Professional Documents
Culture Documents
Forecasting Techniques
Prepared By:
Ashraf S. Youssef; Ph. D.
Quality Assurance & Communications Manager
Electronic & Electrical Industries Corp
Training Approach
• Focus on Basics
• Interactive
• Exercises
• Case Studies
• Role Plays
• Have Fun !
Learning Objectives
• Learn about Forecasting
Techniques and how can you link
it with SAP.
• Become Familiar with Different
Techniques.
Techniques
• Design Your Own Model.
• Realize the Benefits of
Forecasting techniques at Your
Organization
1
April 11
Agenda
Demand Sales
and order Customer
forecasting
entry
Materials Shop-floor
p Shipping
pp g
Aggregate requirement scheduling Production and
planning planning and control receiving
Inventory
management Inventory Vendors
2
April 11
Production Objectives
High
Profitability
Low High
Costs Sales
Performance Measures
Throughput
WIP
Cycle time
Service quality (OTD)
Profit
3
April 11
Forecasting
Aggregate Planning
• Objective: generate a long-term production plan that
establishes a rough product mix, anticipates bottlenecks,
and is consistent with capacity and workforce plans.
• Issues:
– Aggregation: product families and time periods must be
set appropriately for the environment.
– Coordination: AP is the link between the high level
functions of forecasting/capacity planning and
intermediate level functions of MRP, inventory control,
and scheduling.
– Anticipating Execution: AP is virtually always done
deterministically, while production is carried out in a
stochastic environment.
Demand Management
• Objective: establish an interface between the customer
and the plant floor, that supports both competitive
customer service and workable production schedules.
• Issues:
– Customer Lead Times: shorter is more competitive.
– Customer Service: on-time delivery.
– Batching: grouping like product families can reduce
lost capacity due to setups.
– Interface with Scheduling: customer due dates are
an enormously important control in the overall
scheduling process.
4
April 11
Definitions
• Parts: a component, sub-assembly, or an assembly that
moves through the workstations.
• End Items: parts sold directly to customers; relationship to
constituent parts defined in bill of material.
• Work in Process (WIP): inventory between the start and
endpoints of a product routing.
• Raw Material Inventory (RMI): material stocked at beginning of
routing.
• Crib and Finished Goods Inventory (FGI): crib inventory is
material held in a stock point at the end of a routing; FGI is
material held in inventory prior to shipping to the customer.
• Order: request from customer.
• Job: transfer quantity on the line.
Forecasting
xt
5
April 11
Inventory
Inventory Vendors
management
Forecasting
Forecasting “Laws”
1) Forecasts are always wrong!
2) Forecasts always change!
3) The further into the future, the less reliable the
forecast!
40%
Trumpet
p of Doom
20%
+10%
-10%
Start of
season
16 weeks
26 weeks
6
April 11
Why Forecasting?
Qualitative Forecasting
1. Delphi Technique: Iteratively tapping multiple
experts opinion with continuous comparisons and
revisions.
Quantitative Forecasting
• Goals:
–Predict future from past
–Smooth out “noise”
–Standardize forecasting procedure
• Methodologies:
–Causal
Causal Forecasting:
• regression analysis
–Time Series Forecasting:
• Moving average
• Weighted Moving Average
• Exponential smoothing
• Double Exponential smoothing
