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Forecasting
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M&DCPurchasing&SupplyChain:MaterialManagement
Forecasting
IntroductiontoMaterialManagement
MasterScheduling
Contents
MaterialRequirementsPlanning
CapacityManagement
1.
Introduction
ProductionActivityControl
2.
DemandManagement
Purchasing
3.
DemandForecasting
4.
CharacteristicsOfDemand
5.
PrinciplesOfForecasting
6.
CollectionAndPreparationOfData
7.
ForecastingTechniques
Forecasting
InventoryFundamentals
OrderQuantities
IndependentDemandOrderingSystems8.
SomeImportantIntrinsicTechniques
9.
Seasonality
PhysicalInventoryandWarehouseManagement
PhysicalDistribution
10.
TrackingTheForecast
1.Introduction
Forecastingisapreludetoplanning.Beforemakingplans,anestimatemustbemadeofwhat
conditionswillexistoversomefutureperiod.Howestimatesaremade,andwithwhataccuracy,is
anothermatter,butlittlecanbedonewithoutsomeformofestimation.
Whyforecast?Therearemanycircumstancesandreasons,butforecastingisinevitableindeveloping
planstosatisfyfuturedemand.Mostfirmscannotwaituntilordersareactuallyreceivedbeforethey
starttoplanwhattoproduce.Customersusuallydemanddeliveryinreasonabletime,and
manufacturersmustanticipatefuturedemandforproductsorservicesandplantoprovidethecapacity
andresourcestomeetthatdemand.Firmsthatmakestandardproductsneedtohavesaleablegoods
immediatelyavailableoratleasttohavematerialsandsubassembliesavailabletoshortenthe
deliverytime.Firmsthatmaketoordercannotbeginmakingaproductbeforeacustomerplacesan
orderbutmusthavetheresourcesoflaborandequipmentavailabletomeetdemand.
Manyfactorsinfluencethedemandforafirmsproductsandservices.Althoughitisnotpossibleto
identifyallofthem,ortheireffectondemand,itishelpfultoconsidersomemajorfactors:
Generalbusinessandeconomicconditions.
Competitivefactors.
Markettrendssuchaschangingdemand.
Thefirmsownplansforadvertising,promotion,pricing,andproductchanges.
2.DemandManagement
Theprimepurposeofanorganizationistoservethecustomer.Marketingfocusesonmeeting
customerneeds,butoperations,throughmaterialsmanagement,mustprovidetheresources.The
coordinationofplansbythesetwopartiesisdemandmanagement.
a.Demandmanagement
Demandmanagementisthefunctionofrecognizingandmanagingalldemandsfor
products.Itoccursintheshort,medium,andlongterm.inthelongterm,demand
projectionsareneededforstrategicbusinessplanningofsuchthingsasfacilities.In
themediumterm,thepurposeofdemandmanagementistoprojectaggregatedemand
forproductionplanning.Intheshortrun,demandmanagementisneededforitemsand
isassociatedwithmasterproductionscheduling.Wearemostconcernedwiththe
latter.
Ifmaterialandcapacityresourcesaretobeplannedeffectively,allsourcesofdemand
mustbeidentified.Theseincludedomesticandforeigncustomers,otherplantsinthe
samecorporation,branchwarehouses,servicepartsandrequirements,promotions,
distributioninventory,andconsignedinventoryincustomerslocations.
Demandmanagementincludesfourmajoractivities:
Forecasting.
Orderprocessing.
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Makingdeliverypromises.Theconceptofavailabletopromisewasdiscussed
inChapter3.
Interfacingbetweenmanufacturingplanningandcontrolandthemarketplace.
Figure8.1showsthisrelationshipgraphically.
b.Orderprocessing.
Orderprocessingoccurswhenacustomersorderisreceived.Theproductmaybe
deliveredfromfinishedgoodsinventoryoritmaybemadeorassembledtoorder.if
goodsaresoldfrominventory,asalesorderisproducedauthorizingthegoodstobe
shippedfrominventory.Iftheproductismadeorassembledto
order,thesalesdepartmentmustwriteupasalesorderspecifyingtheproduct.This
mayberelativelysimpleiftheproductisassembledfromstandardcomponentsbut
canbealengthy,complexprocessiftheproductrequiresextensiveengineering.A
copyofthesalesorderstatingthetermsandconditionsofacceptanceoftheorderis
senttothecustomer.Anothercopy,senttothemasterplanner,isauthorizationtogo
aheadandplanformanufacture.Themasterplannermustknowwhattoproduce,
howmuch,andwhentodeliver.Thesalesordermustbewritteninlanguagethat
makesthisinformationclear.
3.DemandForecasting
Forecastsdependuponwhatistobedone.Theymustbemadeforthestrategicbusinessplan,the
productionplan,andthemasterproductionschedule.AsdiscussedinChapter2,thepurpose,
planninghorizons,andlevelofdetailvaryforeach.
Thestrategicbusinessplanisconcernedwithoverallmarketsandthedirectionoftheeconomyover
thenexttwototenyearsormore.Itspurposeistoprovidetimetoplanforthosethingsthattake
longtochange.Forproduction,thestrategicbusinessplanshouldprovidesufficienttimefor
resourceplanning:plantexpansion,capitalequipmentpurchase,andanythingrequiringalonglead
timetopurchase.Thelevelofdetailisnothigh,andusuallyforecastsareinsalesunits,sales
dollars,orcapacity.Forecastsandplanningwillprobablybereviewedquarterlyoryearly.
Productionplanningisconcernedwithmanufacturingactivityforthenextonetothreeyears.For
manufacturing,itmeansforecastingthoseitemsneededforproductionplanning,suchasbudgets,
laborplanning,longleadtime,procurementitems,andoverallinventorylevels.Forecastsaremade
forgroupsorfamiliesofproductsratherthanspecificenditems.Forecastsandplanswillprobablybe
reviewedmonthly.
