1

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Chapter 12
Forecasting

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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
Dependent Demand:
Raw Materials,
Component parts,
Sub-assemblies, etc.

C(2)

B(4)

D(2)

E(1)

D(3)

F(2)

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Independent Demand:
What a firm can do to manage it?
Can take an active role to influence
demand

Can take a passive role and simply

respond to demand

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Types of Forecasts
Qualitative (Judgmental)
Quantitative
Time Series Analysis
Causal Relationships
Simulation
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Components of Demand

Average demand for a period of time

Trend
Seasonal element
Cyclical elements
Random variation
Autocorrelation
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Finding Components of Demand

Seasonal
Seasonalvariation
variation

Sales

x
x x

xx
x
x xx
x
x x
x
x
x
x
x
x
x
x
x
x
x
x
xxxx

x x

x
x

x
x

x
x x
x
x

Linear
Linear
x

Trend
Trend
x

Year
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Qualitative Methods
Executive Judgment

Historical analogy

Grass Roots

Qualitative

Market Research

Methods

Delphi Method

Panel Consensus

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10

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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11

Time Series Analysis

Time series forecasting models try to predict
the future based on past data
You can pick models based on:
1. Time horizon to forecast
2. Data availability
3. Accuracy required
4. Size of forecasting budget
5. Availability of qualified personnel
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12

Simple Moving Average Formula

The simple moving average model assumes an
average is a good estimator of future behavior
The formula for the simple moving average is:
A
+
A
+
A
+...+A
A
+
A
+
A
+...+A
t-1
t-2
t-3
t-t-nn
t-1
t-2
t-3
FFtt ==
nn
Ft = Forecast for the coming period
N = Number of periods to be averaged
A t-1 = Actual occurrence in the past period for
up to n periods
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13

Simple Moving Average Problem (1)

Week
1
2
3
4
5
6
7
8
9
10
11
12

Demand
650
678
720
785
859
920
850
758
892
920
789
844

A
+
A
+
A
+...+A
A
+
A
+
A
+...+A
t-1
t-2
t-3
t-t-nn
t-1
t-2
t-3
FFtt ==
nn
Question:
Question: What
What are
arethe
the 3-week
3-week
and
and 6-week
6-week moving
moving average
average
forecasts
forecasts for
for demand?
demand?
Assume
Assume you
you only
only have
have 33
weeks
weeks and
and 66 weeks
weeks of
of actual
actual
demand
demand data
data for
for the
the
respective
respective forecasts
forecasts

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Calculating the moving averages gives us:

Week
1
2
3
4
5
6
7
8
9
10
11
12

14

Demand 3-Week 6-Week

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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15

Plotting
Plottingthe
themoving
moving averages
averagesand
andcomparing
comparing
them
themshows
showshow
how the
thelines
linessmooth
smoothout
out to
to reveal
reveal
the
theoverall
overallupward
upwardtrend
trendin
inthis
this example
example
1000

Demand

900
Demand

800

3-Week

700

6-Week

600
500
1 2 3 4 5 6 7 8 9 10 11 12
Week

Note
Notehow
howthe
the
3-Week
3-Weekisis
smoother
smootherthan
than
the
theDemand,
Demand,
and
and6-Week
6-Weekisis
even
evensmoother
smoother
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16

Simple Moving Average Problem (2) Data

Week
1
2
3
4
5
6
7

Demand
820
775
680
655
620
600
575

Question:
Question:What
What isis the
the 33
week
week moving
moving average
average
forecast
forecast for
for this
this data?
data?
Assume
Assume you
you only
only have
have 33
weeks
weeks and
and 55 weeks
weeks of
of
actual
actual demand
demand data
data for
for
the
the respective
respective
forecasts
forecasts

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17

Simple Moving Average Problem (2)

