FORECASTING

IE 505 PRODUCTION PLANNING AND CONTROL

Forecasting

1. Introduction

 For production, we need forecasts for demands

 Forecasting techniques - predict the future
Characteristics of Forecasts
 Usually wrong

 More than a number (, )

 Aggregate forecasts are more accurate
 Longer the horizon, less accurate the forecast
 Forecasts shouldn't be used to the exclusion of known information

c Rakesh Nagi

University at Bualo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Forecasting

Approaches to Forecasting
 Subjective Methods - human judgment

{ Sales force Composites

{ Customer Surveys
{ Expert Opinion
{ Delphi

 Objective Methods - analysis of data

{ Causal Methods - Econometrics

Y = f (X1; X2; : : : ; Xn)

Xi is a variable related to Y

(1)

{ Time Series Methods

c Rakesh Nagi

University at Bualo - IE

27

IE 505 PRODUCTION PLANNING AND CONTROL

Forecasting

Time Series (TS) Methods

1. Trend

2. Seasonality

3. Cycles - length may vary

4. Random
c Rakesh Nagi

University at Bualo - IE

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IE 505 PRODUCTION PLANNING AND CONTROL

Forecasting

Notation
Di : Demand during period i

Ft;t+ : Forecast made in period t for period t + 

Simplication - one period forecast
Ft 1;t = Ft

Basic idea of TS
Ft;t+ =

c Rakesh Nagi

1
X
n=0

anDt

for some weights of a0 ; a1; a2 ; : : :

University at Bualo - IE

(2)

29

2. EVALUATING FORECASTS

IE 505 PRODUCTION PLANNING AND CONTROL

2. Evaluating Forecasts

et = error in period t
= Ft ;t Dt
= Ft Dt(onestep)

 MAD: Mean Absolute Deviation

 MSE: Mean Squared Error
MSE =

MAD =

n
X

n i=1

n
X

j
eij
n i=1

ei2 :   1.25 MAD for N(.,.)

 MAPE: Mean Absolute Percentage

Error
1
0
n
1
MAP E = B@ X jei=DijCA  100
n i=1

(3)
(4)
(5)

Desirable properties of forecasts - Simplicity

- Accuracy: a. Unbiasedness, E (ei) = 0, b. low variance
c Rakesh Nagi

University at Bualo - IE

31

3. METHODS OF FORECASTING STATIONARY SERIES

IE 505 PRODUCTION PLANNING AND CONTROL

3. Methods of Forecasting Stationary Series

Stationary ! no trend; no seasonality; no cycles

Dt =  + t

c Rakesh Nagi

University at Bualo - IE

(6)

33

IE 505 PRODUCTION PLANNING AND CONTROL

3. Methods of Forecasting Stationary Series

1. MA: Moving Averages ( MA(N) - over N periods )

1 tX1
Ft =
Di

n i=t

(7)

Drawbacks:  N?  keep last N observations  lags trend

c Rakesh Nagi

University at Bualo - IE

34

IE 505 PRODUCTION PLANNING AND CONTROL

3. Methods of Forecasting Stationary Series

2. ES: Exponential Smoothing, ES()

 is a smoothing constant, 0 <   1

Weighted average of last forecast and current demand

Ft = Dt 1 + (1 )Ft
= Ft 1 et 1

for one step

Ft

= Dt
Ft = Dt
1

+ (1
1 + (1
2

)Ft 2
)Dt 2 + (1 )2Ft

 Declining set of weights for older periods

  near 1 ! less weight on old (spiky)
  small ! more weight on old (stable)

Drawbacks:  Start-up? - MA  lags trend

c Rakesh Nagi

University at Bualo - IE

35

IE 505 PRODUCTION PLANNING AND CONTROL

3. Methods of Forecasting Stationary Series

Suggested Reading: Similarities and dierences between MA and ES

c Rakesh Nagi

University at Bualo - IE

36

4. TREND BASED METHODS

IE 505 PRODUCTION PLANNING AND CONTROL

4. Trend Based Methods

Specically account for trend; no seasonality; no cycles

Dt = t + t; where t = u1t + u2

c Rakesh Nagi

University at Bualo - IE

(8)
38

IE 505 PRODUCTION PLANNING AND CONTROL

1. RA: Regression Analysis

(xi; yi) - n points

4. Trend Based Methods

Y^ = a + bX

(9)

X : time; Y^ : estimate of demand

n

where

g(a; b) = X (yi (a + bxi))2

i=1
@g
@g
= 0;
=0
@a
@b
b(n + 1)
Sxy

b = ;a = D
Sxx
2
n(n + 1)

n
X

Sxy = n iDi
i=1
2
n2(n + 1)(2n + 1)
Sxx =
D =
c Rakesh Nagi

n
X

n i=1

Di

University at Bualo - IE

(10)
(11)
(12)

n
X

Di
i=1
n2(n + 1)2
4

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IE 505 PRODUCTION PLANNING AND CONTROL

4. Trend Based Methods

2. DES: Double Exponential Smoothing

Extension of ES: two smoothing constants, , 

St = Dt + (1 )(St 1 + Gt 1) \intercept"
Gt =  (St St 1) + (1  )Gt 1 \slope"

new slope
old slope
Ft = St + Gt (one step)
Ft;t+ = St + Gt ( step)

 Usually,   

c Rakesh Nagi

University at Bualo - IE

40

METHODS FOR SEASONAL SERIES

IE 505 PRODUCTION PLANNING AND CONTROL

Methods for Seasonal Series

Pattern repeats every N periods

Representation of Seasonality Set of multipliers, ct, for 1  t  N , such

that:
P
ct = N

c Rakesh Nagi

University at Bualo - IE

42

IE 505 PRODUCTION PLANNING AND CONTROL

Methods for Seasonal Series

Method for Computing Seasonal Factors

 Compute sample mean, 

 Divide each observation by 
 Average the factors for like periods

c Rakesh Nagi

University at Bualo - IE

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