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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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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
2007 Pearson Education 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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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
2007 Pearson Education 7-12
Static Methods
Estimating level and trend Estimating seasonal factors
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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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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
2007 Pearson Education 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)
2007 Pearson Education 7-26
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
2007 Pearson Education 7-29
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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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