CH 12

Chapter 12
Forecasting
Lecture Outline
Strategic Role of Forecasting in Supply Chain
Management
Components of Forecasting Demand
Time Series Methods
Forecast Accuracy
Time Series Forecasting Using Excel
Regression Methods
Copyright 2011 John Wiley & Sons, Inc.
12-2
Forecasting
Predicting the future
Qualitative forecast methods
subjective
Quantitative forecast methods

based on mathematical formulas
12-3
Supply Chain Management

Accurate forecasting determines inventory levels
in the supply chain
Continuous replenishment
supplier & customer share continuously updated data

typically managed by the supplier
reduces inventory for the company
speeds customer delivery
Variations of continuous replenishment
quick response
JIT (just-in-time)
VMI (vendor-managed inventory)
stockless inventory
12-4
The Effect of Inaccurate Forecasting
12-5
Forecasting
Quality Management
Accurately forecasting customer demand is a key to
providing good quality service
Strategic Planning
Successful strategic planning requires accurate
forecasts of future products and markets
12-6
Types of Forecasting Methods

Depend on
time frame
demand behavior
causes of behavior
12-7
Time Frame
Indicates how far into the future is forecast
Short- to mid-range forecast
typically encompasses the immediate future
daily up to two years
Long-range forecast
usually encompasses a period of time longer than
two years
12-8
Demand Behavior
Trend
a gradual, long-term up or down movement of demand
Random variations
movements in demand that do not follow a pattern
Cycle
an up-and-down repetitive movement in demand
Seasonal pattern
an up-and-down repetitive movement in demand
occurring periodically
12-9
Demand
Demand
Forms of Forecast Movement
Random
movement
Time
(b) Cycle
Demand
Demand
Time
(a) Trend
Time
(c) Seasonal pattern
Time
(d) Trend with seasonal pattern
12-10
Forecasting Methods
Time series
statistical techniques that use historical demand data to predict
future demand
Regression methods
attempt to develop a mathematical relationship between demand
and factors that cause its behavior
Qualitative
use management judgment, expertise, and opinion to predict
future demand
12-11
Qualitative Methods
Management, marketing, purchasing, and
engineering are sources for internal qualitative
forecasts
Delphi method
involves soliciting forecasts about technological
advances from experts
12-12
Forecasting Process
1. Identify the
purpose of forecast
2. Collect historical
data
3. Plot data and identify

patterns
6. Check forecast
accuracy with one or
more measures
5. Develop/compute
forecast for period of
historical data
4. Select a forecast
model that seems
appropriate for data
7.
Is accuracy of
forecast
acceptable?
No
8b. Select new

forecast model or
adjust parameters of
existing model
Yes
8a. Forecast over
planning horizon
9. Adjust forecast based

on additional qualitative
information and insight
10. Monitor results

and measure forecast
accuracy
12-13
Time Series
Assume that what has occurred in the past will continue
to occur in the future
Relate the forecast to only one factor time
Include
moving average
exponential smoothing
linear trend line
12-14
Moving Average
Naive forecast
demand in current period is used as next periods
forecast
Simple moving average

uses average demand for a fixed sequence of periods
stable demand with no pronounced behavioral
patterns
Weighted moving average

weights are assigned to most recent data
12-15
Naive forecasts
We sold 250 wheels last
week.... Now, next week we
should sell.
250 wheels
F(t+1) = At
At : Actual demand in period t
F(t+1) : Forecast of demand for period t+1
Moving Average: Nave Approach

MONTH
ORDERS
PER MONTH
Jan
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
Aug
130
Sept
110
Oct
90
Nov
FORECAST
120
90
100
75
110
50
75
130
110
90
12-17
Simple Moving Average

n
i = 1 Di
MAn =
where
n
Di
= number of periods in
the moving average
= demand in period i
12-18
3-month Simple Moving Average

MONTH
ORDERS
PER MONTH
Jan
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
Aug
130
Sept
110
Oct
Nov
90
-
MOVING
AVERAGE
103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0
i=1
MA3 =
Di
3
=
90 + 110 + 130
3
= 110 orders for Nov
12-19
5-month Simple Moving Average