Solution
Week
1
2
3
4
5
6
7

Demand
820
775
680
655
620
600
575

3-Week

5-Week

F4=(820+775+680)/3
=758.33

758.33
703.33
651.67
625.00

F6=(820+775+680
+655+620)/5
=710.00

710.00
666.00
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18

Weighted Moving Average Formula

While
While the
the moving
moving average
average formula
formula implies
implies an
an equal
equal
weight
weight being
being placed
placed on
on each
each value
value that
that isis being
being averaged,
averaged,
the
the weighted
weighted moving
moving average
average permits
permits an
an unequal
unequal
weighting
weighting on
on prior
prior time
time periods
periods
The
The formula
formula for
for the
the moving
moving average
average is:
is:

FFtt == w
+ w A t-2 ++ w
+...+w A t-n
w11A
At-1
w33A
At-3
t-1 + w22 At-2
t-3 +...+wnn At-n
wwt ==weight
weightgiven
givento
totime
timeperiod
periodt
t
t
occurrence
occurrence(weights
(weightsmust
mustadd
addto
toone)
one)

nn

ww ==11
i=1
i=1

ii

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19

Weighted Moving Average Problem (1)

Data
Question:
Question:Given
Giventhe
theweekly
weeklydemand
demandand
andweights,
weights,what
whatisis
th
the
theforecast
forecastfor
forthe
the44thperiod
periodor
orWeek
Week4?
4?
Week
1
2
3
4

Demand
650
678
720

Weights:
t-1 .5
t-2 .3
t-3 .2

Note
Notethat
thatthe
theweights
weightsplace
placemore
moreemphasis
emphasison
onthe
the
most
mostrecent
recentdata,
data,that
thatisistime
timeperiod
periodt-1
t-1
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20

Weighted Moving Average Problem (1)

Solution

Week
1
2
3
4

Demand Forecast
650
678
720
693.4

F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
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21

Weighted Moving Average Problem (2)

Data
Question:
Question:Given
Giventhe
theweekly
weeklydemand
demandinformation
informationand
and
weights,
weights,what
whatisisthe
theweighted
weightedmoving
movingaverage
averageforecast
forecast
th
of
ofthe
the55thperiod
periodor
orweek?
week?
Week
1
2
3
4

Demand
820
775
680
655

Weights:
t-1 .7
t-2 .2
t-3 .1

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22

Weighted Moving Average Problem (2)

Solution
Week
1
2
3
4
5

Demand Forecast
820
775
680
655
672

F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
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23

Exponential Smoothing Model

FFtt == FFt-1
+
(A
F
)
+
(A
F
t-1
t-1
t-1
t-1
t-1)

Where :
Ft Forcast value for the coming t time period
Ft - 1 Forecast value in 1 past time period
At - 1 Actual occurance in the past t time period
Alpha smoothing constant

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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24

Exponential Smoothing Problem (1) Data

Week
1
2
3
4
5
6
7
8
9
10

Demand
820
775
680
655
750
802
798
689
775

Question:
Question: Given
Given the
the weekly
weekly
demand
demand data,
data, what
what are
arethe
the
exponential
exponential smoothing
smoothing
forecasts
forecasts for
forperiods
periods 2-10
2-10
using
using =0.10
=0.10 and
and =0.60?
=0.60?
Assume
Assume FF11=D
=D11

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25

Answer:
Answer:The
Therespective
respectivealphas
alphascolumns
columnsdenote
denotethe
theforecast
forecastvalues.
values. Note
Note
that
thatyou
youcan
canonly
onlyforecast
forecastone
onetime
timeperiod
periodinto
intothe
thefuture.
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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26

Exponential Smoothing Problem (1)

Plotting
Note
Notehow
howthat
thatthe
thesmaller
smalleralpha
alpharesults
resultsin
inaa smoother
smootherline
linein
in
this
thisexample
example

Demand

900
800

Demand

700

0.1

600

0.6

500
1

10

Week

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27

Exponential Smoothing Problem (2) Data

Week
1
2
3
4
5

Question:
What
are
the
Question:
What
are
the
Demand
exponential
smoothing
exponential
smoothing
820
forecasts
forecasts for
for periods
periods 2-5
2-5
775 using a =0.5?
using a =0.5?
680
655
Assume
Assume FF11=D
=D11

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28

Exponential Smoothing Problem (2)