Masterproductionschedulingisconcernedwithproductionactivityfromthepresenttoafewmonths
ahead.Forecastsaremadeforindividualitems,asfoundonamasterproductionschedule,individual
iteminventorylevels,rawmaterialsandcomponentparts,laborplanning,andsoforth.Forecasts
andplanswillprobablybereviewedweekly.
4.CharacteristicsOfDemand
Inthischapter,thetermdemandisusedratherthansales.Thedifferenceisthatsalesimplieswhat
isactuallysoldwhereasdemandshowstheneedfortheitem.Sometimesdemandcannotbe
satisfied,andsaleswillbelessthandemand.
Beforediscussingforecastingprinciplesandtechniques,itisbesttolookatsomecharacteristicsof
demandthatinfluencetheforecastandtheparticulartechniquesused.
a.DemandPatterns
Ifhistoricaldatafordemandareplottedagainstatimescale,theywillshowany
shapesorconsistentpatternsthatexist.Apatternisthegeneralshapeofatime
series.
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Althoughsomeindividualdatapointswillnotfallexactlyonthepattern,theytendto
clusteraroundit.
Figure8.2showsahypotheticalhistoricaldemandpattern.Thepatternshowsthat
actualdemandvariesfromperiodtoperiod.Therearefourreasonsforthis:
trend,seasonality,randomvariation,andcycle.
Trend.
Figure8.2showsthatdemandisincreasinginasteadypatternof
demandfromyeartoyear.Thisgraphillustratesalineartrend,but
therearedifferentshapes,suchasgeometricorexponential.The
trendcanbelevel,havingnochangefromperiodtoperiod,oritcan
riseorfall.
Seasonality.
ThedemandpatterninFigure8.2showseachyearsdemand
fluctuatingdependingonthetimeofyear.Thisfluctuationmaybe
theresultoftheweather,holidayseasons,orparticulareventsthat
takeplaceonaseasonalbasis.Seasonalityisusuallythoughtofas
occurringonayearlybasis,butitcanalsooccuronaweeklyor
evendailybasis.Arestaurantsdemandvarieswiththehourofthe
day,andsupermarketsalesvarywiththedayoftheweek.
Randomvariation.
Randomvariationoccurswheremanyfactorsaffectdemandduring
specificperiodsandoccuronarandombasis.Thevariationmaybe
small,withactualdemandfallingclosetothepattern,oritmaybe
large,withthepointswidelyscattered.Thepatternofvariationcan
usuallybemeasured,andthiswillbediscussedinthesectionon
trackingtheforecast.
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Cycle.
Overaspanofseveralyearsandevendecades,wavelikeincreases
anddecreasesintheeconomyinfluencedemand.However,
forecastingofcyclesisajobforeconomistsandisbeyondthe
scopeofthistext.
b.StableversusDynamic
Theshapesofthedemandpatternsforsomeproductsorserviceschangeovertime
whereasothersdonot.Thosethatretainthesamegeneralshapearecalledstable
andthosethatdonotarecalleddynamic.Dynamicchangescanaffectthetrend,
seasonality,orrandomnessoftheactualdemand.Themorestablethedemand,the
easieritistoforecast.Figure8.3showsagraphicalrepresentationofstableand
dynamicdemand.Noticetheaveragedemandisthesameforbothstableand
dynamicpatterns.Itisusuallytheaveragedemandthatisforecast.
c.DependentversusIndependentDemand
Chapter4discusseddependentandindependentdemand.Itwassaidthatdemand
foraproductorserviceisindependentwhenitisnotrelatedtothedemandforany
otherproductorservice.Dependentdemandforaproductorserviceoccurswhere
thedemandfortheitemisderivedfromthatofaseconditem.Requirementsfor
dependentdemanditemsneednotbeforecastbutarecalculatedfromthatofthe
independentdemanditem.
Onlyindependentdemanditemsneedbeforecast.Theseareusuallyenditemsor
finishedgoodsbutshouldalsoincludeservicepartsanditemssuppliedtoother
plantsinthesamecompany(intercompanytransfers).
5.PrinciplesOfForecasting
Forecastshavefourmajorcharacteristicsorprinciples.Anunderstandingofthesewillallowusto
makemoreeffectiveuseofforecasts.Theyaresimpleand,tosomeextent,commonsense.
a.
Forecastsareusuallywrong.Forecastsattempttolookintotheunknownfutureand,
exceptbysheerluck,willbewrongtosomedegree.Errorsareinevitableandmustbe
expected.
b.
Everyforecastshouldincludeanestimateoferror.Sinceforecastsareexpectedtobe
wrong,therealquestionis,Byhowmuch?Everyforecastshouldincludeanestimate
oferroroftenexpressedasapercentage(plusandminus)oftheforecastorasarange
betweenmaximumandminimumvalues.Estimatesofthiserrorcanbemade
statisticallybystudyingthevariabilityofdemandabouttheaveragedemand.
c.
Forecastsaremoreaccurateforfamiliesorgroups.Thebehaviorofindividualitemsina
groupisrandomevenwhenthegrouphasverystablecharacteristics.Forexample,the
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marksforindividualstudentsinaclassaremoredifficulttoforecastaccuratelythanthe
classaverage.Highmarksaverageoutwithlowmarks.Thismeansthatforecastsare
moreaccurateforlargegroupsofitemsthanforindividualitemsinagroup.
Forproductionplanning,familiesorgroupsarebasedonthesimilarityofprocessand
equipmentused.Forexample,afirmforecastingthedemandforknitsocksasaproduct
groupmightforecastmenssocksasonegroupandwomensasanothersincethe
marketsaredifferent.However,productionofmensandwomensanklesockswillbe
doneonthesamemachinesandkneesocksonanother.Forproductionplanning,the
forecastshouldbefor(a)mensandwomensanklesocksand(b)mensandwomens
kneesocks.
d.