• Seasonal models
7
April 11
Forecast
Generation
Forecast Current
Forecast
Control Observation
Managerial
Judgment and
Experience
Modified Forecast
t
T T+τ
Assumptions: •
Noo ttrend,
e d, o
only
y random
a do noise
o se
Noise is normally distributed t
Noise is independent
Noise has a constant variance (doesn’t change with
time)
Noise averages out to zero
8
April 11
V (M T ) = σ ,
2
1 T 1
M T
= ∑ ,
N t =T − N +x1 t N xˆ T +τ
(T ) = M T ± 2 1 +
N
σ
1 20
2 22
21.67
3 23
21 67
21.67 21 67
21.67 -1.67
1 67 1 67
1.67
4 20
20.33 21.67 -3.67 3.67
5 18
20.00 20.33 1.67 1.67
6 22
20.67 20.00 2.00 2.00
7 22
22.33 20.67 2.33 2.33
8 23
21.67 22.33 -2.33 2.33
9 20
22.33 21.67 2.33 2.33
10 24
2.29
9
April 11
20 21.67
1
22 21.83 21.67
2
23 22.42 21.83 1.17 1.17
3
20 21 21
21.21 22 42
22.42 -2.42
2 42 2 42
2.42
4
18 19.60 21.21 -3.21 3.21
5
22 20.80 19.60 2.40 2.40
6
22 21.40 20.80 1.20 1.20
7
23 22.20 21.40 1.60 1.60
8
20 21.10 22.20 -2.20 2.20
9
24 22.55 21.10 2.90 2.90
10
2.14
xt
• Model:
xt = a + bt + εt, εt NID(0, σ2)
• Assumptions:
Linear trend
Noise is normally distributed
Noise is independent t
T T T
N ∑t x x
− ∑ x ∑t x
bˆ = t =T − N +1
T
t =T − N +1 t =T − N +1
T
, aˆ = x − bˆt
∑t ∑t )
2
N 2
−(
t =T − N +1 t =T − N +1
1 (T + τ − t )2
xˆ T +τ
(T ) = aˆ + bˆ(T + τ ) ± 2 1 + + σ
N S tt
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April 11
1 T
( N − 1)
= ∑M , E[ M T ] = E[ xT ] − ( N − 1)b = E[ M T ] −
[ 2] [ 2]
M T
N t =T − N +1
t
2
b
2τ 2τ
(T ) = 2 M T − M T , (T ) = ( 2 + − (1 +
[ 2] [ 2]
xˆ T xˆ T +τ
N −1 M T
)
N −1 M T
) , ( point estimate )
2τ 2τ 1 (T + τ − t ) 2
(T ) = ( 2 + − (1 + ± 2 1+ + σ
[ 2]
xˆ T +τ
N −1 M T
)
N −1 M T
)
N S tt
ατ ατ [ 2 ]
(T ) = 2 S T − S T , (T ) = (2 + − (1 + ) S T , (point estimate )
[2]
xˆ
T xˆ T +τ
β ST
)
β
ατ ατ 1 (T + τ − t )2
(T ) = ( 2 + − (1 + ± 2 1+ + σ
[ 2]
xˆ T +τ
β ST
)
β ST
)
N S tt
Year
Month 1 2 3 4
Jan 816 870 842 898
Feb 817 890 896 869
Mar 686 795 737 787
Apr 594 664 694 749
May 596 625 732 777
June 526 634 618 756
Jul 540 610 653 642
Aug 602 617 658 673
Sept 665 708 682 840
Oct 747 738 789 914
Nov 756 674 703 935
Dec 868 870 875 1020
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April 11
60.00
50.00
40 00
40.00
30.00
20.00
10.00
0.00
1
Year I II III IV
1 0.6 2 1.4 2 1 .26 0 .71
2 0.6 2 1.3 8 1 .31 0 .70
Seasonal 3 0.6 4 1.2 6 1 .36 0 .75
Indices 4 0.6 2 1.4 9 1 .29 0 .60
5 0.6 6 1.3 4 1 .32 0 .68
A verag e 0.6 3 1.3 8 1 .31 0 .69
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April 11
Year I II III IV
Forecasted 6 3 4 .7 7 7 6 .0 5 7 2 .1 1 3 7 .9 5
Values
7 3 8 .0 9 8 3 .3 3 7 9 .0 0 4 1 .5 8
Booster
Pump Motor
13
April 11
Inventory
Inventory Vendors
management
Quantities and
Requires: Order Times
Assumptions
1. Known deterministic demands.
3. Infinite capacity.
14
April 11
MRP Procedure
g p
3. Time Phasing: planned orders backed out by
y lead time
Inputs
– IInventory
t Status:
St t (on
( hand
h d plus
l scheduled
h d l d receipts)
i t ) ffor
all items
Pump Motor
Period GR
1 10
2 15
3 12
4 16 Scheduled Order Receipts (SOR)
5 15
6 12
Period 1 2 3 4 5 6 7 8
7 18 Pump 12 14 0 0 0 0 0 0
8 14 Motor 8 2 2 0 0 0 0 0
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April 11
Time 1 2 3 4 5 6 7 8
GR 10 15 12 16 15 12 18 14
Pump SOR 12 14 0 0 0 0 0 0
BI 0 2 1 0 0 0 0 0
LT = 2 NR -2 -1 11 16 15 12 18 14
POR 0 0 11 16 15 12 18 14
EI 2 1 0 0 0 0 0 0
PORE 11 16 15 12 18 14 ? ?
