Materials Planning

Dealing with the Problem Complexity through Decomposition

Forecasting Aggregate Unit Demand End Item (SKU) Demand

Aggregate (Plan.Planning Time Unit: 1 Hor.: 1 year,

month)

Capacity and Aggregate Production Plans

Master Production (Plan. Hor.: a few months, Time Unit: 1 Scheduling

week)

Manufacturing and Procurement lead times Part process plans

SKU-level Production Plans

Materials Requirement (Plan. Hor.: a few months, Time Unit: 1 Planning

week)

Component Production lots and due dates

Shop floor-level Production (Plan. Hor.: a day or a shift, Time Unit: realControl
time)

Forecasting

Costs of Forecasting
IBM continues to struggle with shortages in the Think Pad line. WSJ 5/2/94 Dell stock plunges. Dellwas sharply off in its forecast of demand WSJ 8/93 Toyota believes it can save $100M [with] accurate ordering and inventory management.

Importance of forecasting

Methods of Forecasting
Qualitative Approaches Quantitative Approaches

Qualitative Approaches
intuitive hunches Executive committee consensus Delphi method Survey of sales force Survey of customers Market research scientifically conducted surveys

Quantitative Approaches
Time Series Methods use historical data extrapolated into the future. They are best suited for stable environments. EG - Moving averages, exponential smoothing methods. Causal Methods assume demand is highly correlated with certain environmental factors (indicators). EG - Regression models, and econometric models.

Time Series Methods

(Simple) Moving Average Weighted Moving Average Exponential Smoothing

SIMPLE MOVING AVERAGE

In a moving average, the forecast would be calculated as the average of the last few observations. If we let M equal the number of observations to be included in the moving average, then: Zt+1 =1/M i=t+M-1 Zi For example, if we let M=3, we have a "three period moving average", and so, for example, at t = 7: Z8= (Z7+Z6+Z5) /3

M=2

M=3

M=4

M=5

M=6

M=7

1
2 3 4 5

98
110 100 94 100 104 105 97 103 101 101

6
7 8 9 10

92
96 102 105 96

97
96 94 99 104

98
95 96 97 101

101
97 96 98 99

100
99 96 97 99 99 99 97 98 99 99 98

Weighted Moving Average

This is a variation on the simple moving average where the weights used to compute the average are not equal. This allows more recent demand data to have a greater effect on the moving average, therefore the forecast. . . . more

Weighted Moving Average

The weights must add to 1.0 and generally decrease in value with the age of the data. The distribution of the weights determine the impulse response of the forecast.

Exponential Smoothing
The weights used to compute the forecast (moving average) are exponentially distributed. The forecast is the sum of the old forecast and a portion ( ) of the forecast error (A t-1 - Ft-1). Ft = Ft-1 + (A t-1 - Ft-1)

Exponential Smoothing
The smoothing constant, , must be between 0.0 and 1.0. A large provides a high impulse response forecast. A small provides a low impulse response forecast.

Example: Central Call Center

Moving Average CCC wishes to forecast the number of incoming calls it receives in a day from the customers of one of its clients, BMI. CCC schedules the appropriate number of telephone operators based on projected call volumes. CCC believes that the most recent 12 days of call volumes (shown on the next slide) are representative of the near future call volumes.

Example: Central Call Center

Moving Average
o

Representative Historical Data Day Calls Day Calls 1 159 7 203 2 217 8 195 3 186 9 188 4 161 10 168 5 173 11 198 6 157 12 159

Example: Central Call Center

Moving Average Use the moving average method with an AP = 3 days to develop a forecast of the call volume in Day 13.

F13 = (168 + 198 + 159)/3 = 175.0 calls

Example: Central Call Center

Weighted Moving Average Use the weighted moving average method with an AP = 3 days and weights of .1 (for oldest datum), .3, and .6 to develop a forecast of the call volume in Day 13. F13 = .1(168) + .3(198) + .6(159) = 171.6 calls Note: The WMA forecast is lower than the MA forecast because Day 13s relatively low call volume carries almost twice as much weight in the WMA (.60) as it does in the MA (.33).