Forecastsaremoreaccuratefornearertimeperiods.Thenearfutureholdsless
uncertaintythanthefarfuture.Mostpeoplearemoreconfidentinforecastingwhatthey
willbedoingoverthenextweekthanayearfromnow.Assomeoneoncesaid,tomorrow
isexpectedtobeprettymuchliketoday.
Inthesameway,demandfortheneartermiseasierforacompanytoforecastthanfor
atimeinthedistantfuture.Thisisextremelyimportantforlongleadtimeitemsand
especiallysoiftheirdemandisdynamic.Anythingthatcanbedonetoreduceleadtime
willimproveforecastaccuracy.
6.CollectionAndPreparationOfData
Forecastsareusuallybasedonhistoricaldatamanipulatedinsomewayusingeitherjudgmentora
statisticaltechnique.Thus,theforecastisonlyasgoodasthedataonwhichitisbased.Togetgood
data,threeprinciplesofdatacollectionareimportant.
I.
Recorddatainthesametermsasneededfortheforecast.Thisisaproblemindeterminingthe
purposeoftheforecastandwhatistobeforecast.Therearethreedimensionstothis:
a.
Ifthepurposeistoforecastdemandonproduction,databasedondemand,not
shipments,areneeded.Shipmentsshowwhengoodswereshippedandnotnecessarily
whenthecustomerwantedthem.Thusshipmentsdonotnecessarilygiveatrue
indicationofdemand.
b.
Theforecastperiod,inweeks,months,orquarters,shouldbethesameastheschedule
period.Ifschedulesareweekly,theforecastshouldbeforthesametimeinterval.
c.
Theitemsforecastshouldbethesameasthosecontrolledbymanufacturing.For
example,ifthereareavarietyofoptionsthatcanbesuppliedwithaparticularproduct,
thedemandfortheproductandforeachoptionshouldbeforecast.
Supposeafirmmakesabicyclethatcomesinthreeframesizes,threepossiblewheelsizes,a3,5.
or10speedgearchanger,andwithorwithoutdeluxetrim.Inall,thereare54(3x3x3x2)individual
enditemssold.Ifeachwereforecast,therewouldbe54forecaststomake.Abetterapproachisto
forecast(a)totaldemandand(b)thepercentageofthetotalthatrequireseachframesize,wheelsize,
andsoon.Thatwaythereneedbeonly12forecasts(threeframes,threewheels,fivegears,andthe
bikeitself).
Inthisexample,theleadtimetomakethecomponentswouldberelativelylongincomparisontothe
leadtimetoassembleabike.Manufacturingcanmakethecomponentsaccordingtocomponent
forecastandcanthenassemblebikesaccordingtocustomerorders.Thiswouldbeidealforsituations
wherefinalassemblyschedulesareused.
II.
Recordthecircumstancesrelatingtothedata.Demandisinfluencedbyparticularevents,and
theseshouldberecordedalongwiththedemanddata.Forinstance,artificialbumpsindemand
canbecausedbysalespromotions,pricechanges,changesintheweather,orastrikeata
competitorsfactory.Itisvitalthatthesefactorsberelatedtothedemandhistorysotheymay
beincludedorremovedforfutureconditions.
III.
Recordthedemandseparatelyfordifferentcustomergroups.Manyfirmsdistributetheirgoods
throughdifferentchannelsofdistribution,eachhavingitsowndemandcharacteristics.For
example,afirmmayselltoanumberofwholesalersthatorderrelativelysmallquantities
regularlyandalsoselltoamajorretailerthatbuysalargelottwiceayear.Forecastsof
averagedemandwouldbemeaningless,andeachsetofdemandsshouldbeforecast
separately.
7.ForecastingTechniques
Therearemanyforecastingmethods,buttheycanusuallybeclassifiedintothreecategories:
qualitative,extrinsic,andintrinsic.
a.QualitativeTechniques
Qualitativetechniquesareprojectionsbasedonjudgment,intuition,andinformed
opinions.Bytheirnature,theyaresubjective.Suchtechniquesareusedtoforecast
genera!businesstrendsandthepotentialdemandforlargefamiliesofproductsover
anextendedperiodoftime.Assuch,theyareusedmainlybyseniormanagement.
Productionandinventoryforecastingisusuallyconcernedwiththedemandfor
particularenditems,andqualitativetechniquesareseldomappropriate.
Whenattemptingtoforecastthedemandforanewproduct,thereisnohistoryon
whichtobaseaforecast.Inthesecases,thetechniquesofmarketresearchand
historicalanalogymightbeused.Marketresearchisasystematic,formal,and
consciousprocedurefortestingtodeterminecustomeropinionorintention.Historical
analogyisbasedonacomparativeanalysisoftheintroductionandgrowthofsimilar
productsinthehopethatthenewproductbehavesinasimilarfashion.Another
methodistotestmarketaproduct.
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Thereareseveralothermethodsofqualitativeforecasting.One,calledtheDelphi
method,usesapanelofexpertstogivetheiropiniononwhatislikelytohappen.
b.ExtrinsicTechniques
Extrinsicforecastingtechniquesareprojectionsbasedonexternal(extrinsic)
indicatorswhichrelatetothedemandforacompanysproducts.Examplesofsuch
datawouldbehousingstarts,birthrates,anddisposableincome.Thetheoryisthat
thedemandforaproductgroupisdirectlyproportional,orcorrelates,toactivityin
anotherfield.Examplesofcorrelationare:
Salesofbricksareproportionaltohousingstarts.
Salesofautomobiletiresareproportionaltogasolineconsumption.