ORDERS
MONTH
PER MONTH
Jan
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
Aug
130
Sept
110
Oct
Nov
90
-
MOVING
AVERAGE
99.0
85.0
82.0
88.0
95.0
91.0
i=1
MA5 =
=
Di
90 + 110 + 130+75+50
5
= 91 orders for Nov
12-20
Smoothing Effects
150
125
5-month
Orders
100
75
50
3-month
25
Actual
0
|
Jan
|
Feb
|
Mar
|
Apr
|
May
|
|
June July
|
|
Aug Sept
|
Oct
|
Nov
Month
12-21
Weighted Moving Average

Adjusts moving average method to more closely
reflect data fluctuations
WMAn =
Wi Di
i=1
where
Wi = the weight for period i,

between 0 and 100
percent
W = 1.00
i
12-22
Weighted Moving Average Example

MONTH
August
September
October
November Forecast
WEIGHT
DATA
17%
33%
50%
130
110
90
WMA3 = i
= 1 Wi Di
= (0.50)(90) + (0.33)(110) + (0.17)(130)

= 103.4 orders
12-23
Exponential Smoothing
Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
12-24
Ft +1 = Dt + (1 - )Ft
where:
Ft +1 = forecast for next period
Dt =
actual demand for present period
Ft = previously determined forecast for

present period
= weighting factor, smoothing constant
12-25
Effect of Smoothing Constant

0.0 1.0
If = 0.20, then Ft +1 = 0.20Dt + 0.80 Ft
If = 0, then Ft +1 = 0Dt + 1 Ft = Ft
Forecast does not reflect recent data
If = 1, then Ft +1 = 1Dt + 0 Ft =Dt

Forecast based only on most recent data
12-26
Exponential Smoothing (=0.30)

PERIOD
MONTH
DEMAND
F2 = D1 + (1 - )F1
1
Jan
37
Feb
40
Mar
41
Apr
37
May
45
Jun
50
Jul
43
Aug
47
Sep
56
10
Oct
52
11
Nov
55
12
Dec
54
= (0.30)(37) + (0.70)(37)
= 37
F3 = D2 + (1 - )F2
= (0.30)(40) + (0.70)(37)
= 37.9
F13 = D12 + (1 - )F12
= (0.30)(54) + (0.70)(50.84)
= 51.79
12-27
PERIOD
MONTH
DEMAND
1
2
3
4
5
6
7
8
9
10
11
12
13
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
37
40
41
37
45
50
43
47
56
52
55
54
FORECAST, Ft + 1
( = 0.3)
( = 0.5)
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
51.79
37.00
38.50
39.75
38.37
41.68
45.84
44.42
45.71
50.85
51.42
53.21
53.61
12-28
70
60
= 0.50
Actual
50
Orders
40
30
= 0.30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
11
|
12
|
13
Month
12-29
Adjusted Exponential Smoothing

AFt +1 = Ft +1 + Tt +1
where
T = an exponentially smoothed trend factor
Tt +1 = (Ft +1 - Ft) + (1 - ) Tt
where
Tt = the last period trend factor
= a smoothing constant for trend
0
12-30
Adjusted Exponential Smoothing (=0.30)

PERIOD
MONTH
DEMAND
Jan
37
Feb
40
Mar
41
Apr
37
May
45
Jun
50
Jul
43
Aug
47
Sep
56
10
Oct
52
11
Nov
55
12
Dec
54
T3
= (F3 - F2) + (1 - ) T2
= (0.30)(38.5 - 37.0) + (0.70)(0)
= 0.45
AF3 = F3 + T3 = 38.5 + 0.45

= 38.95
T13
= (F13 - F12) + (1 - ) T12

= (0.30)(53.61 - 53.21) + (0.70)
(1.77)
= 1.36
AF13 = F13 + T13 = 53.61 + 1.36 = 54.97
12-31

PERIOD
MONTH
DEMAND
FORECAST
Ft +1
1
2
3
4
5
6
7
8
9
10
11
12
13
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
38.50
39.75
38.37
38.37
45.84
44.42
45.71
50.85
51.42
53.21
53.61
TREND
Tt +1
ADJUSTED
FORECAST AFt +1
0.00
0.45
0.69
0.07
0.07
1.97
0.95
1.05
2.28
1.76
1.77
1.36
37.00
38.95
40.44
38.44
38.44
47.82
45.37
46.76
58.13
53.19
54.98
54.96
12-32

