Supply Chain Mapping/Decisions

Rohit Kapoor
Demand Forecasting

Rohit Kapoor
 Framework
Forecasting models
Judgement

Old realizations of
demand: y1, …, yt

Old realizations of
variables: x1, …, xt Forecasting Forecast for: yt+1
Process

Subjective opinions
about the future
Analytical Methods for Forecasting
• Static Methods
• Adaptive Methods
• Casual Methods
 Static Methods
• Case 1: Forecasting the trend form
• Case 2: Forecasting seasonality
• Case 3: Forecasting combination of seasonality
and trend
Case 1: Forecasting the Trend Form
• A constant increase or decrease in demand
denotes
– Linear trend
– Model
• Forecast (t) = a + b * t
 Case 1: Forecasting the Trend Form
t D(t)
1 328 D(t)
2 310
600
3 355
500
4 362
400
5 375
Demand

300 D(t)
6 380
200
7 408
100
8 415
0
9 417 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
10 412 Period

11 429
12 434
13 449
14 471
15 475
16 489
 Case 1: Forecasting the Trend Form …
Calculations
t D(t) t-Tavg D(t) - Davg (t-Tavg) * (D(t)-Davg) (t-tavg)^2 Forecast Abs error
1 328 -7.5 -78.81 591.09 56.25 326.40 1.60
2 310 -6.5 -96.81 629.28 42.25 337.12 27.12
3 355 -5.5 -51.81 284.97 30.25 347.84 7.16
4 362 -4.5 -44.81 201.66 20.25 358.56 3.44
5 375 -3.5 -31.81 111.34 12.25 369.29 5.71
6 380 -2.5 -26.81 67.03 6.25 380.01 0.01
7 408 -1.5 1.19 -1.78 2.25 390.73 17.27
8 415 -0.5 8.19 -4.09 0.25 401.45 13.55
9 417 0.5 10.19 5.09 0.25 412.17 4.83
10 412 1.5 5.19 7.78 2.25 422.90 10.90
11 429 2.5 22.19 55.47 6.25 433.62 4.62
12 434 3.5 27.19 95.16 12.25 444.34 10.34
13 449 4.5 42.19 189.84 20.25 455.06 6.06
14 471 5.5 64.19 353.03 30.25 465.78 5.22
15 475 6.5 68.19 443.22 42.25 476.51 1.51
16 489 7.5 82.19 616.41 56.25 487.23 1.77
Mean 8.5 406.8125 7.57
Sum 3645.50 340.00
b 10.72206
a 315.675
 Estimating Forecasting Error

• Four ways:
– Mean error (ME)
• Value close to 0
– Magnitude of the error?
– Mean absolute deviation (MAD)
– Mean square error (MSE)
– Mean absolute percentage error (MAPE)
Different Estimates of Forecast Error
Absolute Square Absolute
Month Sales Forecast Error Deviation Error % Error
1 328 326 2 2 4 0.61%
2 310 337 -27 27 729 8.71%
3 355 348 7 7 49 1.97%
4 362 359 3 3 9 0.83%
5 375 369 6 6 36 1.60%
6 380 380 0 0 0 0.00%
7 408 391 17 17 289 4.17%
8 415 401 14 14 196 3.37%
9 417 412 5 5 25 1.20%
10 412 423 -11 11 121 2.67%
11 429 434 -5 5 25 1.17%
12 434 444 -10 10 100 2.30%
13 449 455 -6 6 36 1.34%
14 471 466 5 5 25 1.06%
15 475 476 -1 1 1 0.21%
16 489 487 2 2 4 0.41%
Mean     0.0625 7.5625 103.0625 1.98%
      ME MAD MSE MAPE
 Case 2: Forecasting Seasonality
Period Demand Data

within
Time Block block Demand 700

1 1 6

Demand
600

2 2 55 500
1
3 3 249 400

4 4 646 300
Demand

5 1 24 200

6 2 73
2 100
7 3 140 0
8 4 569 1 2 3 4 5 6 7 8 9 10 11 12

9 1 12 Period

10 2 28
3
11 3 136
12 4 631
 Case 2: Forecasting Seasonality …Some
Equations
• Seasonality index of period i for block j
– S(i, j) = (di)/[(d1 + d2 + … + dp)/p]
• For each period i within block j
• Average seasonality index for period i within a
block
– S(i)
Case 2: Forecasting Seasonality … Analysis

Period Seasonal
within Index of
Time Block block Demand Average Period
1 1 6 0.03
2 2 55 0.23
1 239
3 3 249 1.04
4 4 646 2.70
5 1 24 0.12
6 2 73 0.36
2 201.5
7 3 140 0.69
8 4 569 2.82
9 1 12 0.06
10 2 28 0.14
3 201.75
11 3 136 0.67
12 4 631 3.13
Case 2: Forecasting Seasonality …Seasonality
Index Calculation