Housingstartsandgasolineconsumptionarecalledeconomicindicators.They
describeeconomicconditionsprevailingduringagiventimeperiod.Somecommonly
usedeconomicindicatorsareconstructioncontractawards,automobileproduction,
farmincome,steelproduction,andgrossnationalincome.Dataofthiskindare
compiledandpublishedbyvariousgovernmentdepartments,financialpapersand
magazines,tradeassociations,andbanks.
Theproblemistofindanindicatorthatcorrelateswithdemandandonethatpreferably
leadsdemand,thatis,onethatoccursbeforethedemanddoes.Forexample,the
numberofconstructioncontractsawardedinoneperiodmaydeterminethebuilding
materialsoldinthenextperiod.Whenitisnotpossibletofindaleadingindicator,it
maybepossibletouseanonleadingindicatorforwhichthegovernmentoran
organizationforecasts.Inasense,itisbasingaforecastonaforecast.
Extrinsicforecastingismostusefulinforecastingthetotaldemandforafirms
productsorthedemandforfamiliesofproducts.Assuch,itisusedmostoftenin
businessandproductionplanningratherthantheforecastingofindividualenditems.
c.IntrinsicTechniques
Intrinsicforecastingtechniquesusehistoricaldatatoforecast.Thesedataare
usuallyrecordedinthecompanyandarereadilyavailable.Intrinsicforecasting
techniquesarebasedontheassumptionthatwhathappenedinthepastwillhappen
inthefuture.Thisassumptionhasbeenlikenedtodrivingacarbylookingoutthe
rearviewmirror.Whilethereissomeobvioustruthtothis,itisalsotruethatlacking
anyothercrystalball,thebestguidetothefutureiswhathashappenedinthepast.
Sinceintrinsictechniquesaresoimportant,thenextsectionwilldiscusssomeofthe
moreimportanttechniques.Theyareoftenusedasinputtomasterproduction
schedulingwhereenditemforecastsareneededfortheplanninghorizonoftheplan.
8.SomeImportantIntrinsicTechniques
AssumethatthemonthlydemandforaparticularitemoverthepastyearisasshowninFigure8.4.
SupposeitistheendofDecember,andwewanttoforecastdemandforJanuaryofthecomingyear.
Severalrulescanbeused:
Demandthismonthwillbethesameaslastmonth.Januarydemandwouldbeforecastat84,
thesameasDecember.Thismayappeartoosimple,butifthereislittlechangeindemand
monthtomonth,itprobablywillbequiteusable.
Demandthismonthwillbethesameasdemandthesamemonthlastyear.Forecastdemand
wouldbe92,thesameasJanuarylastyear.Thisruleisadequateifdemandisseasonaland
thereislittleupordowntrend.
Rulessuchasthese,basedonasinglemonthorpastperiod,areoflimitedusewhenthereismuch
randomfluctuationindemand.Usuallymethodsthataverageouthistoryarebetterbecausethey
dampenoutsomeeffectsofrandomvariation.
Asanexample,theaverageoflastyearsdemandcanbeusedasanestimateforJanuarydemand.
Suchasimpleaveragewouldnotberesponsivetotrendsorchangesinlevelofdemand.Abetter
methodwouldbetouseamovingaverage.
Averagedemand.Thisraisesthequestionofwhattoforecast.Asdiscussedearlier,demandcan
fluctuatebecauseofrandomvariation.Itisbesttoforecasttheaveragedemandratherthansecond
guesswhattheeffectofrandomfluctuationwillbe.Thesecondprincipleofforecastingdiscussed
earliersaidthataforecastshouldincludeanestimateoferror.Aswewillseelater,thisrangecanbe
estimated.Thus,aforecastofaveragedemandshouldbemade,andtheestimateoferrorappliedto
it.
a.MovingAverages
Onesimplewaytoforecastistotaketheaveragedemandfor,say,thelastthreeor
sixperiodsandusethatfigureastheforecastforthenextperiod.Attheendofthe
next
January92
July84
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February83
August81
March66
September75
April74
October63
May75
November91
June84
December84
period,thefirstperioddemandisdroppedandthelatestperioddemandaddedto
determineanewaveragetobeusedasaforecast.Thisforecastwouldalwaysbe
basedontheaverageoftheactualdemandoverthespecifiedperiod.
Forexample,supposeitwasdecidedtouseathreemonthmovingaverageonthe
datashowninFigure8.4.OurforecastforJanuary,basedonthedemandinOctober,
November,andDecember,wouldbe:
63+91+84
.=79
3
NowsupposethatJanuarydemandturnedouttobe90insteadof79.Theforecastfor
Februarywouldbecalculatedas:
91+84+90
=88
3
b.ExampleProblem
Demandoverthepastthreemonthshasbeen120,135,and114units.Usingathree
monthmovingaverage,calculatetheforecastforthefourthmonth.
Answer
120+135+114369
Forecastformonth4===
123
33
Actualdemandforthefourthmonthturnedouttobe129.Calculatetheforecastfor
thefifthmonth.
135+114+129
Forecastformonth5==
126
3
Inthepreviousdiscussion,theforecastforJanuarywas79,andtheforecastforFebruarywas88.The
forecasthasrisen,reflectingthehigherJanuaryvalueandthedroppingofthelowOctobervalue.Ifa
longerperiod,suchassixmonths,isused,theforecastdoesnotreactasquickly.Thefewermonths
includedinthemovingaverage,themoreweightisgiventothelatestinformation,andthefasterthe
forecastreactstotrends.However,theforecastwillalwayslagbehindatrend.Forexample,consider
thefollowingdemandhistoryforthepastfiveperiods:
Period
Demand
1
1000
2000
3000
4000
5000
Thereisarisingtrendtodemand.Ifafiveperiodmovingaverageisused,theforecastforperiod6is
(1000+2000+3000+4000+5000)5=3000.Itdoesnotlook
veryaccuratesincetheforecastislaggingactualdemandbyalargeamount.However,
ifathreemonthmovingaverageisused,theforecastis(3000+4000+5000)3
4000.Notperfect,butsomewhatbetter.Thepointisthatamovingaveragealwayslags
atrend,andthemoreperiodsincludedintheaverage,thegreaterthelagwillbe.
