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Chapter 12
Forecasting
OBJECTIVES
Demand Management
Qualitative Forecasting Methods
Simple & Weighted Moving Average
Forecasts
Exponential Smoothing
Simple Linear Regression
Web-Based Forecasting
The McGraw-Hill Companies, Inc.,
Demand Management
Independent Demand:
Finished Goods
Dependent Demand:
Raw Materials,
Component parts,
Sub-assemblies, etc.
C(2)
B(4)
D(2)
E(1)
D(3)
F(2)
Independent Demand:
What a firm can do to manage it?
Can take an active role to influence
demand
Types of Forecasts
Qualitative (Judgmental)
Quantitative
Time Series Analysis
Causal Relationships
Simulation
The McGraw-Hill Companies, Inc.,
Components of Demand
Sales
x
x x
xx
x
x xx
x
x x
x
x
x
x
x
x
x
x
x
x
x
x
xxxx
x x
x
x
x
x
x
x x
x
x
Linear
Linear
x
Trend
Trend
x
Year
The McGraw-Hill Companies, Inc.,
Qualitative Methods
Executive Judgment
Historical analogy
Grass Roots
Qualitative
Market Research
Methods
Delphi Method
Panel Consensus
10
Delphi Method
l. Choose the experts to participate representing a
variety of knowledgeable people in different areas
2. Through a questionnaire (or E-mail), obtain
forecasts (and any premises or qualifications for the
forecasts) from all participants
3. Summarize the results and redistribute them to the
participants along with appropriate new questions
4. Summarize again, refining forecasts and conditions,
and again develop new questions
5. Repeat Step 4 as necessary and distribute the final
results to all participants
11
12
13
Demand
650
678
720
785
859
920
850
758
892
920
789
844
A
+
A
+
A
+...+A
A
+
A
+
A
+...+A
t-1
t-2
t-3
t-t-nn
t-1
t-2
t-3
FFtt ==
nn
Question:
Question: What
What are
arethe
the 3-week
3-week
and
and 6-week
6-week moving
moving average
average
forecasts
forecasts for
for demand?
demand?
Assume
Assume you
you only
only have
have 33
weeks
weeks and
and 66 weeks
weeks of
of actual
actual
demand
demand data
data for
for the
the
respective
respective forecasts
forecasts
Week
1
2
3
4
5
6
7
8
9
10
11
12
14
15
Plotting
Plottingthe
themoving
moving averages
averagesand
andcomparing
comparing
them
themshows
showshow
how the
thelines
linessmooth
smoothout
out to
to reveal
reveal
the
theoverall
overallupward
upwardtrend
trendin
inthis
this example
example
1000
Demand
900
Demand
800
3-Week
700
6-Week
600
500
1 2 3 4 5 6 7 8 9 10 11 12
Week
Note
Notehow
howthe
the
3-Week
3-Weekisis
smoother
smootherthan
than
the
theDemand,
Demand,
and
and6-Week
6-Weekisis
even
evensmoother
smoother
The McGraw-Hill Companies, Inc.,
16
Week
1
2
3
4
5
6
7
Demand
820
775
680
655
620
600
575
Question:
Question:What
What isis the
the 33
week
week moving
moving average
average
forecast
forecast for
for this
this data?
data?
Assume
Assume you
you only
only have
have 33
weeks
weeks and
and 55 weeks
weeks of
of
actual
actual demand
demand data
data for
for
the
the respective
respective
forecasts
forecasts
17
Demand
820
775
680
655
620
600
575
3-Week
5-Week
F4=(820+775+680)/3
=758.33
758.33
703.33
651.67
625.00
F6=(820+775+680
+655+620)/5
=710.00
710.00
666.00
The McGraw-Hill Companies, Inc.,
18
FFtt == w
+ w A t-2 ++ w
+...+w A t-n
w11A
At-1
w33A
At-3
t-1 + w22 At-2
t-3 +...+wnn At-n
wwt ==weight
weightgiven
givento
totime
timeperiod
periodt
t
t
occurrence
occurrence(weights
(weightsmust
mustadd
addto
toone)
one)
nn
ww ==11
i=1
i=1
ii
19
Demand
650
678
720
Weights:
t-1 .5
t-2 .3
t-3 .2
Note
Notethat
thatthe
theweights
weightsplace
placemore
moreemphasis
emphasison
onthe
the
most
mostrecent
recentdata,
data,that
thatisistime
timeperiod
periodt-1
t-1
The McGraw-Hill Companies, Inc.,
20
Week
1
2
3
4
Demand Forecast
650
678
720
693.4
F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
The McGraw-Hill Companies, Inc.,
21
Demand
820
775
680
655
Weights:
t-1 .7
t-2 .2
t-3 .1
22
Demand Forecast
820
775
680
655
672
F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
The McGraw-Hill Companies, Inc.,
23
FFtt == FFt-1
+
(A
F
)
+
(A
F
t-1
t-1
t-1
t-1
t-1)
Where :
Ft Forcast value for the coming t time period
Ft - 1 Forecast value in 1 past time period
At - 1 Actual occurance in the past t time period
Alpha smoothing constant
24
Demand
820
775
680
655
750
802
798
689
775
Question:
Question: Given
Given the
the weekly
weekly
demand
demand data,
data, what
what are
arethe
the
exponential
exponential smoothing
smoothing
forecasts
forecasts for
forperiods
periods 2-10
2-10
using
using =0.10
=0.10 and
and =0.60?
