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2/1/2012

Operations
Management
Forecasting

Murat Erkoc
MGT303
University of Miami
41

What is Forecasting?
Process of
predicting a future
event
Underlying basis of
all business
decisions

??

Production
Inventory
Personnel
Facilities
42

Forecasting Time Horizons


Short-range forecast
Up to 1 year, generally less than 3 months
Purchasing, job scheduling, workforce
levels, job assignments, production levels

Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting

Long-range forecast
3+ years
New product planning, facility location,
research and development
43

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Product Life Cycle


Company Strategy/Issues

Introduction

Growth

Maturity

Best period to
increase market
share

Practical to change
price or quality
image

Poor time to
change image,
price, or quality

R&D engineering is
critical

Strengthen niche

Competitive costs
become critical
Defend market
position

Internet search engines


LCD & plasma TVs
Sales

Decline
Cost control
critical

CD-ROMs
Analog TVs

Drive-through
restaurants

iPods
Xbox 360

3 1/2
Floppy
disks

44

Types of Forecasts
Economic forecasts
Address business cycle inflation rate,
money supply, housing starts, etc.

Technological forecasts
Predict rate of technological progress
Impacts development of new products

Demand forecasts
Predict sales of existing products and
services
45

Seven Steps in Forecasting


Determine the use of the forecast
Select the items to be forecasted
Determine the time horizon of the
forecast
Select the forecasting model(s)
Gather the data
Make the forecast
Validate and implement results
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The Realities!
Forecasts are seldom perfect
Most techniques assume an
underlying stability in the system
Product family and aggregated
forecasts are more accurate than
individual product forecasts

47

Forecasting Approaches
Qualitative Methods
Used when situation is vague
and little data exist
New products
New technology

Involves intuition, experience


e.g., forecasting sales on Internet

48

Forecasting Approaches
Quantitative Methods
Used when situation is stable and
historical data exist
Existing products
Current technology

Involves mathematical techniques


e.g., forecasting sales of color
televisions
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2/1/2012

Overview of Qualitative
Methods
Jury of executive opinion
Pool opinions of high-level experts,
sometimes augment by statistical
models

Delphi method
Panel of experts, queried iteratively

4 10

Overview of Qualitative
Methods
Sales force composite
Estimates from individual
salespersons are reviewed for
reasonableness, then aggregated

Consumer Market Survey


Ask the customer

4 11

Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential
smoothing

Time-Series
Models

4. Trend projection
5. Linear regression

Associative
Model

4 12

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Time Series Forecasting


Set of evenly spaced numerical data
Obtained by observing response
variable at regular time periods

Forecast based only on past values,


no other variables important
Assumes that factors influencing
past and present will continue
influence in future
4 13

Time Series Components


Trend

Cyclical

Seasonal

Random

4 14

Demand for product or service

Components of Demand
Trend
component
Seasonal peaks

Actual
demand
Average
demand over
four years

Random
variation
|
1

|
2

|
3
Year

|
4
Figure 4.1
4 15

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Trend Component
Persistent, overall upward or
downward pattern
Changes due to population,
technology, age, culture, etc.
Typically several years
duration

4 16

Seasonal Component
Regular pattern of up and
down fluctuations
Due to weather, customs, etc.
Occurs within a single year
Period

Length

Number of
Seasons

Week
Month
Month
Year
Year
Year

Day
Week
Day
Quarter
Month
Week

7
4-4.5
28-31
4
12
52
4 17

Cyclical Component
Repeating up and down movements
Affected by business cycle, political,
and economic factors
Multiple years duration
Often causal or
associative
relationships
0

10

15

20
4 18

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Random Component
Erratic, unsystematic, residual
fluctuations
Due to random variation or
unforeseen events
Short duration and
nonrepeating

F
4 19

Naive Approach
Assumes demand in next
period is the same as
demand in most recent period
e.g., If January sales were 68, then
February sales will be 68