Ontheotherhand,ifthereisnotrendbutactualdemandfluctuatesconsiderablyduetorandom
variation,amovingaveragebasedonafewperiodsreactstothefluctuationratherthanforecaststhe
average.Considerthefollowingdemandhistory:
Period
Demand
1
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2
5000
3000
1000
4000
Thedemandhasnotrendandisrandom.Ifafivemonthmovingaverageisused,theforecastforthe
nextmonthis3000.Thisreflectsallthevalues.Ifatwomonthaverageistaken,theforecastsforthe
third,fourth,fifth,andsixthmonthsare:
Forecastforthirdmonth=(2000+5000)
2=3500
Forecastforfourthmonth=(5000+3000)2=4000
Forecastforfifthmonth=(3000+1000)2=2000
Forecastforsixthmonth=(1000+4000)22500
Withatwomonthmovingaveragetheforecastreactsveryquicklytothelatestdemandandthusis
notstable.
Movingaveragesarebestusedforforecastingproductswithstabledemandwherethereislittletrend
orseasonality.Movingaveragesarealsousefultofilteroutrandomfluctuations.Thishassome
commonsensesinceperiodsofhighdemandareoftenfollowedbyperiodsoflowdemand.
Onedrawbacktousingmovingaveragesistheneedtoretainseveralperiodsofhistoryforeachitem
tobeforecast.Thiswillrequireagreatdealofcomputerstorageorclericaleffort.Also,the
calculationsarecumbersome.Acommonforecastingtechnique,calledexponentialsmoothing,
givesthesameresultsasamovingaveragebutwithouttheneedtoretainasmuchdataandwith
easiercalculations.
c.ExponentialSmoothing
Itisnotnecessarytokeepmonthsofhistorytogetamovingaveragebecausethe
previouslycalculatedforecasthasalreadyallowedforthishistory.Therefore,the
forecastcanbebasedontheoldcalculatedforecastandthenewdata.
UsingthedatainFigure8.4,supposeanaverageofthedemandofthelastsix
months(80units)isusedtoforecastJanuarydemand.IfattheendofJanuary,
actualdemandis90units,wemustdropJulysdemandandpickupJanuarys
demandtodeterminethenewforecast.However,ifanaverageoftheoldforecast
(80)andtheactualdemandforJanuary(90)istaken,thenewforecastforFebruaryis
85units.Thisformulaputsasmuchweightonthemostrecentmonthasontheold
forecast(allpreviousmonths).Ifthisdoesnotseemsuitable,lessweightcouldbe
putonthelatestactualdemandandmoreweightontheoldforecast.Perhapsputting
only10%oftheweightonthelatestmonthsdemandand90%oftheweightonthe
oldforecastwouldbebetter.Inthatcase,
Februaryforecast=0.1(90)+0.9(80)=81
Noticethatthisforecastdidnotriseasmuchasourpreviouscalculationinwhichthe
oldforecastandthelatestactualdemandweregiventhesameweight.One
advantagetoexponentialsmoothingisthatthenewdatacanbegivenanyweight
wanted.
Theweightgiventolatestactualdemandiscalledasmoothingconstantandis
representedbytheGreekletteralpha(a).Itisalwaysexpressedasadecimalfrom0
to1.0.
Ingeneral,theformulaforcalculatingthenewforecastis:
Newforecast=(a)latestdemand)+(1a)previousforecast)
d.ExampleProblem
TheoldforecastforMaywas220,andtheactualdemandforMaywas190.Ifalpha
(a)is0.15,calculatetheforecastforJune.IfJunedemandturnsouttobe218,
calculatetheforecastforJuly.
Answer
Juneforecast=(0.15)(190)+(10.15)(220)=215.5
Julyforecast=(0.15)(218)+(0.85)(215.5)=215.9
Exponentialsmoothingprovidesaroutinemethodforregularlyupdatingitemforecasts.Itworksquite
wellwhendealingwithstableitems.Generally,ithasbeenfoundsatisfactoryforshortrange
forecasting.Itisnotsatisfactorywherethedemandisloworintermittent.
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Exponentialsmoothingwilldetecttrends,althoughtheforecastwilllagactualdemandifadefinite
trendexists.Figure8.5showsagraphoftheexponentiallysmoothedforecastlaggingtheactual
demandwhereapositivetrendexists.Noticetheforecastwiththelargerafollowsactualdemand
moreclosely.
Ifatrendexists,itispossibletouseaslightlymorecomplexformulacalleddoubleexponential
smoothing.Thistechniqueusesthesameprinciplesbutnoteswhethereachsuccessivevalueofthe
forecastismovingupordownonatrendline.Doubleexponentialsmoothingisbeyondthescopeof
thistext.
Aproblemexistsinselectingthebestalphafactor.Ifalowfactorsuchas0.1isused,theold
forecastwillbeheavilyweighted,andchangingtrendswillnotbepickedupasquicklyasmightbe
desired.Ifalargerfactorsuchas0.4isused,theforecastwillreactsharplytochangesindemand
andwillbeerraticifthereisasizablerandomfluctuation.Agoodwaytogetthebestalphafactoristo
usecomputersimulation.Usingpastactualdemand,forecastsaremadewithdifferentalphafactorsto
seewhichonebestsuitsthehistoricaldemandpatternforparticularproducts.