T ime 1 2 3 4 5 6 7 8
GR 22 32 30 24 36 28 ? ?
SOR 8 2 2 0 0 0 0 0
Motor BI 14 0 0 0 0 0 0 0
NR 0 30 28 24 36 26 ? ?
LT = 1 POR 0 30 28 24 36 26 ? ?
EI 0 0 0 0 0 0 0 0
PORE 30 28 24 36 26 ? ? ?
MRP Results
16
April 11
MRP Results
• MRP is capacity-insensitive
– But, lead times do depend on loading when capacity is finite
– Incentive to inflate lead times
– Results
• increased congestion,
• increased WIP,
• decreased customer service
Inventory
management Inventory Vendors
17
April 11
Demand Management
• Basic Problem: establish an interface between the customer and the
plant floor, that supports both competitive customer service and
workable production schedules.
• Issues:
– Customer Lead Times: shorter is more competitive.
– Customer Service: on
on-time
time delivery.
– Batching: grouping like product families can reduce lost
capacity due to setups.
– Interface with Scheduling: customer due dates are an
enormously important control in the overall scheduling
process.
18
April 11
Customers,
Field demand
Sources: Regional Warehouses: centers
plants Warehouses: stocking sinks
vendors stocking points
ports points
Supply
Inventory &
warehousing
costs
Production/ Transportation
purchase costs Transportation
costs Inventory & costs
warehousing
costs
Inventory
• Where do we hold inventory?
– suppliers and manufacturers
– warehouses and distribution centers
– retailers
• Types of Inventory
– WIP and subassemblies
– raw materials
– Spare parts
– finished goods
• Why do we hold inventory? (Short answer)
– Economies of scale
– Uncertainty in supply and demand
19
April 11
• Economies of scale
• Uncertainty in supply and demand
• Speculation
• Transportation
• Smoothing production/purchasing
• Logistics
• Cost of controlling inventory
Decisions to Make
• We have to decide
– How often we review the inventory
– When we should issue a (replenishment/production) order
– How large the order should be
• Lead Time
• Review Time
– Continuous or periodic review
• Excess Demand
– Backordered or lost
• Changing inventory
20
April 11
Relevant Costs
Relevant Costs
Relevant Costs
Inv.
Avg. inv. level
Time, t
1 2
21
April 11
Relevant Costs
EOQ History
22
April 11
EOQ Model
• Time unit: one year
• Total Cost = setup cost + opportunity cost + Warehousing cost,
total cost is calculated per unit.
• Purchase Cost Constant
• Opportunity cost is always based on average quantity
• Warehousing cost may be based on average quantity for mixed
storage areas, or on maximum quantity for dedicated storage.
• Goal: Find the order quantity that minimizes total costs
• General Equation
P ITQavg
TC = + + WT , for dedicated
Q Q storage
P ( I + W )TQavg
TC = + , for mixed storage
Q Q
EOQ Model
Assumptions:
• No Stockouts
• Order when no inventory
• Order size determines
policy
Inventory
y
Qavg = Q/2
EOQ Model
160
140
120 Total Cost
100
Cost
80
Holding Cost
60
40 Order Cost
20
0
0 500 1000 1500
Optimal Order Order Quantity
Quantity, Q*
23
April 11
EOQ Model
P ITQavg
TC = + + WT , for dedicated
Q Q storage
P ( I + W )TQavg
TC = + , for mixed storage
Q Q
By differentiation:
2 PD
EOQ = Q * = for dedicated
( I + 2W ) storage
2 PD
EOQ = Q * = for mixed storage
(I + W )
EOQ Observations
2 PD
Q* = carrying cost (cc) = I + W or cc = I + 2W
cc
EOQ Trade-off
• Two interpretations:
– If you order more (larger Q), you incur higher
inventory cost, but less setup cost
– If you order less frequently, you incur larger
inventory cost,
cost but less setup cost
• The trade-off is not linear!
24
April 11
Moving F M S (R)
Item Class
A
B
C
25