135 97  142  108  135
5.5 136.25 120.50 
5 120 4
6.5 140.00
6 164 7.5 140.75
7 126 etc…
8.5 137.50
8 150 9.5 141.25
9 123 10.5 139.25
10 151
11 141 • Each moving average is for a consecutive
12 142
block of 4 quarters
 Multiplicative Decomposition
of a Time Series
• An average period
of 2.5 or 3.5 does 4-Quarter Centered
not match the Average Moving Centered Moving
original quarters, Period Average Period Average
so we average two 2.5 120.50 3 123.375
consecutive 3.5 126.25 4 129.000
moving averages to 4.5 131.75 5 134.000
get centered 5.5 136.25 etc… 6 138.125
moving averages 6.5 140.00 7 140.375
7.5 140.75 8 139.125
8.5 137.50 9 139.375
9.5 141.25 10 140.250
10.5 139.25
Multiplicative Decomposition
of a Time Series

• The purpose of calculating a four-period centered

moving average is to remove the seasonal
component, St , from the time series
• Each average includes all four seasons
• Averaging removes the random component Rt , because
we expect the random fluctuations to average out over
time
• With seasonality and randomness removed, the
centered moving average values represent trend (Tt)
CMAt  Tt
Multiplicative Decomposition
of a Time Series

• The ratio-to-moving-average represents the

seasonal and random components in the original
time series and is found by dividing the time series
value by its centered moving average
• Formula for the Ratio-to-Moving-Average
 Multiplicative Decomposition
of a Time Series
• Calculating the ratio-to-moving-average values

Centered Ratio-to-
Centered
Quarter Sales Moving Moving-
Period
Average Average
3 2011-Q3 108 123.375 0.8754
4 2011-Q4 135 129.000 1.0465 Example:

5 2012-Q1 120 134.000 0.8955 120

0.8955 
134.000
6 2012-Q2 164 138.125 1.1873
7 2012-Q3 126 140.375 0.8976
8 2012-Q4 150 139.125 1.0782
9 2013-Q1 123 139.375 0.8825
10 2013-Q2 151 140.250 1.0766
 Multiplicative Decomposition
of a Time Series
• Seasonal factors (SFQ) are obtained by averaging the
ratio-to-moving-averages associated with each season
in the time series

SF1 SF2 SF3 SF4

 Multiplicative Decomposition
of a Time Series
• Normalized seasonal factors (NSFQ) are seasonal
factors that are adjusted so that they add up to the
number of seasons in the time series

4
NSF1  ( SF1 )  (1.0076)(0 .8955)  0.8958
3.9699
SF1 = 0.8890
4
SF2 = 1.1320 NSF2  ( SF2 )  (1.0076)(1 .1320)  1.1406
3.9699
SF3 = 0.8865 4
NSF3  ( SF3 )  (1.0076)(0 .8865)  0.8932
SF4 = 1.0624 3.9699
Total = 3.9699 4
NSF4  ( SF4 )  (1.0076)(1 .0624)  1.0704
3.9699
Total = 4.0000
Multiplicative Decomposition
of a Time Series

Quarter 1 sales average only

89.58% of the average
quarterly sales during the year

Quarter 2 has about 14% more

sales than an average quarter
during the
year
 Multiplicative Decomposition
of a Time Series
2. Deseasonalize the Time Series
• Remove the seasonality from the data using the
seasonal components just computed
• Formula for the Deseasonalized Time Series

yt
Tt  Rt 
St
Multiplicative Decomposition
of a Time Series

Example:
135
126.1 
1.0704
Multiplicative Decomposition
of a Time Series

• The deseasonalized time series graphically:

 Multiplicative Decomposition
of a Time Series
3. Identify the Trend Component with the
Deseasonalized Data

Excal can be used to

obtain the simple linear
regression results using
the deseasonalized sales
as the dependent
variable and time as the
independent variable:

Tt  116.8545  2.522 t
 Multiplicative Decomposition
of a Time Series
4. Generate Forecasts with the Trend and
Seasonal Components
• Formula for Forecasting with the Multiplicative
Decomposition Method

Ft  Tt  St
Multiplicative Decomposition
of a Time Series

Forecast for period 13:

• Begin with the trend component for t = 13:
Tt  116.8545  2.522 t
T13  116.8545  2.522(13)  149.65
• Now adjust for seasonal variation:
• Period 13 is the first quarter of 2012
• The seasonal component for season one is S1 = 0.8958
F13•The completed
T13  sales forecast
S13  (149.65)(0 .8958)for the period
134.1  13 is cars
134
Multiplicative Decomposition
of a Time Series

• Forecasts for additional quarters into the future:

• Remember that forecasting errors are likely to increase as we

forecast farther into the future
CYCLE PATTERN

• models that base predictions on historical economic patterns

• Last more than one year
RANDOM VARIATIONS
• Blips in data caused by chance or unusual situations
Naive Methods
• Next period = last period
• Simple to use and understand
• Very low cost
1 Stable time series data : Ft  At 1
• Low accuracy
2 Seasonal variations : Ft  At  n
3 Data with trend : Ft  At 1   At 1  At  2 
F = forecast A = actual

Period of 2 periods
time since ago
‘Last
Season’
Stable Time Series

n A F
1 10 Example
2 10
3 10 What is the forecast for Period 9?
4 10
5 10
6 10 F9 = A9-8 or F9 = A8 or F9 =
7 10 10
8 10
9
 Seasonal Variation

Season n A F Example
Spring 1 12 What is the forecast for Periods 9, 10, 11, 12 ?
Summer 2 25
Fall 3 8
Winter 4 2 F9 = A9-4 or F9 = A5 or F9 = 10
Spring 5 10
Summer 6 28
Fall 7 7 F10 = A10-4 or F10 = A6 or
Winter 8 0
Spring 9 F10 = 28
Summer 10
Fall 11
Winter 12 F11 = A11-4 or F11 = A7 or F11 = 7

F12 = A12-4 or F12 = A8 or F12 = 0

Data with Trend
n A F
1 2
2 4
Example
3 6 What is the forecast for Period 17?
4 8
5 10
6 12 F17 = A17-1 + (A17-1 – A17-2)
7 14
8 16
9 18 or
10 20
11 22
12 24 F17 = A16 + (A16 – A15)
13 26
14 28
15 30 or
16 32
17
F17 = 32 + (32-30)

or

F17 = 34
 Averaging Methods 1. Moving average
• Smoothing of random variation 2. Weighted moving
• 3 techniques: average
3. Exponential smoothing

1
Moving
: Ft 
 Demand in previous n periods
Average n

2
Exponentia l
3 : Ft  Ft 1    At 1  Ft 1 
Smoothing Relevance
%
F = forecast A = actual  = smoothingconstant
 Moving
: Ft 
 Demand in previous n periods
Moving Average Average n

n A F
1 2
Example 1
2 4 What is the 4-Period Moving Average forecast
3 6
4 8
for Period 17?
5 10
6
7
12
14
F17 = Sum (32+30+28+26) / 4
8 16
9
10
18
20
or
11 22
12 24 F17 = 29
13 26
14 28
15 30 Example 2
16 32
17 What is the 6-Period Moving Average forecast
for Period 17?

F17 = Sum (32+30+28+26+24+24) / 6

or

F17 = 27
Weighted Moving
Average
n A Weight % F Example 1
1 2 0
2 4 0
What is the 4-period weighted moving average
3 6 0 forecast for period 17 using a weight of 0.4 for
4
5
8
10
0
0
the most recent period, 0.3 for the next, 0.2 for
6 12 0 the next, and 0.1 for the next.
7 14 0
8 16 0
9 18 0
10 20 0 F17 = Sum (32x0.4) + (30x0.3) + (28*0.2) +
11 22 0
12 24 0 (26*0.1)
13 26 10
14 28 20
15 30 30 Or
16 32 40
17
F17 = 30
 Exponentia l
: Ft  Ft 1    At 1  Ft 1 
Exponential Smoothing
Smoothing
n Actual Forecast
1 65 60
2 55
3 58
4 64
5 Example 1
What is the Period 5 forecast using
smoothing constant of 0.40 ?