Sometimes cost effective and


efficient
Can be good starting point
4 20

Moving Average Method


MA is a series of arithmetic means
Used if little or no trend
Used often for smoothing
Provides overall impression of data
over time

Moving average =

demand in previous n periods


n
4 21

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Moving Average Example


Month

Actual
Shed Sales

3-Month
Moving Average

January
February
March
April
May
June
July

10
12
13
16
19
23
26

(10 + 12 + 13)/3 = 11 2/3


(12 + 13 + 16)/3 = 13 2/3
(13 + 16 + 19)/3 = 16
(16 + 19 + 23)/3 = 19 1/3

4 22

Shed Sales

Graph of Moving Average


30
28
26
24
22
20
18
16
14
12
10

Moving
Average
Forecast

Actual
Sales

D
4 23

Weighted Moving Average


Used when trend is present
Older data usually less important

Weights based on experience and


intuition
Weighted
moving average =

(weight for period n)


x (demand in period n)
weights

4 24

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Weights Applied

Period

Weighted Moving
Average
3
Last
month
2
1
6
Month

Actual
Shed Sales

January
February
March
April
May
June
July

10
12
13
16
19
23
26

Two months ago


Three months ago
Sum of weights
3-Month Weighted
Moving Average

[(3 x 13) + (2 x 12) + (10)]/6 = 121/6


[(3 x 16) + (2 x 13) + (12)]/6 = 141/3
[(3 x 19) + (2 x 16) + (13)]/6 = 17
[(3 x 23) + (2 x 19) + (16)]/6 = 201/2
4 25

Potential Problems With


Moving Average
Increasing n smooths the forecast
but makes it less sensitive to
changes
Do not forecast trends well
Require extensive historical data

4 26

Moving Average And


Weighted Moving Average
Weighted
moving
average

Sales demand

30
25
Actual
sales

20
15

Moving
average

10
5
|

Figure 4.2

|
F

|
M

|
A

|
M

|
J

|
J

|
A

|
S

|
O

|
N

|
D
4 27

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Exponential Smoothing
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most

Requires smoothing constant ()


Ranges from 0 to 1
Subjectively chosen

Involves little record keeping of past


data
4 28

Exponential Smoothing
New forecast = Last periods forecast
+ (Last periods actual demand
Last periods forecast)
Ft = Ft 1 + (At 1 - Ft 1)
where

Ft = new forecast
Ft 1 = previous forecast
= smoothing (or weighting)
constant (0 1)
4 29

Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20

4 30

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Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
New forecast = 142 + .2(153 142)

4 31

Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
New forecast = 142 + .2(153 142)
= 142 + 2.2
= 144.2 144 cars

4 32

Effect of
Smoothing Constants
Weight Assigned to

Smoothing
Constant

Most
Recent
Period
()

2nd Most 3rd Most 4th Most 5th Most


Recent
Recent
Recent
Recent
Period
Period
Period
Period
(1 - ) (1 - )2 (1 - )3 (1 - )4

= .1

.1

.09

.081

.073

.066

= .5

.5

.25

.125

.063

.031

4 33

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Impact of Different

Demand

225

= .5

Actual
demand

200

175

= .1
150 |
1

|
2

|
3

|
4

|
5

|
6

|
7

|
8

|
9

Quarter
4 34

Impact of Different
225

= .5

Demand

Actual

Chose
high values
of
demand
200

when underlying average


is likely to change
175

Choose low values of


when underlying average
is stable|
|
|
|
150 |
1

= .1
|
6

|
7

|
8

|
9

Quarter
4 35

Choosing
The objective is to obtain the most
accurate forecast no matter the
technique
We generally do this by selecting the
model that gives us the lowest forecast
error
Forecast error = Actual demand - Forecast value
= At - Ft
4 36

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Common Measures of Error


Mean Absolute Deviation (MAD)
MAD =

|Actual - Forecast|
n

Mean Squared Error (MSE)


