Demand Forecasting

Oxford University Press 2007. All rights reserved.

Reasons for demand forecasting

To maximize gains from events external to the organization (from the external environment)

To maximize gains from events, which are the results of actions taken by the organization

To minimize losses associated with uncontrollable events external to the organization

To develop policies that apply to people who are not part of the organization

Reasons for Demand Forecasting

To offset the actions of competitor organizations

To develop administrative plans and policy internal to an organization (e.g. personnel or budget) In order to perform adequate staffing to support production requirements In decision making for Facility Capacity Planning and for Capital Budgeting

As an input to Aggregate Production Planning and / or Material Requirements Planning (MRP)

Oxford University Press 2007. All rights reserved.

Methods of demand forecasting

Demand Forecasting

Qualitative Analysis

Quantitative Analysis

Customer Survey

Sales Force Composite

Time Series Analysis

Causal Analysis

Executive Opinion

Delphi Method

Simple Moving Average

Simple Exponential Smoothing

Trend Analysis

Past Analogy

Holts Double Exponential Smoothing

Winterss Triple Exponential Smoothing Forecast by Linear Regression Analysis

Oxford University Press 2007. All rights reserved.

Actual Demand

Actual Demand

Time
No growth or decline trend; no seasonal variation simple (or weighted) moving average; simple exponential smoothing No growth or decline trend; seasonal variation present simple moving average

Time

Actual Demand

Actual Demand

Time
Linear growth (or decline) trend; no seasonal variation Holts double exponential smoothing

Time
Linear growth (or decline) trend; seasonal variation present Winterss triple exponential smoothing; linear regression analysis

Different Types of Demand Patterns and Oxford University Press 2007. All rights reserved. Suitable Time Series Forecasting Methods

Forecasting by Linear Regression Analysis

Best fit line is extrapolated to find the forecast for the future Forecast

Actual Demand / Forecast

Best fit line with slope b y = a + b. x (Least squares method) using the past demand data

y intercept = a 0 Time

Scatter Diagram and Best Fit Line (Forecasting by Linear Regression Analysis)

Oxford University Press 2007. All rights reserved.

Measurement of Forecasting Errors

Running Sum of Forecast Errors (RSFE) Mean Forecast Error (MFE) Mean Absolute Deviation (MAD) Mean Squared Error (MSE) Mean Absolute Percentage Error (MAPE) Tracking Signal (TS)
Oxford University Press 2007. All rights reserved.
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Forecast Control Limits

Forecast Error 0 + 3. s Upper Control Limit (UCL)

Targeted or Aimed-at Mean Forecast Error = 0 0 - 3. s

Central Line (CL) Time Lower Control Limit (LCL)

Forecast Control Limits

Oxford University Press 2007. All rights reserved.