Solution
F1=820+(0.5)(820-820)=820

Week
1
2
3
4
5

Demand
820
775
680
655

F3=820+(0.5)(775-820)=797.75

0.5
820.00
820.00
797.50
738.75
696.88
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29

The MAD Statistic to Determine

Forecasting Error
nn

MAD
MAD ==

AA --FF
t=1
t=1

tt

tt

1 MAD 0.8 standard deviation

1 standard deviation 1.25 MAD

nn

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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30

MAD Problem Data

Question:
Question: What
What isis the
the MAD
MAD value
value given
given
the
the forecast
forecast values
values in
in the
the table
table below?
below?
Month
1
2
3
4
5

Sales Forecast
220
n/a
250
255
210
205
300
320
325
315
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31

MAD Problem Solution

Month
1
2
3
4
5

Sales
220
250
210
300
325

Forecast Abs Error

n/a
255
5
205
5
320
20
315
10

40
nn

MAD
MAD==

AA --FF
t=1
t=1

tt

nn

tt

40
== 40 ==10
44 10

Note
Notethat
thatby
byitself,
itself,the
theMAD
MAD
only
onlylets
letsus
usknow
knowthe
themean
mean
error
errorin
inaaset
setof
offorecasts
forecasts

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32

Tracking Signal Formula

The Tracking Signal or TS is a measure that
indicates whether the forecast average is keeping
pace with any genuine upward or downward
changes in demand.
Depending on the number of MADs selected, the TS
can be used like a quality control chart indicating
when the model is generating too much error in its
forecasts.
The TS formula is:

RSFE
RSFE Running
Running sum
sum of
of forecast
forecast errors
errors
TS
==
TS ==
MAD
Mean
MAD
Mean absolute
absolute deviation
deviation
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33

Simple Linear Regression Model

The
Thesimple
simplelinear
linearregression
regression
model
modelseeks
seeksto
tofit
fitaaline
line
through
throughvarious
variousdata
dataover
over
time
time

Yt = a + bx

a
0 1 2 3 4 5

(Time)

Is
Isthe
thelinear
linearregression
regressionmodel
model

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.

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34

Simple Linear Regression Formulas

for Calculating a and b

aa == yy-- bx
bx
-- n(y)(x)

xy
n(y)(x)
xy
bb ==
22
22

n(x))
xx -- n(x

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35

Simple Linear Regression Problem Data

Question:
Question:Given
Giventhe
thedata
databelow,
below,what
whatisisthe
thesimple
simplelinear
linear
regression
regressionmodel
modelthat
thatcan
canbe
beused
usedto
topredict
predictsales
salesin
infuture
future
weeks?
weeks?

Week
1
2
3
4
5

Sales
150
157
162
166
177
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36

Answer:
Answer: First,
First, using
using the
the linear
linear regression
regressionformulas,
formulas, we
we
can
cancompute
computea
aand
andb
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
--5(162.4)(3)
63

xy--n(y)(x)
n(y)(x) 2499
2499
5(162.4)(3)
63= 6.3

bb==
=

=
10 = 6.3
22
22
55

5
(
9
)
x
n(x
)

55 5(9 )
10
x - n(x )
aa== yy--bx
bx==162.4
162.4--(6.3)(3)
(6.3)(3)==143.5
143.5

37

The resulting regression model

is:

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

Forecast

3
Period

38

Web-Based Forecasting: CPFR

Defined
Collaborative Planning, Forecasting, and Replenishment
(CPFR) a Web-based tool used to coordinate demand
forecasting, production and purchase planning, and
inventory replenishment between supply chain trading
partners.
Used to integrate the multi-tier or n-Tier supply chain,
including manufacturers, distributors and retailers.
CPFRs objective is to exchange selected internal
information to provide for a reliable, longer term future
views of demand in the supply chain.
CPFR uses a cyclic and iterative approach to derive
consensus forecasts.
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39

Web-Based Forecasting:
Steps in CPFR
1. Creation of a front-end partnership agreement
2. Joint business planning
3. Development of demand forecasts
4. Sharing forecasts
5. Inventory replenishment

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40

End of Chapter 12

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