MSE =

(Forecast Errors)2
n
4 37

Common Measures of Error


Mean Absolute Percent Error (MAPE)
n

100|Actuali - Forecasti|/Actuali

MAPE =

i=1

4 38

Comparison of Forecast
Error
Quarter

Actual
Tonnage
Unloaded

Rounded
Forecast
with
= .10

Absolute
Deviation
for
= .10

1
2
3
4
5
6
7
8

180
168
159
175
190
205
180
182

175
175.5
174.75
173.18
173.36
175.02
178.02
178.22

5.00
7.50
15.75
1.82
16.64
29.98
1.98
3.78
82.45

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62

4 39

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Comparison of Forecast
Error

|deviations|
Rounded
Absolute
MADActual
=
Forecast
Deviation
n
Tonnage
with
for
Quarter

Unloaded

= .10

= .10

For 180
= .10 175
5.00
168 = 82.45/8
175.5 = 10.31
7.50

1
2
3
4 For
5
6
7
8

159
174.75
175
= .50 173.18
190
173.36
205 = 98.62/8
175.02
180
178.02
182
178.22

15.75
1.82
16.64
12.33
29.98
1.98
3.78
82.45

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62

4 40

Comparison of Forecast
Error2

(forecast errors)
Rounded
Absolute
MSE = Actual
Forecast
Deviation
n
Tonnage
with
for
Quarter

Unloaded

= .10

= .10

For 180
= .10 175
5.00
168
175.5 = 190.82
7.50
= 1,526.54/8

1
2
3
4 For
5
6
7
8

159

174.75

15.75

180
182

178.02
178.22

1.98
3.78
82.45
10.31

1.82
175
= .50 173.18
190
173.36
16.64
=
1,561.91/8
=
195.24
205
175.02
29.98

MAD

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33

4 41

Comparison of Forecast
n
Error

100|deviationi|/actuali
Rounded
Absolute
Rounded
i=1
MAPE =
Actual
Forecast
Deviation
Forecast
Tonnage
with n
for
with
Quarter Unloaded
= .10
= .10
= .50
For

=
.10
1
180
175
5.00
175
2
168
175.5
= 44.75/8
= 7.50
5.59% 177.50
3
4
5
6
7
8

159

174.75

15.75

180
182

178.02
178.22

1.98
3.78
82.45
10.31
190.82

1.82
For 175
= .50 173.18
190
173.36
16.64
=
54.05/8
=
6.76%
205
175.02
29.98

MAD
MSE

172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33
195.24
4 42

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Comparison of Forecast
Error
Quarter

Actual
Tonnage
Unloaded

Rounded
Forecast
with
= .10

1
2
3
4
5
6
7
8

180
168
159
175
190
205
180
182

175
175.5
174.75
173.18
173.36
175.02
178.02
178.22
MAD
MSE
MAPE

Absolute
Deviation
for
= .10

5.00
7.50
15.75
1.82
16.64
29.98
1.98
3.78
82.45
10.31
190.82
5.59%

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33
195.24
6.76%
4 43

Exponential Smoothing with


Trend Adjustment
When a trend is present, exponential
smoothing must be modified
Forecast
Exponentially
Exponentially
including (FITt) = smoothed (Ft) + (Tt) smoothed
trend
forecast
trend

4 44

Exponential Smoothing with


Trend Adjustment
Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1)
Tt = (Ft - Ft - 1) + (1 - )Tt - 1
Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
4 45

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Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)
12
17
20
19
24
21
31
28
36

Smoothed
Forecast, Ft
11

Smoothed
Trend, Tt
2

Forecast
Including
Trend, FITt
13.00

Table 4.1
4 46

Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Forecast
Actual
Smoothed
Smoothed
Including
Demand (At) Forecast, Ft
Trend, Tt
Trend, FITt
12
11
2
13.00
17
20
19
Step 1: Forecast for Month 2
24
21
F2 = A1 + (1 - )(F1 + T1)
31
28
F2 = (.2)(12) + (1 - .2)(11 + 2)
36

