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Chapter 12 Forecasting
OBJECTIVES Demand Management Qualitative Forecasting Methods Simple & Weighted Moving Average Forecasts Exponential Smoothing Simple Linear Regression Web-Based Forecasting
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Demand Management
Independent Demand: Finished Goods
A
B(4)
C(2)
D(2)
E(1)
D(3)
F(2)
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
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Sales
x x x
xx x x xx x x x x x x x xxx x x x x x xxxx
x x
x x x
x x
x x x x x
Linear Linear
x x
Trend Trend
x
Year
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Qualitative Methods
Executive Judgment
Grass Roots
Historical analogy
Qualitative Methods
Market Research
Delphi Method
Panel Consensus
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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
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W eek 1 2 3 4 5 6 7 8 9 10 11 12
Demand 3-W eek 6-W eek 650 F4=(650+678+720)/3 678 =682.67 720 F7=(650+678+720 785 682.67 +785+859+920)/6 859 727.67 =768.67 920 788.00 850 854.67 768.67 758 876.33 802.00 892 842.67 815.33 920 833.33 844.00 789 856.67 866.50 844 867.00 854.83
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Plotting the moving averages and comparing Plotting the moving averages and comparing them shows how the lines smooth out to reveal them shows how the lines smooth out to reveal the overall upward trend in this example the overall upward trend in this example
1 0 00 9 00 Demand 8 00 7 00 6 00 5 00 1 2 3 4 5 6 7 8 9 1 0 11 1 2 Week Dema n d 3- W e ek 6- W e ek
Note how the Note how the 3-Week is 3-Week is smoother than smoother than the Demand, the Demand, and 6-Week is and 6-Week is even smoother even smoother
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Week 1 2 3 4 5 6 7
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5-Week
710.00 666.00
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w
i=1
=1
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Note that the weights place more emphasis on the Note that the weights place more emphasis on the most recent data, that is time period t-1 most recent data, that is time period t-1
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Week 1 2 3 4
F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
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F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
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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
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Question: Given the weekly Question: Given the weekly demand data, what are the demand data, what are the exponential smoothing exponential smoothing forecasts for periods 2-10 forecasts for periods 2-10 using =0.10 and using =0.10 and =0.60? =0.60? Assume F1=D1 1 Assume F1=D
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Answer: The respective alphas columns denote the forecast values. Note Answer: The respective alphas columns denote the forecast values. Note that you can only forecast one time period into the future. that you can only forecast one time period into the future.
Week 1 2 3 4 5 6 7 8 9 10
Demand 820 775 680 655 750 802 798 689 775
0.1 820.00 820.00 815.50 801.95 787.26 783.53 785.38 786.64 776.88 776.69
0.6 820.00 820.00 820.00 817.30 808.09 795.59 788.35 786.57 786.61 780.77
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Week
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Week 1 2 3 4 5
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Week 1 2 3 4 5
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A
t=1
- Ft
The ideal MAD is zero which would mean there is no forecasting error The larger the MAD, the less the accurate the resulting model
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Sales Forecast 220 n/a 250 255 210 205 300 320 325 315
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MAD =
A
t=1
- Ft
40 = = 10 4
Note that by itself, the MAD Note that by itself, the MAD only lets us know the mean only lets us know the mean error in a set of forecasts error in a set of forecasts
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RSFE Running su m of forec ast errors TS = = MAD Mean absol ute deviat ion
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a
0 1 2 3 4 5 x (Time)
Yt is the regressed forecast value or dependent variable in the model, a is the intercept value of the the regression line, and b is similar to the slope of the regression line. However, since it is calculated with the variability of the data in mind, its formulation is not as straight forward as our usual notion of slope.
Yt = a + bx
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a = y - bx
xy - n(y)(x) x - n(x )
2 2
b=
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Week 1 2 3 4 5
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Answer: First, using the linear regression formulas, we Answer: First, using the linear regression formulas, we can compute a and b can compute a and 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 xy - n(y)(x) = 2499 - 5(162.4)(3) = 63 = 6.3 b= 55 5(9) 10 x 2 - n(x )2
a = y - bx = 162.4 - (6.3)(3) = 143.5
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Yt = 143.5 + 6.3x
Sales
Now if we plot the regression generated forecasts against the actual sales we obtain the following chart: 180 175 170 165 Sales 160 155 150 145 140 135 1 2 3 Period 4 5 Forecast
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End of Chapter 12