PRODUCTION PLANNING AND CONTROL

(BMM4823)

FORECASTING
 Naive Approach
 Assumes demand in next
period is the same as
demand in most recent period
 e.g., If January sales were 68, then
February sales will be 68
 Sometimes cost effective and
efficient
 Can be good starting point
 Moving Average Method

 MA is a series of arithmetic means

 Used if little or no trend
 Used often for smoothing
 Provides overall impression of data over time

∑ demand in previous n periods

Moving average =
n
 Moving Average Example
Always One Sdn. Bhd. wants a 3-month
moving-average forecast, for servicing 3 inch
valve.
Actual
Month 3 inch valve

January 10
February 12
March 13
April 16
May 19
June 23
July 26
 Moving Average Example
Actual 3-Month
Month 3in valve Moving Average

January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11.67
May 19 (12 + 13 + 16)/3 = 13.67
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19.33
 Moving Average Example
So, please help Always One to forecast for August jobs?

January 10
February 12
March 13
April 16
May 19
June 23
July 26
 Moving Average Example
(19+23+26)/3 = ?

If the actual sales in July were 30, what is the

new August forecast?
 Weighted Moving Average
 Used when some trend might be present
 Older data usually less important
 Weights based on experience and intuition

Weighted ∑ (weight for period n) x (demand in period n)

=
moving average weights
 Weighted Moving Average
Weights Applied Period
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights

Actual 3-Month Weighted

Month Baju Kurung Sales Moving Average

January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2
 Potential Problems With
Moving Average
 Increasing n smooths the forecast but makes it
less sensitive to changes
 Do not forecast trends well
 Require extensive historical data
 Exponential Smoothing
 Form of weighted moving average
 Weights decline exponentially
 Most recent data weighted most
 Requires smoothing constant (α)
 Ranges from 0 to 1(0.05-0.5)
 Subjectively chosen
 Involves little record keeping of past data
 Exponential Smoothing
New forecast = Last period’s forecast
+ α(Last period’s actual demand
– Last period’s forecast)

Ft = Ft – 1 + α(At – 1 - Ft – 1)
where Ft = new forecast
Ft – 1 = previous forecast
α = smoothing (or weighting)
constant (0 ≤ α ≤ 1)
At-1 = Actual demand
 Exponential Smoothing Example
In January, a car dealer predicted February demand for Proton Preve is
142. However, the actual February demand was 153 cars.

By using a smoothing constant of α = 0.20, the dealer wants to forecast

month of March demand using the exponential smoothing model.
Exponential Smoothing Example
Predicted demand = 142 Preve cars
Actual demand = 153
Smoothing constant α = 0.20

Ft = Ft – 1 + α(At – 1 - Ft – 1)
Exponential Smoothing Example
Predicted demand = 142 Preve cars
Actual demand = 153
Smoothing constant α= .20

New forecast = 142 + .2(153 – 142)

Exponential Smoothing Example
Predicted demand = 142 Preve cars
Actual demand = 153
Smoothing constant α = .20

New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars
 Impact of Different 
225 –

Actual  = .5
demand
200 –
Demand

175 –

 = .1
150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
 Impact of Different 
225 –
 Chose high values of 
Actual
when underlying demand
 = .5
200 –
average is likely to
Demand

change
 Choose
175 low
– values of 
when underlying
 = .1
average is stable
150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
© 2011 Pearson
Education
 Choosing 

The objective is to obtain the most

accurate forecast no matter the
technique
We generally do this by selecting the model
that gives us the lowest forecast error

Forecast error = Actual demand - Forecast value

= At - Ft
Example
 The monthly for units manufactured by
the Always One Sdn Bhd has been as
follows
Month Units
May 100 a) Use the exponential smoothing method
to forecast for June to January. The initial
June 80 forecast for May was 105 units α = 0.2
July 110
August 115
September 105
October 110
November 125
December 120
Common Measures of Error

Mean Absolute Deviation (MAD)

∑ |Actual - Forecast|
MAD =
n

Mean Squared Error (MSE)

∑ (Forecast Errors)2
MSE =
n
 Common Measures of Error

Mean Absolute Percent Error (MAPE)

n
∑100|Actuali - Forecasti|/Actuali
MAPE = i=1
n
Comparison of Forecast Error
Example:
During the past 8 quarters, the LKIM Kuala Pahang has
Unloaded large quantities of fish from fishing boats. The jetty’s
operation manager wants to test the use of exponential
smoothing to see how well the technique works in predicting
tonnage unloaded. He guesses that the forecast of fish
unloaded in the first quarter was 175 tons.

