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Chapter Eighteen
McGraw-Hill/Irwin Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
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LO181: Understand how forecasting is essential to
supply chain planning
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Decoupling point: Point at which inventory is
stored, which allows SC to operate independently.
Seasonal Cyclical
element elements
Random
Autocorrelation
variation Excel: Components
of Demand
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Using the past to predict the future
Short term forecasting less than 3 months
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Choosing an appropriate forecasting
model depends upon
Time horizon to be forecast
Data availability
Accuracy required
Size of forecasting budget
Availability of qualified personnel
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Amount of Historical Forecast
Forecasting Method Data Pattern
Data Horizon
6 to 12 months; Stationary (i.e.,
Simple moving
weekly data are often no trend or Short
average
used seasonality)
Weighted moving
average and simple 5 to 10 observations
Stationary Short
exponential needed to start
smoothing
Exponential 5 to 10 observations
Stationary and
smoothing with needed to start Short
trend
trend
Stationary,
Short to
Linear regression 10 to 20 observations trend, and
medium
seasonality
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Forecast is the average of a fixed number of past
periods.
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The simple moving average formula implies
equal weighting for all periods.
A weighted moving average allows unequal
weighting of prior time periods.
The sum of the weights must be equal to one.
Often, more recent periods are given higher
weights than periods farther in the past.
= 1 1 + 2 2 + +
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Experience and/or trial-and-error are the
simplest approaches.
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A weighted average method that includes all
past data in the forecasting calculation
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Well accepted for six reasons
Exponential models are surprisingly accurate
Formulating an exponential model is relatively
easy
The user can understand how the model works
Little computation is required to use the model
Computer storage requirements are small
Tests for accuracy are easy to compute
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Week Demand Forecast
1 820 820
2 775 820
3 680 811
4 655 785
5 750 759
6 802 757
7 798 766
8 689 772
9 775 756
10 760
18-20
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The presence of a trend in the data causes the
exponential smoothing forecast to always lag behind
the actual data
This can be corrected by adding a trend adjustment
The trend smoothing constant is delta ()
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Calculate the new forecast, assuming the
following:
The previous forecast including trend (FITt-1) is 110
and the previous estimate of the trend (Tt-1) is 10
= 0.2 and = 0.3
Actual demand for period t-1 is 115
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Regression is used to identify the functional
relationship between two or more correlated variables,
usually from observed data.
One variable (the dependent variable) is predicted for
given values of the other variable (the independent
variable).
Linear regression is a special case that assumes the
relationship between the variables can be explained
with a straight line.
Y = a + bt
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The least squares method Quarter Sales Quarter Sales
determines the parameters a 1 600 7 2,600
and b such that the sum of the 2 1,550 8 2,900
squared errors is minimized 3 1,500 9 3,800
least squares 4 1,500 10 4,500
5 2,400 11 4,000
6 3,100 12 4,900
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1 600 600 1 360,000 801.3
18-26
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Microsoft
Excel
includes data
analysis
tools, which
can perform
least squares
regression on
a data set.
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Chronologically ordered data are referred
to as a time series.
A time series may contain one or many
elements.
Trend, seasonal, cyclical, autocorrelation, and
random
Identifying these elements and separating
the time series data into these components
is known as decomposition.
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Seasonal variation may be either
additive or multiplicative (shown here
with a changing trend).
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The seasonal factor (or index) is the ratio of
the amount sold during each season divided by
the average for all seasons.
Average Sales for
Season Past Sales Seasonal Factor
Each Season
1000 200
Spring 200 = 250 = 0.8
4 250
1000 350
Summer 350 = 250 = 1.4
4 250
1000 300
Fall 300 = 250 = 1.2
4 250
1000 150
Winter 150 = 250 = 0.6
4 250
Total 1000
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Expected Average Next
Demand Sales for Seasonal Years
for Each Season Factor Seasonal
Next Year (1,100y4) Forecast
Spring 275 X 0.8 = 220
Summer 275 X 1.4 = 385
Fall 275 X 1.2 = 330
Winter 275 X 0.6 = 165
1100
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Decompose the time series into its
components
Find seasonal component
Deseasonalize the demand
Find trend component
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Develop a least squares regression line for the
deseasonalized data.
Project the regression line through the period of the
forecast.
Regression Results:
Y = 555.0 + 342.2t
Forecast for
periods 13-16
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Create the final forecast by adjusting
the regression line by the seasonal
factor.
Seasonal Forecast (F x
Period Quarter Y from Regression
Factor Seasonal Factor
13 I 5,003.5 0.82 4,102.87
14 II 5,345.7 1.10 5,880.27
15 III 5,687.9 0.97 5,517.26
16 IV 6,030.1 1.12 6,753.71
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Forecast error is the difference between the forecast
value and what actually occurred.
All forecasts contain some level of error.
Sources of error
Bias when a consistent mistake is made
Random errors that are not explained by the model
being used
Measures of error
Mean absolute deviation (MAD)
Mean absolute percent error (MAPE)
Tracking signal
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Ideally, MAD will be zero (no MAPE scales the forecast error to
forecasting error). the magnitude of demand.
Larger values of MAD
indicate a less accurate
model.
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Causal relationship forecasting uses
independent variables other than time to
predict future demand.
This independent variable must be a leading
indicator.
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Often, more than one independent
variable may be a valid predictor of
future demand.
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A web-based process used to coordinate the
efforts of a supply chain.
Demand forecasting
Production and purchasing
Inventory replenishment
Integrates all members of a supply chain
manufacturers, distributors, and retailers.
Depends upon the exchange of internal
information to provide a more reliable view of
demand.
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Creation of a
Development
front-end Joint business Sharing Inventory
of demand
partnership planning forecasts replenishment
forecasts
agreement
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Forecasting is a fundamental step in any planning
process.