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Outline
The role of forecasting in a supply chain Characteristics of forecasts Components of forecasts and forecasting methods Basic approach to demand forecasting Time series forecasting methods Measures of forecast error Forecasting demand at Tahoe Salt Forecasting in practice
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Production: scheduling, inventory, aggregate planning Marketing: sales force allocation, promotions, new production introduction Finance: plant/equipment investment, budgetary planning Personnel: workforce planning, hiring, layoffs
Characteristics of Forecasts
Forecasts are always wrong. Should include expected value and measure of error. Long-term forecasts are less accurate than shortterm forecasts (forecast horizon is important) Aggregate forecasts are more accurate than disaggregate forecasts
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Forecasting Methods
Qualitative: primarily subjective; rely on judgment and opinion Time Series: use historical demand only
Static Adaptive
Causal: use the relationship between demand and some other factor to develop forecast Simulation
Imitate consumer choices that give rise to demand Can combine time series and causal methods
2004 Prentice-Hall, Inc. 7-5
Components of an Observation
Observed demand (O) = Systematic component (S) + Random component (R)
Level (current deseasonalized demand)
Demand Dt 8000 13000 23000 34000 10000 18000 23000 38000 12000 13000 32000 41000
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97 ,2 97 ,3 97 ,4 98 ,1 98 ,2 98 ,3 98 ,4 99 ,1 99 ,2 99 ,3 99 ,4 00 ,1
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Forecasting Methods
Static Adaptive
Moving average Simple exponential smoothing Holts model (with trend) Winters model (with trend and seasonality)
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Multiplicative: (level)(trend)(seasonal factor) Additive: level + trend + seasonal factor Mixed: (level + trend)(seasonal factor)
Static
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Static Methods
Assume
a mixed model: Systematic component = (level + trend)(seasonal factor) Ft+l = [L + (t + l)T]St+l = forecast in period t for demand in period t + l L = estimate of level for period 0 T = estimate of trend St = estimate of seasonal factor for period t Dt = actual demand in period t Ft = forecast of demand in period t
2004 Prentice-Hall, Inc. 7-12
Static Methods
Estimating level and trend Estimating seasonal factors
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the number of periods after which the seasonal cycle repeats itself for demand at Tahoe Salt (Table 7.1, Figure 7.1) p = 4
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Demand Dt 8000 13000 23000 34000 10000 18000 23000 38000 12000 13000 32000 41000
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97 ,2 97 ,3 97 ,4 98 ,1 98 ,2 98 ,3 98 ,4 99 ,1 99 ,2 99 ,3 99 ,4 00 ,1
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the number of periods after which the seasonal cycle repeats itself for demand at Tahoe Salt (Table 7.1, Figure 7.1) p = 4
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Deseasonalizing Demand
S Di / p for p odd
(sum is from i = t-(p/2) to t+(p/2)), p/2 truncated to lower integer
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Deseasonalizing Demand
For the example, p = 4 is even For t = 3: D3 = {D1 + D5 + Sum(i=2 to 4) [2Di]}/8 = {8000+10000+[(2)(13000)+(2)(23000)+(2)(34000)]}/8 = 19750 D4 = {D2 + D6 + Sum(i=3 to 5) [2Di]}/8 = {13000+18000+[(2)(23000)+(2)(34000)+(2)(10000)]/8 = 20625
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Deseasonalizing Demand
Then include trend Dt = L + tT where Dt = deseasonalized demand in period t L = level (deseasonalized demand at period 0) T = trend (rate of growth of deseasonalized demand) Trend is determined by linear regression using deseasonalized demand as the dependent variable and period as the independent variable (can be done in Excel) In the example, L = 18,439 and T = 524
2004 Prentice-Hall, Inc. 7-20
Demand
Dt Dt-bar
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Adaptive Forecasting
The estimates of level, trend, and seasonality are adjusted after each demand observation General steps in adaptive forecasting Moving average Simple exponential smoothing Trend-corrected exponential smoothing (Holts model) Trend- and seasonality-corrected exponential smoothing (Winters model)
Compute initial estimates of level (L0), trend (T0), and seasonal factors (S1,,Sp). This is done as in static forecasting. Forecast: Forecast demand for period t+1 using the general equation Estimate error: Compute error Et+1 = Ft+1- Dt+1 Modify estimates: Modify the estimates of level (Lt+1), trend (Tt+1), and seasonal factor (St+p+1), given the error Et+1 in the forecast Repeat steps 2, 3, and 4 for each subsequent period
2004 Prentice-Hall, Inc. 7-28
Moving Average
Used when demand has no observable trend or seasonality Systematic component of demand = level The level in period t is the average demand over the last N periods (the N-period moving average) Current forecast for all future periods is the same and is based on the current estimate of the level Lt = (Dt + Dt-1 + + Dt-N+1) / N Ft+1 = Lt and Ft+n = Lt After observing the demand for period t+1, revise the estimates as follows: Lt+1 = (Dt+1 + Dt + + Dt-N+2) / N Ft+2 = Lt+1
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Used when demand has no observable trend or seasonality Systematic component of demand = level Initial estimate of level, L0, assumed to be the average of all historical data L0 = [Sum(i=1 to n)Di]/n Current forecast for all future periods is equal to the current estimate of the level and is given as follows: Ft+1 = Lt and Ft+n = Lt After observing demand Dt+1, revise the estimate of the level: Lt+1 = aDt+1 + (1-a)Lt Lt+1 = Sum(n=0 to t+1)[a(1-a)nDt+1-n ]
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Appropriate when the demand is assumed to have a level and trend in the systematic component of demand but no seasonality Obtain initial estimate of level and trend by running a linear regression of the following form: Dt = at + b T0 = a L0 = b In period t, the forecast for future periods is expressed as follows: Ft+1 = Lt + Tt Ft+n = Lt + nTt
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when the systematic component of demand is assumed to have a level, trend, and seasonal factor Systematic component = (level+trend)(seasonal factor) Assume periodicity p Obtain initial estimates of level (L0), trend (T0), seasonal factors (S1,,Sp) using procedure for static forecasting In period t, the forecast for future periods is given by: Ft+1 = (Lt+Tt)(St+1) and Ft+n = (Lt + nTt)St+n
2004 Prentice-Hall, Inc. 7-36
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Forecasting in Practice
Collaborate
in building forecasts The value of data depends on where you are in the supply chain Be sure to distinguish between demand and sales
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are the roles of forecasting for an enterprise and a supply chain? What are the components of a demand forecast? How is demand forecast given historical data using time series methodologies? How is a demand forecast analyzed to estimate forecast error?
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