9.Seasonality
Manyproductshaveaseasonalorperiodicdemandpattern:skis,lawnmowers,bathingsuits,and
Christmastreelightsareexamples.Lessobviousareproductswhosedemandvariesbythetimeof
day,week,ormonth.Examplesofthesemightbeelectricpowerusageduringthedayorgrocery
shoppingduringtheweek.Powerusagepeaksbetween4and7p.m.,andsupermarketsaremost
busytowardtheendoftheweekorbeforecertainholidays.
a.SeasonalIndex
Ausefulindicationofthedegreeofseasonalvariationforaproductistheseasonal
index.Thisindexisanestimateofhowmuchthedemandduringtheseasonwillbe
aboveorbelowtheaveragedemandfortheproduct.Forexample,swimsuitdemand
mightaverage100permonth,butinJulytheaverageis175andinSeptember,35.
TheindexforJulydemandwouldbe1.75andforSeptember,0.35.
Theformulafortheseasonalindexis:
Period
averagedemand
Seasonalindex=
.
Averagedemand
forallperiods
Theperiodcanbedaily,weekly,monthly,orquarterlydependingonthebasisfor
theseasonalityofdemand.
Theaveragedemandforallperiodsisavaluethataveragesoutseasonality.Thisis
calledthedeseasonalizeddemand.Thepreviousequationcanberewrittenas:
periodaverage
demand
Seasonalindex=
.
deseasonalized
demand
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b.ExampleProblem
Aproductthatisseasonallybasedonquarterlydemandandthedemandforthe
pastthreeyearsisshowninFigure8.6.Thereisnotrend,butthereisdefinite
seasonality.Averagequarterlydemandis100units.Figure8.6alsoshowsagraph
ofactualseasonaldemandandaveragequarterlydemand.Theaveragedemand
shownisthehistoricalaveragedemandforallperiods.Rememberweforecast
averagedemand,notseasonaldemand.
Answer
Theseasonalindicescannowbecalculatedasfollows:
128
Seasonalindex==1.28
(quarter1)
100
102
==1.2
(quarter2)
75
75
==0.75
(quarter3)
100
95
==0.95
(quarter4)
100
Totalofseasonalindices=4.00
Notethatthetotalofalltheseasonalindicesequalsthenumberofperiods.Thisis
agoodwaytocheckwhetherthecalculationsarecorrect.
Year
Quarter
1
Total
122
108
81
90
401
130
100
73
96
399
132
98
71
99
400
Average
128
102
75
95
400
c.SeasonalForecasts
Theequationfordevelopingseasonalindicesisalsousedtoforecastseasonal
demand.Ifacompanyforecastsaveragedemandforallperiods,theseasonal
indicescanbeusedtocalculatetheseasonalforecasts.Changingtheequation
aroundweget:
Seasonaldemand=(seasonalindex)(deseasonalizeddemand)
d.ExampleProblem
Thecompanyinthepreviousproblemforecastsanannualdemandnextyearof420
units.Calculatetheforecastforquarterlysales.
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Answer
420
Forecastaveragequarterlydemand==105
units
4
Expectedquarterdemand=(seasonalindex)
(forecastquarterlydemand)
Expectedfirstquarterdemand=1.28x105=134.4
units
Expectedsecondquarterdemand=1.02x105=
107.1units
Expectedthirdquarterdemand=0.75x105=78.75
units
Expectedfourthquarterdemand=0.95x105=99.75
units
Totalforecastdemand=420
units
e.DeseasonalizedDemand
Forecastsdonotconsiderrandomvariation.Theyaremadeforaveragedemand,
andseasonaldemandiscalculatedfromtheaverageusingseasonalindices.Figure
8.7showsbothactualdemandandforecastaveragedemand.Theforecastaverage
demandisalsothedeseasonalizeddemand.Historicaldataareofactualseasonal
demand,andtheymustbedeseasonalizedbeforetheycanbeusedtodevelopa
forecastofaveragedemand.
Also,ifcomparisonsaremadebetweensalesindifferentperiods,theyare
meaninglessunlessdeseasonalizeddataareused.Forexample,acompanyselling
tennisracketsfindsdemandisusuallylargestinthesummer.However,some
peopleplayindoortennis,sothereisdemandinthewintermonthsaswell.If
demandinJanuarywas5200unitsandinJunewas24,000units,howcould
JanuarydemandbecomparedtoJunedemandtoseewhichwasthebetterdemand
month?Ifthereisseasonality,comparisonofactualdemandwouldbemeaningless.
Deseasonalizeddataareneededtomakeacomparison.
Theequationtocalculatedeseasonalizeddemandisderivedfromtheprevious
seasonalequationandisasfollows:
actualseasonal
demand
Deseasonalizeddemand=
.
seasonalindex
f.ExampleProblem
AcompanysellingtennisracketshasaJanuarydemandof5200unitsandaJuly
demandof24,000units.IftheseasonalindicesforJanuarywere0.5andforJune
were2.5,calculatethedeseasonalizedJanuaryandJulydemand.Howdothetwo
monthscompare?
Answer
DeseasonalizedJanuarydemand=52000.510,400units
DeseasonalizedJunedemand=24,0002.5=9600units
JuneandJanuarydemandcannowbecompared.Onadeseasonalizedbasis,
JanuarydemandisgreaterthanJunedemand.
Deseasonalizeddatamustbeusedforforecasting.Forecastsaremadeforaveragedemand,andthe
forecastforseasonaldemandiscalculatedfromtheaveragedemandusingtheappropriateseason
index.
Therulesforforecastingwithseasonalityare:
Onlyusedeseasonalizeddatatoforecast.
Forecastdeseasonalizeddemand,notseasonaldemand.
Calculatetheseasonalforecastbyapplyingtheseasonalindextothebaseforecast.
