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Outline
I. Perspectives
IV. Summary
I. Perspectives
* Process
* Capacity
* Inventory
- Why Forecast?
2
- Facts of forecasts
1. Safety stock
2. Safety lead time
3. Excess capacity
3
II. Forecasting techniques:
* Level or Trend
* Seasonal effects
* Cycle
* Random effects
Forecasts are then made by projecting the components into the future.
Months
4
1. Simple N-period Moving Averages
At = (Dt+Dt-1+....+Dt-N+1)/N
Ft+1= At
Period Dt At Ft Dt-Ft
1 10
2 18
3 29
4 15
5 10
6
F5=
F6=
F6=
5
2. Weighted N-period Moving Averages
At = (w1Dt+w2Dt-1+. . .+wNDt-N+1)
(w1 + w2 + . . + wN)=1
Ft+1= At
- Example:
6
Exercise 2:
In Victoria Street, the number of daily calls from students has been
recorded as follows:
October Calls
1 92
2 127
3 103
4 165
5 132
6 111
7 174
8 94
7
How do you choose the right forecast model?
N
MFE = ∑(Dt-Ft )/N
t=1
N
MAD = ∑|Dt-Ft |/N
t=1
8
How do you monitor the chosen model over time?
a. Tracking Signal Tt
t
Tt = ∑ (Di-Fi)/MADt
i=1
9
3. Simple Exponential Smoothing
At= ∝Dt+(1-∝)At-1
Ft+1= At
10
Exercise 3: Forecast using simple exponential smoothing and ∝=0.3:
Period Dt At Ft Dt-Ft
0 - A0=15(Assume)
1 10
2 18
3 29
4 15
11
4. Enhanced Exponential Smoothing with Trend
At= ∝Dt+(1-∝)(At-1+Tt-1)
Tt= ß(At-At-1)+(1-ß)Tt-1
Procedure:
Step 3: Using the most current At and Tt, forecast the future demands for
time t+1, t+2, ...., and t+k
Ft+1=At+Tt
Ft+2=At+2.Tt
:
:
:
Ft+k=At+k.Tt
12
Exercise 4:
t Dt At Tt Ft
1 85
2 105
3 112
4 132
5 145
13
5. Enhanced Exponential Smoothing with Trend and Seasonal effects
At= ∝(Dt/Rt-L)+(1-∝)(At-1+Tt-1)
Tt= ß(At-At-1)+(1-ß)Tt-1
where
Example:
14
Procedure:
Step 3: Using the most current At and Tt and the appropriate seasonal
indices, forecast the future demand for time t+k as
15
Exercise 5: Given the following, develop a forecast
Season t Dt At Tt Rt Ft
A -1 - - - 0.8 -
B 0 - 70 10 1.2 -
A 1 66
B 2 106
A 3
B 4
Ft+k= (At+k.Tt)Rt+k-L
At t=1, D1=66,
A1 =
=
=
T1 =
=
=
R1 =
=
=
F2 =
=
=
16
At t=2, D2=106,
A2 =
=
=
T2 =
=
=
R2 =
=
=
F3 =
=
=
F4 =
F5 =
F6 =
17
IV. Summary
Steps in forecasting
1. Given the past demand data, plot data and decide on which models to
try fitting
3. Finally, select the model with lowest MFE and lowest MAD
4. When using the selected model, monitor its performance by its MAD
and Tt
18
Exercise 6:
Management feels that there is a seasonal pattern in the data below for the
Donut-Hole, with the first 2 days of a week representing one season; the
third and fourth days representing a second season; and the fifth, sixth, and
seventh days a third season. Thus, three seasonal indices have been
suggested: RA = 0.9 (for Mon & Tues), RB = 1.3 (for Wed & Thurs), and RC
= 0.8 (for Fri, Sat & Sun).
1 80 8 85
2 95 9 99
3 120 10 110
4 110 11 90
5 75 12 80
6 60 13 65
7 50 14 50
Using exponential smoothing with trend and seasons, forecast demands using A0 =
85, T0 = 1 and α = 0.1, β = 0.2, φ = 0.3.
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