Example: Central Call Center

Exponential Smoothing If a smoothing constant value of .25 is used and the exponential smoothing forecast for Day 11 was 180.76 calls, what is the exponential smoothing forecast for Day 13? F12 = 180.76 + .25(198 180.76) = 185.07 F13 = 185.07 + .25(159 185.07) = 178.55

Causal Methods

Simple Linear Regression

Linear regression analysis establishes a relationship between a dependent variable and one or more independent variables. In simple linear regression analysis there is only one independent variable.

Simple Linear Regression

Regression Equation This model is of the form: Y = a + bX
Y = dependent variable X = independent variable a = y-axis intercept b = slope of regression line

Simple Linear Regression

Constants a and b The constants a and b are computed using the following equations:

Simple Linear Regression

Once the a and b values are computed, a future value of X can be entered into the regression equation and a corresponding value of Y (the forecast) can be calculated.

Example: College Enrollment

Simple Linear Regression
At a small regional college enrollments have grown steadily over the past six years, as evidenced below. Use time series regression to forecast the student enrollments for the next three years.

Students Students Year Enrolled (1000s) Year Enrolle(1000s) 1 2.5 4 3.2 2 2.8 5 3.3 3 2.9 6 3.4

Example: College Enrollment

Simple Linear Regression x y x2 xy 1 2.5 1 2.5 2 2.8 4 5.6 3 2.9 9 8.7 4 3.2 16 12.8 5 3.3 25 16.5 6 3.4 36 20.4
x=21 y=18.1 x2=91 xy=66.5

Example: College Enrollment

Simple Linear Regression

Y = 2.387 + 0.180X

Example: College Enrollment

Simple Linear Regression
Y7 = 2.387 + 0.180(7) = 3.65 or 3,650 students Y8 = 2.387 + 0.180(8) = 3.83 or 3,830 students Y9 = 2.387 + 0.180(9) = 4.01 or 4,010 students Note: Enrollment is expected to increase by 180 students per year.

Simple Linear Regression

Simple linear regression can also be used when the independent variable X represents a variable other than time. In this case, linear regression is representative of a class of forecasting models called causal forecasting models.

Example: Railroad Products Co.

Simple Linear Regression Causal Model The manager of RPC wants to project the firms sales for the next 3 years. He knows that RPCs long-range sales are tied very closely to national freight car loadings. On the next slide are 7 years of relevant historical data. Develop a simple linear regression model between RPC sales and national freight car loadings. Forecast RPC sales for the next 3 years, given that the rail industry estimates car loadings of 250, 270, and 300 million.

Example: Railroad Products Co.

Simple Linear Regression Causal Model RPC Sales Car Loadings Year ($millions) (millions)
1 9.5 120 2 11.0 135 3 12.0 130 4 12.5 150 5 14.0 170 6 16.0 190 7 18.0 220

Example: Railroad Products Co.

Simple Linear Regression Causal Model x y x2 xy
120 9.5 14,400 1,140 135 11.0 18,225 1,485 130 12.0 16,900 1,560 150 12.5 22,500 1,875 170 14.0 28,900 2,380 190 16.0 36,100 3,040 220 18.0 48,400 3,960

1,115 93.0 185,425 15,440

Example: Railroad Products Co.

Simple Linear Regression Causal Model

Y = 0.528 + 0.0801X

Example: Railroad Products Co.

Simple Linear Regression Causal Model
Y8 = 0.528 + 0.0801(250) = $20.55 million Y9 = 0.528 + 0.0801(270) = $22.16 million Y10 = 0.528 + 0.0801(300) = $24.56 million Note: RPC sales are expected to increase by $80,100 for each additional million national freight car loadings.