Period Actual Forecast Calculations

1 65 60
2 55 62 = 60 + 0.4(65-60)
3 58 59.2 = 62 + 0.4(55-62)
4 64 58.72 = 59.2 + 0.4(58-59.2)
5 60.83 = 58.72 + 0.4(64-58.72)

or

F5 = 60.83
 Exponentia l
: Ft  Ft 1    At 1  Ft 1 
Exponential Smoothing
Smoothing
n Actual Forecast
1 65
2 55
3 58
4 64
5 Example 2
What is the Period 5 forecast using
smoothing constant of 0.40 ?
(**If no forecast is given – start using Naïve
Method)

Period Actual Forecast Calculations

1 65
2 55 65
3 58 61 = 65 + 0.4(55-65)
4 64 59.8 = 61 + 0.4(58-61)
5 61.48 =59.8 + 0.4(64-59.8)

or

F5 = 61.48
 
Equation : yt  a  bt
n ty   t  y
n t y
1 2 40
2 4 36

Slope : b  3 6 46

n t   t 
4 8 32
2 2 5 10 57
6 12 38
7 14 34

 y  b t
8 16 52
9 18 26
10 20 34

y - intercept : a  11
12
22
24
27
40

n 13
14
15
26
28
30
32
36
37
16 32 32
17 34 26
18 36 36
19 38 32

What is the linear equation for the following data set? 20

21
40
42
28
26
22 44 30
23 46 28
24 48 32
25 50 40
26 52 32
27 54 36
28 56 32
29 58 30
30 60 38
SUM 930 1045
 
Equation : yt  a  bt
n t y ty t squared
1 2 40 80 4
2 4 36 144 16

n ty   t  y
3 6 46 276 36
4 8 32 256 64
5 10 57 570 100

Slope : b  6 12 38 456 144

n t   t 
7 14 34 476 196
2 2 8 16 52 832 256
9 18 26 468 324
10 20 34 680 400
11 22 27 594 484

 y  b t
12 24 40 960 576
13 26 32 832 676

y - intercept : a 
14 28 36 1008 784
15 30 37 1110 900

n 16
17
18
32
34
36
32
26
36
1024
884
1296
1024
1156
1296
19 38 32 1216 1444
20 40 28 1120 1600
21 42 26 1092 1764

y = a + bt 22
23
44
46
30
28
1320
1288
1936
2116
24 48 32 1536 2304
25 50 40 2000 2500
26 52 32 1664 2704
b = 30(30938) – 930(1045) 27 54 36 1944 2916
28 56 32 1792 3136
30(37820) – (930)(930) = -0.16207 29 58 30 1740 3364
30 60 38 2280 3600
SUM 930 1045 30938 37820

a = 1045-(-0.16207*930) = 39.875 y =39.875 - 0.16207t

30
60

50

40

30

20

10

0
0 10 20 30 40 50 60 70
CORRELATION
• How strong is the linear relationship between the variables?
• Correlation does not necessarily imply causality!
• Coefficient of correlation, r, measures degree of association
• Values range from −1 to +1
n xy   x y
r
[n x 2  ( x)2 ][n y 2  ( y )2 ]
Accuracy and Control of Forecasts
Four measures of forecasts are used:
Absolute

• Mean absolute deviation (MAD)

Lower Values indicate Accurate Forecast N = # of E = # of
samples errors
• Mean squared error (MSE)
Lower Values indicate Accurate Forecast

• Mean absolute percent error (MAPE)

Lower Values indicate Accurate Forecast
Mean Absolute Deviation (MAD)

Example
What is the MAD of this forecast?