Average
Seasonality
Period/Block S(i, 1) S(i, 2) S(i, 3) Index
1 0.03 0.12 0.06 0.07
2 0.23 0.36 0.14 0.24
3 1.04 0.69 0.67 0.80
4 2.70 2.82 3.13 2.88
 Case 2: Forecasting Seasonality … De-
seasonalizing Demand
• De-seasonalized demand data (t)
– Demand(t)/S(t)
• Forecast (t)
– [Level (t)] * Seasonal index (t)
 Case 2: Forecasting Seasonality …
Calculations

Period Seasonal De-

within Index of Seasonlized
Time Block block Demand Average Period Demand Forecast Abs Error
1 1 6 0.03 88 14 8
2 2 55 0.23 226 52 3
1 239
3 3 249 1.04 310 171 78
4 4 646 2.70 224 613 33
5 1 24 0.12 353 14 10
6 2 73 0.36 300 52 21
2 201.5
7 3 140 0.69 174 171 31
8 4 569 2.82 197 613 44
9 1 12 0.06 177 14 2
10 2 28 0.14 115 52 24
3 201.75
11 3 136 0.67 169 171 35
12 4 631 3.13 219 613 18
Mean 213 26
 Case 3: Forecasting Combination of
Seasonality and Trend
Quarter Sales
1 45 Sales
2 335
3 520 1400
4 100 1200
5 70 1000
6 370 800
Demand

7 590 Sales
600
8 170 400
9 100
200
10 585
0
11 830 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
12 285 Quarter
13 100
14 725
15 1160
16 310
 Case 3: Forecasting Combination of
Seasonality and Trend
• Methodology
– Forecasting model
• Demand (t) = (Level (t) + Trend parameter * t) * Seasonality
parameter (t) + random error
– Step 1: Determine the seasonality index for each time
period within a block (similar to Case 2)
– Step 2: De-seasonalize the demand data (similar to Case 2)
– Step 3: Determine the trend and level components for the
de-seasonalized data series (similar to Case 1)
– Step 4: Finalize the forecasting model
Case 3: Forecasting Combination of
Seasonality and Trend … Analysis

Period
within Average Seasonality
Time Block Block Demand Demand Index
1 1 45 0.18
2 2 335 1.34
1 250
3 3 520 2.08
4 4 100 0.40
5 1 70 0.23
6 2 370 1.23
2 300
7 3 590 1.97
8 4 170 0.57
9 1 100 0.22
10 2 585 1.30
3 450
11 3 830 1.84
12 4 285 0.63
13 1 100 0.17
14 2 725 1.26
4 573.75
15 3 1160 2.02
16 4 310 0.54
Case 3: Forecasting Combination of
Seasonality and Trend … Analysis

Average
Seasonality
Period/Block 1 2 3 4 Index
1 0.18 0.23 0.22 0.17 0.20
2 1.34 1.23 1.30 1.26 1.28
3 2.08 1.97 1.84 2.02 1.98
4 0.40 0.57 0.63 0.54 0.54
 Case 3: Forecasting Combination of
Seasonality and Trend … Analysis

De-
seasonlized
Time Demand t-Tavg D(t) - Davg (t-Tavg) * (D(t) - Davg) (t-tavg)^2
1 222 -7.5 -172 1290.14 56.25
2 261 -6.5 -133 867.28 42.25
3 263 -5.5 -131 722.82 30.25
4 187 -4.5 -207 933.27 20.25
5 346 -3.5 -49 169.89 12.25
6 288 -2.5 -106 265.44 6.25
7 298 -1.5 -96 144.05 2.25
8 318 -0.5 -77 38.29 0.25
9 494 0.5 100 49.82 0.25
10 456 1.5 61 91.86 2.25
11 420 2.5 25 63.21 6.25
12 533 3.5 138 484.23 12.25
13 494 4.5 100 448.37 20.25
14 565 5.5 170 936.40 30.25
15 586 6.5 192 1248.66 42.25
16 579 7.5 185 1388.05 56.25
Mean 8.5 394.28
Sum b 27 9141.77 340
a 165.74
 Case 3: Forecasting Combination of
Seasonality and Trend … Analysis

• Step 1, 2 and 3 are complete

• Step 4:
Forecast(t) = (165.74 + 27 * t) * Seasonality Index(t)
 Case 3: Forecasting Combination of
Seasonality and Trend … Analysis
Period De-
within Seasonality seasonlized
Time Block Block Demand Average Demand Index Demand Forecast Abs Error
1 1 45 0.18 222 39 6
2 2 335 1.34 261 282 53
1 250
3 3 520 2.08 263 487 33
4 4 100 0.40 187 146 46
5 1 70 0.23 346 61 9
6 2 370 1.23 288 420 50
2 300
7 3 590 1.97 298 700 110
8 4 170 0.57 318 204 34
9 1 100 0.22 494 83 17
10 2 585 1.30 456 558 27
3 450
11 3 830 1.84 420 913 83
12 4 285 0.63 533 261 24
13 1 100 0.17 494 104 4
14 2 725 1.26 565 696 29
4 573.75
15 3 1160 2.02 586 1126 34
16 4 310 0.54 579 319 9
 Case 3: Forecasting Combination of
Seasonality and Trend … Fit

