Chapter 17 Forecasting Demand for Services

McGraw-Hill/Irwin Service Management: Operations, Strategy, and Information Technology, 6e

Copyright 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.

Learning Objectives

Recommend the appropriate forecasting model for a given situation. Conduct a Delphi forecasting exercise. Describe the features of exponential smoothing. Conduct time series forecasting using exponential smoothing with trend and seasonal adjustments.
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Forecasting Models

Subjective Models Delphi Methods Causal Models Regression Models Time Series Models Moving Averages Exponential Smoothing
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N-Period Moving Average

Let : MAT = The N period moving average at the end of period T AT = Actual observation for period T Then: MAT = (AT + AT-1 + AT-2 + ..+ AT-N+1)/N Characteristics: Need N observations to make a forecast Very inexpensive and easy to understand Gives equal weight to all observations Does not consider observations older than N periods

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Moving Average Example

Saturday Occupancy at a 100-room Hotel
Three-period Moving Average

Saturday

Period

Occupancy

Forecast

Aug.

1 8 15 22 29 Sept. 5 12

1 2 3 4 5 6 7

79 84 83 81 98 100

82 83 87 93

82 83 87 93

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Exponential Smoothing
Let : ST = Smoothed value at end of period T AT = Actual observation for period T FT+1 = Forecast for period T+1
Feedback control nature of exponential smoothing New value (ST ) = Old value (ST-1 ) +

[ observed error ]

ST ST-1 [ AT ST 1 ]
or :

ST AT (1 ) ST 1 FT 1 ST

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Exponential Smoothing Hotel Example

Saturday Hotel Occupancy ( =0.5)
Actual Occupancy At 79 84 83 81 98 100 Smoothed Value St 79.00 81.50 82.25 81.63 89.81 94.91 Forecast Error |At - Ft| 5 1 1 16 10 MAD = 6.6 Period t 1 2 3 4 5 6 Forecast Ft 79 82 82 82 90

Saturday Aug. 1 8 15 22 29 Sept. 5

Forecast Error (Mean Absolute Deviation) = lAt Ftl/n

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Exponential Smoothing Implied Weights Given Past Demand

ST AT (1 ) ST 1
Substitute for

ST 1 AT (1 )[AT 1 (1 ) ST 2 ] ST AT (1 )[AT 1 (1 ) ST 2 ] ST AT (1 ) AT 1 (1 ) 2 ST 2

If continued:

ST AT (1 ) AT 1 (1 ) 2 AT 2 ..... (1 ) T 1 A1 (1 ) T S0

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Exponential Smoothing Weight Distribution

0.3
Weight

0.3
(1 ) 0.21
(1 )2 0147 . 3 (1 ) 0103 .

0.2 0.1 0 0 1

(1 )4 0.072 (1 )5 0.050

Age of Observation (Period Old)

Relationship Between and N

(exponential smoothing constant) : 0.05 N (periods in moving average) : 39

0.1 0.2 19 9

0.3 5.7

0.4 4

0.5 3

0.67 2
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Saturday Hotel Occupancy

Effect of Alpha (

=0.1 vs. =0.5)

Actual Forecast
( 0.5)

105 100 95 90 85 80 75
0 1 2 3

Occupancy

Forecast
( 0.1)

Period
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Exponential Smoothing With Trend Adjustment

St ( At ) (1 )( St 1 Tt 1 ) Tt ( St St 1 ) (1 )Tt 1 Ft 1 St Tt
Commuter Airline Load Factor ( 0.5, 0.3)
Week t 1 2 3 4 5 6 7 8 Actual load factor At 31 40 43 52 49 64 58 68 Smoothed value St 31.00 35.50 39.93 47.10 49.92 58.69 60.88 66.54 Smoothed trend Tt 0.00 1.35 2.27 3.74 3.47 5.06 4.20 4.63 Forecast Forecast error Ft | At - Ft|

31 37 42 51 53 64 65

9 6 10 2 11 6 3 MAD = 6.7

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Exponential Smoothing with Seasonal Adjustment

St ( At / I t L ) (1 ) St 1 Ft 1 ( St )( I t L 1 ) A I t t (1 ) I t L St
( 0.2, 0.3) Ferry Passengers taken to a Resort Island Actual Smoothed Index Period t At value St It 2003 January 1 1651 .. 0.837 February 2 1305 .. 0.662 March 3 1617 .. 0.820 April 4 1721 .. 0.873 May 5 2015 .. 1.022 June 6 2297 .. 1.165 July 7 2606 .. 1.322 August 8 2687 .. 1.363 September 9 2292 .. 1.162 October 10 1981 .. 1.005 November 11 1696 .. 0.860 December 12 1794 1794.00 0.910 January 13 1806 1866.74 0.876 February 14 1731 2016.35 0.721 March 15 1733 2035.76 0.829

Forecast Ft .. .. .. .. .. .. .. .. .. .. .. .. 1236 1653

Error | At - Ft|

495 80
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Topics for Discussion

What characteristics of service organizations make forecast accuracy important? For each of the three forecasting methods, what are the developmental costs and associated cost of forecast error? Suggest independent variables for a regression model to predict the sales volume for a proposed video rental store location. Why is the N-period moving-average still in common use if the simple exponential smoothing model is superior? What changes in , , would you recommend to improve the performance of the trendline seasonal adjustment forecast shown in Figure 17.4?
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Interactive Exercise: Delphi Forecasting

Question: In what future election will a woman become president of the united states?
Year 2008 2012 2016 2020 2024 2028 1st Round Positive Arguments 2nd Round Negative Arguments 3rd Round

2032
2036 2040 2044 2048 2052 Never Total
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