Forecasts
70
Adjusted forecast ( = 0.30)
60
Actual
50
Demand
40
30
Forecast ( = 0.50)
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
12-33
Linear Trend Line

y = a + bx
where
a = intercept
b = slope of the line
x = time period
y = forecast for
demand for period x
xy - nxy
b = x2 - nx2
a = y-bx
where
n = number of periods
x
x = n = mean of the x values
y
y = n = mean of the y values
12-34
Least Squares Example

x(PERIOD)
y(DEMAND)
xy
x2
1
2
3
4
5
6
7
8
9
10
11
12
73
40
41
37
45
50
43
47
56
52
55
54
37
80
123
148
225
300
301
376
504
520
605
648
1
4
9
16
25
36
49
64
81
100
121
144
78
557
3867
650
12-35
Least Squares Example

x = 78 = 6.5
12
y = 557 = 46.42
12
b = xy - nxy = 3867 - (12)(6.5)(46.42) =1.72
x2 - nx2
650 - 12(6.5)2
a = y - bx
= 46.42 - (1.72)(6.5) = 35.2
12-36
Linear trend line y = 35.2 + 1.72x

Forecast for period 13 y = 35.2 + 1.72(13) = 57.56 units
70
60
Actual
Demand
50
40
30
Linear trend line
20
10
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
12-37
Seasonal Adjustments
Repetitive increase and decrease in demand
Use seasonal factor to adjust forecast
Holiday season: toys, sport equipments,
clothing, wine, fruit, etc.
Seasonal factor = Si =
Di
D
12-38
Seasonal Adjustment
YEAR
2002
2003
2004
Total
DEMAND (1000S PER QUARTER)

1
2
3
4
Total
12.6
14.1
15.3
42.0
8.6
10.3
10.6
29.5
D1
42.0
S1 =
=
= 0.28
D 148.7
D2
29.5
S2 =
=
= 0.20
148.7
D
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
45.0
50.1
53.6
148.7
D3
21.9
S3 =
=
= 0.15
D 148.7
D4
55.3
S4 =
=
= 0.37
148.7
D
12-39
Seasonal Adjustment
For 2005
y = 40.97 + 4.30x = 40.97 + 4.30(4) = 58.17
SF1 = (S1) (F5) = (0.28)(58.17) = 16.28
SF2 = (S2) (F5) = (0.20)(58.17) = 11.63
SF3 = (S3) (F5) = (0.15)(58.17) = 8.73
SF4 = (S4) (F5) = (0.37)(58.17) = 21.53
12-40
Forecast Accuracy
Forecast error
difference between forecast and actual demand
MAD
mean absolute deviation
MAPD
mean absolute percent deviation
Cumulative error
Average error or bias
12-41
Mean Absolute Deviation (MAD)

Dt - Ft
MAD =
n
where
t = period number
Dt = demand in period t
Ft = forecast for period t
n = total number of periods
= absolute value
12-42
MAD Example
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
DEMAND, Dt
Ft ( =0.3)
(Dt - Ft)
|Dt - Ft|
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
3.00
3.10
-1.83
6.72
9.69
-0.20
3.86
11.70
4.19
5.94
3.15
3.00
3.10
1.83
6.72
9.69
0.20
3.86
11.70
4.19
5.94
3.15
49.31
53.39
557
12-43
MAD Calculation
Dt - Ft
MAD =
n
53.39
=
11
= 4.85
12-44
Other Accuracy Measures

Mean absolute percent deviation (MAPD)
MAPD =
|Dt - Ft|
Dt
Cumulative error
E = et
Average error
et
E= n
12-45
Comparison of Forecasts
FORECAST
MAD
MAPD
(E)
Exponential smoothing (= 0.30)

Exponential smoothing (= 0.50)
Adjusted exponential smoothing
(= 0.50, = 0.30)
Linear trend line
4.85
4.04
3.81
9.6%
8.5%
7.5%
49.31
33.21
21.14
4.48
3.02
1.92
2.29
4.9%
12-46
Forecast Control
Tracking signal
monitors the forecast to see if it is biased high or low
1 MAD 0.8
Control limits of 2 to 5 MADs are used most
frequently
Tracking signal =
(Dt - Ft)
MAD
E
= MAD
12-47
Tracking Signal Values