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g.ExampleProblem
Acompanyusesexponentialsmoothingtoforecastdemandforitsproducts.For
April,thedeseasonalizedforecastwas1000,andtheactualseasonaldemandwas
1250units.TheseasonalindexforAprilis1.2andforMayis0.7.Ifcxis0.1,
calculate:
a.
ThedeseasonalizedactualdemandforApril.
b.
c.
ThedeseasonalizedMayforecast.
TheseasonalforecastforMay.
Answer
1250
a.DeseasonalizedactualdemandforApril=
=1042
1.2
b.DeseasonalizedMayforecast=cx(latestactual)+
1cx)
(previous
forecast)
=0.1(1042)+
0.9(1000)=1004
c.SeasonalizedMayforecast=(seasonalindex)
(deseasonalized
forecast)
=0.7(1004)=703
10.TrackingTheForecast
Asnotedinthediscussionontheprinciplesofforecasting,forecastsareusuallywrong.Thereare
severalreasonsforthis,someofwhicharerelatedtohumaninvolvementandotherstothebehavior
oftheeconomy.Iftherewereamethodofdetermininghowgoodaforecastis,forecastingmethods
couldbeimprovedandbetterestimatescouldbemadeaccountingfortheerror.Thereisnopointin
continuingwithaplanbasedonpoorforecastdata.Weneedtotracktheforecast.Trackingthe
forecastistheprocessofcomparingactualdemandwiththeforecast.
a.ForecastError
Forecasterroristhedifferencebetweenactualdemandandforecastdemand.Error
canoccurintwoways:biasandrandomvariation.
Bias.Cumulativeactualdemandmaynotbethesameasforecast.Considerthedata
inFigure8.8.Actualdemandvariesfromforecast,andoverthesixmonthperiod,
cumulativedemandis120unitsgreaterthanexpected.
Biasexistswhenthecumulativeactualdemandvariesfromthecumulativeforecast.
Thismeanstheforecastaveragedemandhasbeenwrong.IntheexampleinFigure
8.8,theforecastaveragedemandwas100,buttheactualaveragedemandwas720
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6=120units.Figure8.9showsagraphofcumulativeforecastandactualdemand.
Biasisasystematicerrorinwhichtheactualdemandisconsistentlyaboveorbelow
theforecastdemand.Whenbiasexists,theforecastshouldbechangedtoimprove
itsaccuracy.
Month
ForecastActual
Monthly
Cumulative
Monthly
Cumulative
100
100
110
110
100
200
125
235
100
300
120
355
100
400
125
480
100
500
130
610
100
600
110
720
Total
600
600
720
720
Thepurposeoftrackingtheforecastistobeabletoreacttoforecasterrorby
planningarounditorbyreducingit.Whenanunacceptablylargeerrororbiasis
observed,itshouldbeinvestigatedtodetermineitscause.
Oftenthereareexceptionalonetimereasonsforerror.Examplesaremachine
breakdown,customershutdown,largeonetimeorders,andsalespromotions.These
reasonsrelatetothediscussiononcollectionandpreparationofdataandtheneedto
recordthecircumstancesrelatingtothedata.Ontheseoccasions,thedemand
historymustbeadjustedtoconsidertheexceptionalcircumstances.
Errorscanalsooccurbecauseoftiming.Forexample,anearlyorlatewinterwill
affectthetimingofdemandforsnowshovelsalthoughthecumulativedemandwillbe
thesame.
Trackingcumulativedemandwillconfirmtimingerrorsorexceptionalonetime
events.Thefollowingexampleillustratesthis.NotethatinAprilthecumulative
demandisbackinanormalrange.
Month
Cumulative Cumulative
Forecast
Actual
Forecast
Actual
February
100
110
200
205
March*
100
155
300
360
April
100
45
400
405
May
100
90
500
495
*Customerforesawapossiblestrikeandstockpiled.
Month
Forecast
Actual
Variation(error)
100
105
100
94
100
98
100
104
100
103
100
96
Total
600
600
Randomvariation.
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Inagivenperiod,actualdemandwillvaryabouttheaveragedemand.
Thevariabilitywilldependuponthedemandpatternoftheproduct.
Someproductswillhaveastabledemand,andthevariationwillnot
belarge.Otherswillbeunstableandwillhavealargevariation.
ConsiderthedatainFigure8.10,showingforecastandactual
demand.Noticethereismuchrandomvariation,buttheaverageerror
iszero.Thisshowsthattheav
erageforecastwascorrectandthere
wasnobias.ThedataareplottedinFigure8.11.
b.MeanAbsoluteDeviation
Forecasterrormustbemeasuredbeforeitcanbeusedtorevisetheforecastorto
helpinplanning.Thereareseveralwaystomeasureerror,butonecommonlyusedis
meanabsolutedeviation(MAD).
ConsiderthedataonvariabilityinFigure8.10.Althoughthetotalerror(variation)is
zero,thereisstillconsiderablevariationeachmonth.Totalerrorwouldbeuselessto
measurethevariation.Onewaytomeasurethevariabilityistocalculatethetotal
errorignoringtheplusandminussignsandtaketheaverage.Thisiscalledmean
absolutedeviation:
meanimpliesanaverage,
absolutemeanswithoutreferencetoplusandminus,
deviationreferstotheerror:
sumofabsolute
deviations
MAD=
.
numberof
observations
c.ExampleProblem
GiventhedatashowninFigure8.10,calculatethemeanabsolutedeviation.
Answer
Sumofabsolutedeviations=5+6+2+4
+3+4=24
24
MAD==4
6
d.Normaldistribution
Themeanabsolutedeviationmeasuresthedifference(error)betweenactualdemand
andforecast.Usually,actualdemandisclosetotheforecastbutsometimesisnot.A
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graphofthenumberoftimes(frequency)actualdemandisofaparticularvalue
producesabellshapedcurve.Thisdistributioniscalledanormaldistributionandis
showninFigure8.12.Chapter11givesamoredetaileddiscussionofnormal
distributionsandtheircharacteristics.