= 2.4 + 10.4 = 12.8 units

Table 4.1
4 47

Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Forecast
Actual
Smoothed
Smoothed
Including
Demand (At) Forecast, Ft
Trend, Tt
Trend, FITt
12
11
2
13.00
17
12.80
20
19
Step 2: Trend for Month 2
24
21
T2 = (F2 - F1) + (1 - )T1
31
28
T2 = (.4)(12.8 - 11) + (1 - .4)(2)
36

= .72 + 1.2 = 1.92 units

Table 4.1
4 48

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Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Forecast
Actual
Smoothed
Smoothed
Including
Demand (At) Forecast, Ft
Trend, Tt
Trend, FITt
12
11
2
13.00
17
12.80
1.92
20
19
Step 3: Calculate FIT for Month 2
24
21
FIT2 = F2 + T1
31
28
FIT2 = 12.8 + 1.92
36

= 14.72 units

Table 4.1
4 49

Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)
12
17
20
19
24
21
31
28
36

Smoothed
Forecast, Ft
11
12.80
15.18
17.82
19.91
22.51
24.11
27.14
29.28
32.48

Smoothed
Trend, Tt
2
1.92
2.10
2.32
2.23
2.38
2.07
2.45
2.32
2.68

Forecast
Including
Trend, FITt
13.00
14.72
17.28
20.14
22.14
24.89
26.18
29.59
31.60
35.16

Table 4.1
4 50

Exponential Smoothing with


Trend Adjustment Example
35

Actual demand (At)

Product demand

30
25
20
15

Forecast including trend (FITt)


with = .2 and = .4

10
5
0 |

Time (month)

Figure 4.3
4 51

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Trend Projections
Fitting a trend line to historical data points
to project into the medium to long-range
Linear trends can be found using the least
squares technique
y^ = a + bx
^ = computed value of the variable to
where y
be predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
4 52

Values of Dependent Variable

Least Squares Method


Actual observation
(y value)

Deviation7

Deviation5

Deviation6

Deviation3
Deviation4
Deviation1
(error)

Deviation2

Trend line, y^ = a + bx

Time period

Figure 4.4
4 53

Values of Dependent Variable

Least Squares Method


Actual observation
(y value)

Deviation7

Deviation5
Deviation3

Deviation6

Least squares method


minimizes the sum of the
Deviation
squared
errors (deviations)
4

Deviation1
Deviation2

Trend line, y^ = a + bx

Time period

Figure 4.4
4 54

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Least Squares Method


Equations to calculate the regression variables
y^ = a + bx

b=

xy - nxy
x2 - nx2

a = y - bx

4 55

Least Squares Example


Year
2001
2002
2003
2004
2005
2005
2007

Time
Period (x)
1
2
3
4
5
6
7
x = 28
x=4
b=

Electrical Power
Demand
74
79
80
90
105
142
122
y = 692
y = 98.86

x2

xy

1
4
9
16
25
36
49
2
x = 140

74
158
240
360
525
852
854
xy = 3,063

3,063 - (7)(4)(98.86)
xy - nxy
=
= 10.54
140 - (7)(42)
x2 - nx2

a = y - bx = 98.86 - 10.54(4) = 56.70


4 56

Least Squares Example


Time
Period (x)

Electrical Power
Demand

x2

xy

1999
1
74
1
2000
2
79
4
The
trend
line
is
2001
3
80
9
2002
4
90
16
^
2003
105
25
y 5= 56.70 + 10.54x
2004
6
142
36
2005
7
122
49
x = 28
y = 692
x2 = 140
x=4
y = 98.86