=0.60?
Assume
Assume FF11=D
=D11
25
Answer:
Answer:The
Therespective
respectivealphas
alphascolumns
columnsdenote
denotethe
theforecast
forecastvalues.
values. Note
Note
that
thatyou
youcan
canonly
onlyforecast
forecastone
onetime
timeperiod
periodinto
intothe
thefuture.
future.
Week
1
2
3
4
5
6
7
8
9
10
Demand
820
775
680
655
750
802
798
689
775
0.1
820.00
820.00
815.50
801.95
787.26
783.53
785.38
786.64
776.88
776.69
0.6
820.00
820.00
820.00
817.30
808.09
795.59
788.35
786.57
786.61
780.77
The McGraw-Hill Companies, Inc.,
26
Demand
900
800
Demand
700
0.1
600
0.6
500
1
10
Week
27
Week
1
2
3
4
5
Question:
What
are
the
Question:
What
are
the
Demand
exponential
smoothing
exponential
smoothing
820
forecasts
forecasts for
for periods
periods 2-5
2-5
775 using a =0.5?
using a =0.5?
680
655
Assume
Assume FF11=D
=D11
28
Week
1
2
3
4
5
Demand
820
775
680
655
F3=820+(0.5)(775-820)=797.75
0.5
820.00
820.00
797.50
738.75
696.88
The McGraw-Hill Companies, Inc.,
29
MAD
MAD ==
AA --FF
t=1
t=1
tt
tt
nn
30
Sales Forecast
220
n/a
250
255
210
205
300
320
325
315
The McGraw-Hill Companies, Inc.,
31
Sales
220
250
210
300
325
40
nn
MAD
MAD==
AA --FF
t=1
t=1
tt
nn
tt
40
== 40 ==10
44 10
Note
Notethat
thatby
byitself,
itself,the
theMAD
MAD
only
onlylets
letsus
usknow
knowthe
themean
mean
error
errorin
inaaset
setof
offorecasts
forecasts
32
RSFE
RSFE Running
Running sum
sum of
of forecast
forecast errors
errors
TS
==
TS ==
MAD
Mean
MAD
Mean absolute
absolute deviation
deviation
The McGraw-Hill Companies, Inc.,
33
Yt = a + bx
a
0 1 2 3 4 5
(Time)
Is
Isthe
thelinear
linearregression
regressionmodel
model
34
aa == yy-- bx
bx
-- n(y)(x)
xy
n(y)(x)
xy
bb ==
22
22
n(x))
xx -- n(x
35
Week
1
2
3
4
5
Sales
150
157
162
166
177
The McGraw-Hill Companies, Inc.,
36
Answer:
Answer: First,
First, using
using the
the linear
linear regression
regressionformulas,
formulas, we
we
can
cancompute
computea
aand
andb
b
Week Week*Week
Sales Week*Sales
1
1
150
150
2
4
157
314
3
9
162
486
4
16
166
664
5
25
177
885
3
55
162.4
2499
Average
Sum Average
Sum
xy
--5(162.4)(3)
63
xy--n(y)(x)
n(y)(x) 2499
2499
5(162.4)(3)
63= 6.3
bb==
=
=
10 = 6.3
22
22
55
5
(
9
)
x
n(x
)
55 5(9 )
10
x - n(x )
aa== yy--bx
bx==162.4
162.4--(6.3)(3)
(6.3)(3)==143.5
143.5
37
Yt = 143.5 + 6.3x
Sales
Forecast
3
Period
38
39
Web-Based Forecasting:
Steps in CPFR
1. Creation of a front-end partnership agreement
2. Joint business planning
3. Development of demand forecasts
4. Sharing forecasts
5. Inventory replenishment
40
End of Chapter 12