PERIOD
DEMAND
Dt
FORECAST,
Ft
1
2
3
4
5
6
7
8
9
10
11
12
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
TS3 =
ERROR
Dt - Ft
3.00
3.10
-1.83
6.72
9.69
-0.20
3.86
11.70
4.19
5.94
3.15
E =
(Dt - Ft)
MAD
3.00
6.10
4.27
10.99
20.68
20.48
24.34
36.04
40.23
46.17
49.32
3.00
3.05
2.64
3.66
4.87
4.09
4.06
5.01
4.92
5.02
4.85
TRACKING
SIGNAL
1.00
2.00
1.62
3.00
4.25
5.01
6.00
7.19
8.18
9.20
10.17
6.10
= 2.00
3.05
12-48
Tracking Signal Plot
Tracking signal (MAD)
3
2
Exponential smoothing ( = 0.30)
1
0
-1
-2
-3
|
0
Linear trend line
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
12-49
Statistical Control Charts
(Dt - Ft)2
n-1
Using we can calculate statistical

control limits for the forecast error
Control limits are typically set at 3
12-50
Statistical Control Charts

18.39
12.24
UCL = +3
Errors
6.12
0
-6.12
-12.24
-18.39
LCL = -3
|
0
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
12-51
Time Series Forecasting Using Excel

Excel can be used to develop forecasts:
Moving average
Exponential smoothing
Adjusted exponential smoothing
Linear trend line
12-52
Exponentially Smoothed and Adjusted

Exponentially Smoothed Forecasts
=B5*(C11-C10)+
(1-B5)*D10
=C10+D10
=ABS(B10-E10)
=SUM(F10:F20)
=G22/11
12-53
Demand and Exponentially Smoothed

Forecast
Click on Insert then Line
12-54
Data Analysis Option
12-55
Forecasting With Seasonal Adjustment
12-56
Forecasting With OM Tools
12-57
Regression Methods
Linear regression
mathematical technique that relates a dependent
variable to an independent variable in the form of a
linear equation
Correlation
a measure of the strength of the relationship between
independent and dependent variables
12-58
Linear Regression
y = a + bx
a = y-bx
xy - nxy
b = x2 - nx2
where
a = intercept
b = slope of the line
x
x = n = mean of the x data
y
y = n = mean of the y data
12-59
Linear Regression Example

x
(WINS)
y
(ATTENDANCE)
xy
x2
4
6
6
8
6
7
5
7
36.3
40.1
41.2
53.0
44.0
45.6
39.0
47.5
145.2
240.6
247.2
424.0
264.0
319.2
195.0
332.5
16
36
36
64
36
49
25
49
49
346.7
2167.7
311
12-60

49
= 6.125
8
346.9
y=
= 43.36
8
x=
xy - nxy2
b=
x2 - nx2
(2,167.7) - (8)(6.125)(43.36)
=
(311) - (8)(6.125)2
= 4.06
a = y - bx
= 43.36 - (4.06)(6.125)
= 18.46
12-61

60,000
50,000
Attendance, y
40,000
30,000
Linear regression line, y

= 18.46 + 4.06x
Attendance forecast for 7 wins
20,000
10,000
|
0
y = 18.46 + 4.06(7)
= 46.88, or 46,880
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
Wins, x
12-62
Correlation and Coefficient of

Determination
Correlation, r
Measure of strength of relationship
Varies between -1.00 and +1.00
Coefficient of determination, r2
Percentage of variation in dependent variable
resulting from changes in the independent variable
12-63
Computing Correlation
r=
n xy - x y
[n x2 - ( x)2] [n y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
r=
[(8)(311) - (49)2] [(8)(15,224.7) - (346.9)2]

r = 0.947
Coefficient of determination
r2 = (0.947)2 = 0.897
12-64
Regression Analysis With Excel
=INTERCEPT(B5:B12,A5:A12)
=SUM(B5:B12)
=CORREL(B5:B12,A5:A12)
12-65
Regression Analysis with Excel
12-66
Regression Analysis With Excel
12-67
Multiple Regression
Study the relationship of demand to two or more
independent variables
y = 0 + 1x1 + 2x2 + kxk
where
0
= the intercept
1, , k = parameters for the
independent variables
x1, , xk = independent variables
12-68
Multiple Regression With Excel
r2, the coefficient

of determination
Regression equation
coefficients for x1 and x2
12-69
Multiple Regression Example

y = 19,094.42 + 3560.99 x1 + .0368 x2
y = 19,094.42 + 3560.99 (7) + .0368 (60,000)