Therearetwoimportantcharacteristicstonormalcurves:thecentraltendency,or
average,andthedispersion,orspread,ofthedistribution.InFigure8.12,thecentral
tendencyistheforecast.Thedispersion,thefatnessorthinnessofthenormalcurve,
ismeasuredbythestandarddeviation.Thegreaterthedispersion,thelarger
thestandarddeviation.Themeanabsolutedeviationisanapproximationofthe
standarddeviationandisusedbecauseitiseasytocalculateandapply.
Fromstatisticsweknowthattheerrorwillbewithin:
1MADoftheaverageabout60%ofthetime
2MADoftheaverageabout90%ofthetime
3MADoftheaverageabout98%ofthetime.
e.Usesofmeanabsolutedeviation.
Meanabsolutedeviationhasseveraluses.Someofthemostimportantfollow.
Trackingsignal.Biasexistswhencumulativeactualdemandvariesfromforecast.
Theproblemisinguessingwhetherthevarianceisduetorandomvariationorbias.If
thevariationisduetorandomvariation,theerrorwillcorrectitself,andnothingshould
bedonetoadjusttheforecast.However,iftheerrorisduetobias,theforecast
shouldbecorrected.Usingthemeanabsolutedeviation,wecanmakesome
judgmentaboutthereasonablenessoftheerror.Undernormalcircumstances,the
actualperioddemandwillbewithin3MADoftheaverage98%ofthetime.Ifactual
perioddemandvariesfromtheforecastbymorethan3MAD,wecanbeabout98%
surethattheforecastisinerror.
Atrackingsignalcanbeusedtomonitorthequalityoftheforecast.Thereareseveral
proceduresused,butoneofthesimplerisbasedonacomparisonofthecumulative
sumoftheforecasterrorstothemeanabsolutedeviation.Followingistheequation:
algebraicsumofforecast
errors
Trackingsignal=
.
MAD
f.ExampleProblem
Theforecastis100unitsaweek.Theactualdemandforthepastsixweekshas
been105,110,103,105,107,and115.IfMADis7.5,calculatethesumofthe
forecasterrorandthetrackingsignal.
Answer
Sumofforecasterror=5+10+3+5+7+15=45
Trackingsignal=457.5=6
g.ExampleProblem
Acompanyusesatriggerof4todecidewhetheraforecastshouldbereviewed.
Giventhefollowinghistory,determineinwhichperiodtheforecastshouldbe
reviewed.MADfortheitemis2.
Period Forecast
Actual
Deviation
Cumulative
Tracking
Deviation
Signal
2.5
100
96
100
98
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3
100
104
100
110
Actual
Deviation
Cumulative
Tracking
Deviation
Signal
2.5
Answer
Period Forecast
100
96
0.5
100
98
0.5
100
104
1.5
100
110
10
13
6.5
Theforecastshouldbereviewedinperiod4.
Contingencyplanning.Supposeaforecastismadethatdemandfordoorslammerswillbe100units
andthatcapacityformakingthemis110units.Meanabsolutedeviationofactualdemandaboutthe
forecasthistoricallyhasbeencalculatedat10units.Thismeansthereisa60%chancethatactual
demandwillbebetween90and110unitsanda40%chancethattheywillnot.Withthisinformation,
manufacturingmanagementmightheabletodeviseacontingencyplantocopewiththepossibleextra
demand.
SafelystockThedatacanbeusedasabasisforsettingsafetystock.Thiswillbediscussedin
detailinChapter11.
h.P/DRatio
Becauseoftheinherenterrorinforecasts,companieswhorelyonthemcanruninto
avarietyofproblems.Forexample,thewrongmaterialmaybeboughtandperhaps
processedintothewronggoods.Amorereliablewayofproducingwhatisreally
neededistheuseoftheP/Dratio.
P,orproductionleadtime,isthestackedleadtimeforaproduct.Itincludestime
forpurchasingofrawmaterialstoarrive,manufacturing,assembly,delivery,and
sometimesthedesignoftheproduct.Figure1.1.onpage4showsvarioustimesin
differenttypesofindustriesandisreproducedhereasFigure8.13
"D,"ordemandleadtime,isthecustomersleadtime.itisthetimefromwhena
customerplacesanorderuntilthegoodsaredelivered,itcanbeveryshort,asina
maketostockenvironment,orverylong,asanengineertoordercompany.
Thetraditionalwaytoguardagainstinherenterrorinforecastingistoincludesafety
stockininventory.Thereisanaddedexpensetotheextrainventorycarriedjustin
case.Oneotherwayistomakemoreaccuratepredictions.Therearefivewaysto
moveinthisdirection.
a.
ReducePtime.ThelongerthePtime,themorechancethereisforerror.
Ideally,PwillbelessthanD.
b.
ForceamatchbetweenPandD.Movinginthisdirectioncanbedoneintwo
ways:
a.MakethecustomersDtimeequaltoyourPtime.Thisiscommonwith
customproductswhenthemanufacturermakestheproductaccordingtothe
customersspecification.
c.
Sellwhatyouforecast.Thiswillhappenwhileyoucontrolthemarket.One
goodexampleistheautomobilemarket.Itiscommontoofferspecial
inducementstowardtheendoftheautomotiveyearinordertosellwhatthe
manufacturershavepredicted.
d.
Simplifytheproductline.Themorevarietyintheproductline,themoreroom
forerror.
e.
Standardizeproductsandprocesses.Thismeansthatcustomizationoccurs
closetofinalassembly.Thebasiccomponentsareidentical,orsimilar,forall
components.Figure8.14showsthisgraphically.
f.
Forecastmoreaccurately.Makeforecastsusingawellthoughtout,well
controlledprocess.
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