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Process of predicting
a future event
Underlying basis
of all business
decisions
??
Production
Inventory
Personnel
Facilities
2011 Pearson Education, Inc. publishing as Prentice Hall
4-1
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
4-2
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
2011 Pearson Education, Inc. publishing as Prentice Hall
4-3
Forecasting Approaches
Qualitative Methods
Used when little data exist
New products
New technology
4-4
Qualitative Methods
1.
Jury of executive opinion (Pool opinions of highlevel experts, sometimes augment by statistical
models)
2.
3.
4.
4-5
Quantitative Approaches
Used when situation is stable and
historical data exist
Existing products
Current technology
4-6
Quantitative Approaches
1. Naive approach
2. Moving averages
3. Exponential
smoothing
time-series
models
4. Trend projection
5. Linear regression
2011 Pearson Education, Inc. publishing as Prentice Hall
associative
model
4-7
4-8
Cyclical
Seasonal
Random
4-9
Components of Demand
Demand for product or service
Trend
component
Seasonal peaks
Actual demand
line
Average demand
over 4 years
|
1
Random variation
|
|
2
3
Time (years)
|
4
Figure 4.1
4 - 10
Trend Component
Persistent, overall upward or
downward pattern
Changes due to population,
technology, age, culture, etc.
Typically several years
duration
4 - 11
Seasonal Component
Regular pattern of up and
down fluctuations
Due to weather, customs, etc.
Occurs within a single year
Period
Week
Month
Month
Year
Year
Year
2011 Pearson Education, Inc. publishing as Prentice Hall
Length
Number of
Seasons
Day
Week
Day
Quarter
Month
Week
7
4-4.5
28-31
4
12
52
4 - 12
Cyclical Component
Repeating up and down movements
Affected by business cycle,
political, and economic factors
Multiple years duration
0
2011 Pearson Education, Inc. publishing as Prentice Hall
10
15
20
4 - 13
Random Component
Erratic, unsystematic, residual
fluctuations
Due to random variation or unforeseen
events
Short duration
and nonrepeating
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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
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Exponential Smoothing
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
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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)
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100|Actuali - Forecasti|/Actuali
MAPE =
i=1
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4 - 24
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
^
where y
= computed value of
the variable to be predicted
(dependent variable)
a
= y-axis intercept
b
= slope of the regression line
x
= the independent variable
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The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand (jet skis,
snow mobiles)
2011 Pearson Education, Inc. publishing as Prentice Hall
4 - 28
4 - 29
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
2011 Pearson Education, Inc. publishing as Prentice Hall
4 - 30
Associative Forecasting
Forecasting an outcome based on predictor
variables using the least squares technique
y^ = a + bx
^
where y
= computed value of
the variable to 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
2011 Pearson Education, Inc. publishing dependent
as Prentice Hall
variable
4 - 31
Nodels sales
|
1
|
2
|
|
|
|
3
4
5 6
Area payroll
|
7
4 - 32
Sy,x =
y2 - ay - bxy
n-2
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y2 - ay - bxy
=
n-2
Sy,x = .306
4.0
Nodels sales
3.25
3.0
2.0
1.0
0
2011 Pearson Education, Inc. publishing as Prentice Hall
|
1
|
2
|
|
|
|
3
4
5 6
Area payroll
|
7
4 - 34
Prediction Intervals
The ranges or limits of a forecast are estimated by:
Upper limit = Y + t*Sy,x
Lower limit = Y - t*Sy,x
where:
Y = forecasted value (point estimate)
t = number of standard deviations from
the mean of the distribution to provide a given
probability of exceeding the limits through chance
syx = standard error of the forecast
2011 Pearson Education, Inc. publishing as Prentice Hall
4 - 35
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
4 - 36
Correlation Coefficient
r=
nxy - xy
[nx2 - (x)2][ny2 - (y)2]
4 - 37
Multiple Regression
Analysis
If more than one independent variable is to be
used in the model, linear regression can be
extended to multiple regression to
accommodate several independent variables
y^ = a + b1x1 + b2x2
Computationally, this is quite
complex and generally done on the
computer
2011 Pearson Education, Inc. publishing as Prentice Hall
4 - 38
Multiple Regression
Analysis
In the Nodel example, including interest rates in
the model gives the new equation:
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Tracking =
signal
|Actual - Forecast|/n)
2011 Pearson Education, Inc. publishing as Prentice Hall
4 - 41
Tracking Signal
Signal exceeding limit
Tracking signal
+
0 MADs
Acceptable
range
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