74
158
240
360
525
852
854
xy = 3,063

Year

b=

3,063 - (7)(4)(98.86)
xy - nxy
=
= 10.54
140 - (7)(42)
x2 - nx2

a = y - bx = 98.86 - 10.54(4) = 56.70


4 57

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Power demand

Least Squares Example


160
150
140
130
120
110
100
90
80
70
60
50

Trend line,
y^ = 56.70 + 10.54x

|
2001

|
2002

|
2003

|
2004

|
2005
Year

|
2006

|
2007

|
2008

|
2009
4 58

Seasonal Variations In Data

The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand

4 59

Seasonal Variations In Data


Steps in the process:
1. Find average historical demand for each
season
2. Compute the average demand over all
seasons
3. Compute a seasonal index for each season
4. Estimate next years total demand
5. Divide this estimate of total demand by the
number of seasons, then multiply it by the
seasonal index for that season
4 60

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Seasonal Index Example


Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec

Demand
2005 2006 2007
80
70
80
90
113
110
100
88
85
77
75
82

85
85
93
95
125
115
102
102
90
78
72
78

105
85
82
115
131
120
113
110
95
85
83
80

Average
2005-2007

Average
Monthly

90
80
85
100
123
115
105
100
90
80
80
80

94
94
94
94
94
94
94
94
94
94
94
94

Seasonal
Index

4 61

Seasonal Index Example


Month

Demand
2005 2006 2007

Average
2005-2007

Average
Monthly

Jan
80
85 105
90
94
Feb
70
85
85
80
94
Mar
80
93 average
82
85 monthly demand
94
2005-2007
Seasonal90index95= 115 average monthly
Apr
100
94
demand
May
113 125 131
123
94
= 90/94 = .957
Jun
110 115 120
115
94
Jul
100 102 113
105
94
Aug
88 102 110
100
94
Sept
85
90
95
90
94
Oct
77
78
85
80
94
Nov
75
72
83
80
94
Dec
82
78
80
80
94

Seasonal
Index
0.957

4 62

Seasonal Index Example


Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec

Demand
2005 2006 2007
80
70
80
90
113
110
100
88
85
77
75
82

85
85
93
95
125
115
102
102
90
78
72
78

105
85
82
115
131
120
113
110
95
85
83
80

Average
2005-2007

Average
Monthly

Seasonal
Index

90
80
85
100
123
115
105
100
90
80
80
80

94
94
94
94
94
94
94
94
94
94
94
94

0.957
0.851
0.904
1.064
1.309
1.223
1.117
1.064
0.957
0.851
0.851
0.851
4 63

21

2/1/2012

Seasonal Index Example


Demand
2005 2006 2007

Month

Average
2005-2007

Average
Monthly

Seasonal
Index

80
85 105
90
94
for802008
70
85 Forecast
85
94
80
93
82
85
94
annual demand
= 1,200
90Expected
95 115
100
94
113 125 131
123
94
110 115 120 1,200 115
94
Jan
x
.957
=
96
100 102 113 12
105
94
88 102 110
100
94
1,200
85
90
Feb 95
x90
.851 = 85 94
77
78
85 12
80
94
75
72
83
80
94
82
78
80
80
94

Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec

0.957
0.851
0.904
1.064
1.309
1.223
1.117
1.064
0.957
0.851
0.851
0.851
4 64

Seasonal Index Example


2008 Forecast
2007 Demand
2006 Demand
2005 Demand

140
130
Demand

120
110
100
90
80
70
|
J

|
F

|
M

|
A

|
M

|
J

|
J

|
A

|
S

|
O

|
N

|
D

Time
4 65

San Diego Hospital


Trend Data
10,200
Inpatient Days

10,000
9,800

9,400

9551

9594

9637

9745

9702

9659

9616

9573

9,600 9530

9680

9724

9766

9,200
9,000

|
|
|
|
|
|
|
|
|
|
|
|
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.6
4 66

22

2/1/2012

San Diego Hospital


Seasonal Indices
Index for Inpatient Days

1.06
1.04

1.04
1.02

1.02

1.03

1.04

1.01

1.00

0.99

1.00
0.98

0.98

0.99

0.96

0.97

0.97

0.96

0.94
0.92

|
|
|
|
|
|
|
|
|
|
|
|
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.7
4 67