= 46,229.35
12-70

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12-71
Auto sales at Carmens Chevrolet are

shown below.
Develop a 3-week moving average.
Auto Sales
Week
1
10
11
10
13
demand in previous n periods
Moving average =
n
Week Auto
Sales
Three-Week Moving
Average
10
11
(8 + 9 + 10) / 3 = 9
10
(10 + 9 + 11) / 3 = 10
13
(9 + 11 + 10) / 3 = 10
(11 + 10 + 13) / 3 = 11 1/3
Carmens decides to forecast auto

sales by weighting the three weeks as
follows:
Weights Period
Applied
3
Last week
Two weeks ago
Three weeks ago
Total
(weight for period n)(demand in period n)
Weighted moving average =

weights
Week
Auto
Sales
Three-Week Moving Average
10
11
[(3*9) + (2*10) + (1*8)] / 6 = 9 1/6
10
[(3*11) + (2*9) + (1*10)] / 6 = 10 1/6
13
[(3*10) + (2*11) + (1*9)] / 6 = 10 1/6
[(3*13) + (2*10) + (1*11)] / 6 = 11 2/3
Exponential smoothing
Smoothing constant
.2
.05
Example 1
Ft Ft 1 ( A t 1 Ft 1 ) 500 0.1( 450 500) 495 units
Example 2
Month
Actual
Battery Sales
Forecast
January
20
22
February
21
March
15
April
14
May
13
June
16
Example 3
Given the forecast demand and actual
demand for 10-foot fishing boats, compute
the tracking signal and MAD.
Year
Forecast Demand
Actual Demand
78
71
75
80
83
101
84
84
88
60
85
73
Forecast errors
MAD =
n
70
11.7
6

CH 12

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CH 12

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Chapter 12

Copyright 2011 John Wiley & Sons, Inc.

Quantitative forecast methods

Copyright 2011 John Wiley & Sons, Inc.

Supply Chain Management

supplier & customer share continuously updated data

Variations of continuous replenishment

Copyright 2011 John Wiley & Sons, Inc.

The Effect of Inaccurate Forecasting

Copyright 2011 John Wiley & Sons, Inc.

Copyright 2011 John Wiley & Sons, Inc.

Types of Forecasting Methods

Copyright 2011 John Wiley & Sons, Inc.

Copyright 2011 John Wiley & Sons, Inc.

Forms of Forecast Movement

3. Plot data and identify

8b. Select new

9. Adjust forecast based

10. Monitor results

Simple moving average

Weighted moving average

Copyright 2011 John Wiley & Sons, Inc.

Moving Average: Nave Approach

Copyright 2011 John Wiley & Sons, Inc.

Simple Moving Average

Copyright 2011 John Wiley & Sons, Inc.

3-month Simple Moving Average

Copyright 2011 John Wiley & Sons, Inc.

= 110 orders for Nov

5-month Simple Moving Average

Copyright 2011 John Wiley & Sons, Inc.

Weighted Moving Average

Wi = the weight for period i,

Copyright 2011 John Wiley & Sons, Inc.

Weighted Moving Average Example

= (0.50)(90) + (0.33)(110) + (0.17)(130)

Copyright 2011 John Wiley & Sons, Inc.

Copyright 2011 John Wiley & Sons, Inc.

actual demand for present period

Ft = previously determined forecast for

Copyright 2011 John Wiley & Sons, Inc.

Effect of Smoothing Constant

If = 1, then Ft +1 = 1Dt + 0 Ft =Dt

Copyright 2011 John Wiley & Sons, Inc.

Exponential Smoothing (=0.30)

Copyright 2011 John Wiley & Sons, Inc.

Copyright 2011 John Wiley & Sons, Inc.

Adjusted Exponential Smoothing

Copyright 2011 John Wiley & Sons, Inc.

Adjusted Exponential Smoothing (=0.30)

Copyright 2011 John Wiley & Sons, Inc.

AF3 = F3 + T3 = 38.5 + 0.45

= (F13 - F12) + (1 - ) T12

AF13 = F13 + T13 = 53.61 + 1.36 = 54.97

Adjusted Exponential Smoothing

Copyright 2011 John Wiley & Sons, Inc.

Adjusted Exponential Smoothing

Copyright 2011 John Wiley & Sons, Inc.

Linear Trend Line

Copyright 2011 John Wiley & Sons, Inc.

Least Squares Example

Copyright 2011 John Wiley & Sons, Inc.