Two values of α are to be examined: α = .10 and α = .50

 Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00
|180-175| |180-175|

2 168 175.5 7.50 177.50 9.50

[175+ .10(180-175) ] |168-175.5| [175+ .50(180-175) ] |168-177.5|

3 159
4 175
5 190
6 205
7 180
8 182
 Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
 Comparison of Forecast Error
∑ |deviations|
Rounded Absolute Rounded Absolute
MADActual
= Forecast Deviation Forecast Deviation
Tonnage n
with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1
For  =
180
.10 175 5.00 175 5.00
2 168 = 82.45/8
175.5 = 10.31
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For = .50 173.18
 175 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 = 98.62/8
175.02 = 12.33
29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
 Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
 Comparison of Forecast Error
Absolute (error)2 Absolute (error)2
Actual Deviation Deviation
Tonnage for for
Quarter Unloaded  = .10  = .50
1 180 5.00 5.00
2 168 7.50 9.50
3 159 15.75 13.75
4 175 1.82 9.12
5 190 16.64 19.56
6 205 29.98 24.78
7 180 1.98 12.61
8 182 3.78 4.30
 Comparison of Forecast Error
Absolute (error)2 Absolute (error)2
Actual Deviation Deviation
Tonnage for for
Quarter Unloaded  = .10  = .50
1 180 5.00 25 5.00 25
2 168 7.50 56.25 9.50 90.25
3 159 15.75 248.06 13.75 189.06
4 175 1.82 3.31 9.12 83.17
5 190 16.64 276.89 19.56 382.59
6 205 29.98 898.80 24.78 614.04
7 180 1.98 3.92 12.61 159.01
8 182 3.78 14.28 4.30 18.49
1,526.52 1,561.63
 Comparison of Forecast Error
∑ (forecast errors)2
MSE = Rounded Absolute Rounded Absolute
Actual
Tonnage with
n
Forecast Deviation
for
Forecast
with
Deviation
for
Quarter Unloaded  = .10  = .10  = .50  = .50
1
For  =
180
.10 175 5.00 175 5.00
2 = 1,526.52/8
168 175.5 = 190.82
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For = .50 173.18
 175 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 = 1,561.63/8
205 175.02 = 29.98
195.20 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
 Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 100(5/180)=2.78 175 100(5/180) =
2 168 175.5 100(7.5/168)= 177.50 100(9.50/168)=
3 159 174.75 100(15.75/159)= 172.75 13.75
4 175 173.18 100(1.82/175)= 165.88 9.12
5 190 173.36 100(16.64/190)= 170.44 19.56
6 205 175.02 100(29.98/205)= 180.22 24.78
7 180 178.02 100(1.98/180)= 192.61 12.61
8 182 178.22 100(3.78/182)= 186.30 4.30
 Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 100(5/180)=2.78 175 100(5/180) =
2 168 175.5 100(7.5/168)= 177.50 100(9.50/168)=
3 159 174.75 100(15.75/159)= 172.75 13.75
4 175 173.18 100(1.82/175)= 165.88 9.12
5 190 173.36 100(16.64/190)= 170.44 19.56
6 205 175.02 100(29.98/205)= 180.22 24.78
7 180 178.02 100(1.98/180)= 192.61 12.61
8 182 178.22 100(3.78/182)= 186.30 4.30
44.75% 54.05%
 Comparison of Forecast Error
n
∑100|deviationi|/actuali
Rounded Absolute Rounded Absolute
MAPE =Actual
i=1
Forecast Deviation Forecast Deviation
Tonnage with n for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1
For  =
180
.10 175 5.00 175 5.00
2 168 = 44.75/8
175.5 =7.50
5.59% 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For  =
175 .50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 = 54.05/8
175.02 =29.98
6.76% 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.24
 Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.20
MAPE 5.59% 6.76%
 Comparison of Forecast Error
If the smoothing constant is changed from  = .10 to  = .20 to the above

example, what are the MAD, MSE, and MAPE.

Thank you
 Class Activity
A magazine publisher is attempting to forecast future subscriptions to the one
of weekly magazine. The numbers of subscriptions for the past 3 weeks
were:

Required:

A.Compute a three-week moving average forecast for the number of subscriptions in

Week 4.

B.Compute a weighted three-week moving average forecast for the number of

subscriptions in Week 4 assuming weights of 0.75, 0.20, and 0.05. Assign the
weights to the logical week

Sunday subscriptions
week
(000)
1 452
2 396
3 402
Class Activity – Cont’d

C.Compute the forecast for Week 4 using exponential smoothing assuming

that a = 0.2 and by using the average of Weeks 1 and 2 as the forecast for
Week 3.

D.What changes would you notice in the variability of forecast numbers in

changing from a three-week moving average to a six-week moving
average? Which type of moving average forecast responds more quickly to
large swings in demand?

Sunday subscriptions
week
(000)
1 452
2 396
3 402
Class Activity – Cont’d

Month Sales Forecast

Jan 195 200
Feb 200 210
Mar 205 200
Apr 200 205

Compute the errors using MAD, MSE and MAPE for the
above forecast?