San Diego Hospital


Combined Trend and Seasonal Forecast
10,200

10068
9949

Inpatient Days

10,000 9911
9,800

9764

9724

9691

9572

9,600
9520 9542

9,400
9,200
9,000

9411

9265

9355

|
|
|
|
|
|
|
|
|
|
|
|
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.8
4 68

Associative Forecasting
Used when changes in one or more
independent variables can be used to predict
the changes in the dependent variable
Most common technique is linear
regression analysis
We apply this technique just as we did
in the time series example

4 69

23

2/1/2012

Associative Forecasting
Forecasting an outcome based on
predictor variables using the least squares
technique
y^ = a + bx
^ = computed value of the variable to
where y
be predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable though to
predict the value of the dependent
variable
4 70

Associative Forecasting
Example
Local Payroll
($ billions), x
1
3
4
4.0
2
1
3.0
7
Sales

Sales
($ millions), y
2.0
3.0
2.5
2.0
2.0
3.5

2.0
1.0
0

|
1

|
2

|
|
|
|
3
4
5
6
Area payroll

|
7

4 71

Associative Forecasting
Example
Sales, y
2.0
3.0
2.5
2.0
2.0
3.5
y = 15.0

Payroll, x
1
3
4
2
1
7
x = 18

x = x/6 = 18/6 = 3
y = y/6 = 15/6 = 2.5

b=

x2
1
9
16
4
1
49
2
x = 80

xy
2.0
9.0
10.0
4.0
2.0
24.5
xy = 51.5

51.5 - (6)(3)(2.5)
xy - nxy
= 80 - (6)(32) = .25
x2 - nx2

a = y - bx = 2.5 - (.25)(3) = 1.75


4 72

24

2/1/2012

Associative Forecasting
Example

If payroll next year


is estimated to be
$6 billion, then:
Sales = 1.75 + .25(6)
Sales = $3,250,000

Sales = 1.75 + .25(payroll)


4.0
3.25
3.0

Sales

y^ = 1.75 + .25x

2.0
1.0
0

|
1

|
2

|
|
|
|
3
4
5
6
Area payroll

|
7
4 73

Monitoring and Controlling


Forecasts
Tracking Signal
Measures how well the forecast is
predicting actual values
Ratio of running sum of forecast errors
(RSFE) to mean absolute deviation (MAD)
Good tracking signal has low values
If forecasts are continually high or low, the
forecast has a bias error
4 74

Monitoring and Controlling


Forecasts
RSFE
Tracking
signal = MAD
(Actual demand in
period i Forecast demand
in period i)
Tracking
signal = |Actual - Forecast|/n)
4 75

25

2/1/2012

Tracking Signal
Signal exceeding limit
Tracking signal
+

Upper control limit

Acceptable
range

0 MADs

Lower control limit


Time

4 76

Adaptive Forecasting
Its possible to use the computer to
continually monitor forecast error and
adjust the values of the and
coefficients used in exponential
smoothing to continually minimize
forecast error
This technique is called adaptive
smoothing
4 77

Forecasting in the Service


Sector
Presents unusual challenges
Special need for short term records
Needs differ greatly as function of
industry and product
Holidays and other calendar events
Unusual events

4 78

26

2/1/2012

Fast Food Restaurant


Forecast
Percentage of sales

20%
15%
10%
5%

11-12

1-2
12-1
(Lunchtime)

3-4
2-3

5-6

7-8
6-7
(Dinnertime)
Hour of day
4-5

9-10
8-9

10-11
Figure 4.12
4 79

FedEx Call Center Forecast


12%
10%
8%
6%
4%
2%
0%
2

6
8
A.M.

10

12

6
8
P.M.

10

12

Hour of day
Figure 4.12
4 80

27

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