MAD = 10 / 4 or 2.5
Mean Squared Errors (MSE)

Example
What is the MSE of this forecast?

MAD = 30 / 4 or 7.5
Mean Absolute Percent Errors (MAPE)

Example
What is the MAPE of this forecast?

MAD = 4.69 / 4 or 1.17

Control Chart

Example
Is this forecast within control limits?

A F A- F
Month (Sales) (Forecast) Error e2
1 90 100 -10 100
2 95 100 -5 25
3 115 100 +15 225
4 100 110 -10 100
5 125 110 +15 225
6 140 110 +30 900
1575

1575
s  262.5  16.2
6

Errors should be within ± 2(16.2).

Acceptable
Range Lower limit = -32.4 Upper limit = 32.4
APPLICATION PRACTICE
3-48
 Next Year = (1 + 12)

t y ty t squared
1 4200 4200 1
2 4300 8600 4
3 4000 12000 9
4 4400 17600 16
5 5000 25000 25
6 4700 28200 36
7 5300 37100 49
8 4900 39200 64
9 5400 48600 81
10 5700 57000 100
11 6300 69300 121
12 6000 72000 144

Sum 78 60200 418800 650

330000 A 3766.666667
1716

B 192.30769
Y = 3766 + 192.30t

3-49
3-50
3-51
b. Calculate MSE, MAPE for the model.

11/18/2023 3-52
3-53
 MSE

Month Demand Technique 1 Error Error Squared Technique 2 Error Error Squared
1 492 488 4 16 495 -3 9
2 470 484 -14 196 482 -12 144
3 485 480 5 25 478 7 49
4 493 490 3 9 488 5 25
5 498 497 1 1 492 6 36
6 492 493 -1 1 493 -1 1
248 264
MSE 41.33333333 44

MAPE
Month Demand Technique 1 Error Error Absolute (Error Absolute / Actual) x 100 Technique 2 Error Error Absolute (Error Absolute / Actual) x 100
1 492 488 4 4 0.008130081 495 -3 3 0.006147541
2 470 484 -14 14 0.029787234 482 -12 12 0.024793388
3 485 480 5 5 0.010309278 478 7 7 0.014583333
4 493 490 3 3 0.006085193 488 5 5 0.010204082
5 498 497 1 1 0.002008032 492 6 6 0.012072435
6 492 493 -1 1 0.00203252 493 -1 1 0.002028398
0.056319819 0.069829177

MAPE 99.99061336 99.9883618

11/18/2023 54 3-54
 Quiz – Chapter 3

 A forecast used for Master Production Scheduling and

Control is likely to cover a period of _____________.
 Regression analysis where the relationship between
variables is a straight line is called _______ _______.
 In a time series analysis, time is the _________ variable.
 An exponential smoothing forecast considers all past data
(T/F).
 In an exponential smoothing forecast, a higher level of alpha
(α) will place more emphasis on recent history (T/F).
 Mean error of a forecast provides information concerning the
forecast’s ________.

3-55
Chapter 3
 A forecast used for Master Production Scheduling and Control
is likely to cover a period of _____________. A few days to a
few weeks
 Regression analysis where the relationship between variables
is a straight line is called _______ _______. Linear regression
 In a time series analysis, time is the _________ variable.
Independent
 An exponential smoothing forecast considers all past data
(T/F). True
 In an exponential smoothing forecast, a higher level of alpha
(α) will place more emphasis on recent history (T/F). True
 Mean error of a forecast provides information concerning the
forecast’s ________. Bias

3-56
 Determining the Coefficient of
Correlation
 Coefficient of Determination, r2, measures the percent of
change in y predicted by the change in x
 Values range from 0 to 1
 Easy to interpret

 For the Nodel Construction example:

r = .901
r2 = .81

3-57