Forecasted Demand Vs. Actual Demand

1400
1200
1000
800 Demand
Demand

600 Forecast
400
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Period
 Adaptive Methods
• Moving Average
• Simple Exponential Smoothening
• Holt’s Method
• Winter’s Method
 Basic Data
Month TV Sales CD Sales AC Sales
1 30 40 13
2 32 47 7
3 30 50 23
4 39 49 32
5 33 56 58
6 34 53 60
7 34 55 90
8 38 63 93
9 36 68 63
10 39 65 39
11 30 72 37
12 36 69 29
13 38 79 36
14 30 82 21
15 35 80 47
16 30 85 81
17 34 94 112
18 40 89 139
19 36 96 230
20 32 100 201
21 40 100 122
22 36 105 84
23 40 108 74
24 34 110 62
 TV Sales
TV Sales

45
40
35
30
T V Sales

25
TV Sales
20
15
10
5
0
1
3
5
7
9

13

19
11

15
17

21
23
Month
 CD Sales
CD Sales

120

100

80
CD Sales

60 CD Sales

40

20

0
10

16

22
13

19
1

Month
 AC Sales
AC Sales

250
AC Sales

200

150
AC Sales
100

50

0
1 3 5 7 9 11 13 15 17 19 21 23

Month
 Moving Average Method
• Time series that fluctuates about a constant
base level
• ft,1
Forecast for period t + 1made after observing xt
ft,1= Average of last N observations
 Moving Average Method Calculations
Month TV Sales MAF (N = 2) Error MAF (N = 3) Error MAF (N = 4) Error MAF (N = 5) Error MAF (N = 6) Error
1 30
2 32
3 30 31 1
4 39 31 8 30.67 8.33
5 33 34.5 1.5 33.67 0.67 32.75 0.25
6 34 36 2 34.00 0.00 33.50 0.50 32.80 1.20
7 34 33.5 0.5 35.33 1.33 34.00 0.00 33.60 0.40 33.00 1.00
8 38 34 4 33.67 4.33 35.00 3.00 34.00 4.00 33.67 4.33
9 36 36 0 35.33 0.67 34.75 1.25 35.60 0.40 34.67 1.33
10 39 37 2 36.00 3.00 35.50 3.50 35.00 4.00 35.67 3.33
11 30 37.5 7.5 37.67 7.67 36.75 6.75 36.20 6.20 35.67 5.67
12 36 34.5 1.5 35.00 1.00 35.75 0.25 35.40 0.60 35.17 0.83
13 38 33 5 35.00 3.00 35.25 2.75 35.80 2.20 35.50 2.50
14 30 37 7 34.67 4.67 35.75 5.75 35.80 5.80 36.17 6.17
15 35 34 1 34.67 0.33 33.50 1.50 34.60 0.40 34.83 0.17
16 30 32.5 2.5 34.33 4.33 34.75 4.75 33.80 3.80 34.67 4.67
17 34 32.5 1.5 31.67 2.33 33.25 0.75 33.80 0.20 33.17 0.83
18 40 32 8 33.00 7.00 32.25 7.75 33.40 6.60 33.83 6.17
19 36 37 1 34.67 1.33 34.75 1.25 33.80 2.20 34.50 1.50
20 32 38 6 36.67 4.67 35.00 3.00 35.00 3.00 34.17 2.17
21 40 34 6 36.00 4.00 35.50 4.50 34.40 5.60 34.50 5.50
22 36 36 0 36.00 0.00 37.00 1.00 36.40 0.40 35.33 0.67
23 40 38 2 36.00 4.00 36.00 4.00 36.80 3.20 36.33 3.67
24 34 38 4 38.67 4.67 37.00 3.00 36.80 2.80 37.33 3.33
Moving Average Method

N MAD
2 3.27
3 3.21
4 2.78
5 2.79
6 3.08
 Simple Exponential Smoothing
• A time series that fluctuates about a base level
• At = αxt + (1 – α) At-1
• A0 = 32
• α = 0.1
 Simple Exponential Smoothing
Calculations
Month TV Sa le s Fore ca st At et
1 30 32 31.8 2.00
2 32 31.8 31.82 0.20
3 30 31.82 31.64 1.82
4 39 31.64 32.37 7.36
5 33 32.37 32.44 0.63
6 34 32.44 32.59 1.56
7 34 32.59 32.73 1.41
8 38 32.73 33.26 5.27
9 36 33.26 33.53 2.74
10 39 33.53 34.08 5.47
11 30 34.08 33.67 4.08
12 36 33.67 33.91 2.33
13 38 33.91 34.32 4.09
14 30 34.32 33.88 4.32
15 35 33.88 34.00 1.12
16 30 34.00 33.60 4.00
17 34 33.60 33.64 0.40
18 40 33.64 34.27 6.36
19 36 34.27 34.45 1.73
20 32 34.45 34.20 2.45
21 40 34.20 34.78 5.80
22 36 34.78 34.90 1.22
23 40 34.90 35.41 5.10
24 34 35.41 35.27 1.41
Simple Exponential Smoothing

Alpha MAD
0.05 3.20
0.1 3.04
0.15 2.94
0.2 2.89
0.25 2.88
0.3 2.90
0.35 2.94
0.4 2.98
0.45 3.05
0.5 3.14