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4 - 1 Forecasting 4 4
4 - 2 Outline ▶ Global Company Profile: Walt Disney Parks & Resorts ▶ What Is Forecasting? ▶ The Strategic Importance of Forecasting ▶ Seven Steps in the Forecasting System ▶ Forecasting Approaches
4 - 3 Outline - Continued ▶ Time-Series Forecasting ▶ Associative Forecasting Methods: Regression and Correlation Analysis ▶ Monitoring and Controlling Forecasts ▶ Forecasting in the Service Sector
4 - 4 Learning Objectives When you complete this chapter you should be able to : 1. Understand the three time horizons and which models apply for each use 2. Explain when to use each of the four qualitative models 3. Apply the naive, moving average, exponential smoothing, and trend methods
4 - 5 Learning Objectives When you complete this chapter you should be able to : 4. Compute three measures of forecast accuracy 5. Develop seasonal indices 6. Conduct a regression and correlation analysis 7. Use a tracking signal
4 - 6 ► Global portfolio includes parks in Hong Kong, Paris, Tokyo, Orlando, and Anaheim ► Revenues are derived from people – how many visitors and how they spend their money ► Daily management report contains only the forecast and actual attendance at each park Forecasting Provides a Competitive Advantage for Disney
4 - 7 ► Disney generates daily, weekly, monthly, annual, and 5-year forecasts ► Forecast used by labor management, maintenance, operations, finance, and park scheduling ► Forecast used to adjust opening times, rides, shows, staffing levels, and guests admitted Forecasting Provides a Competitive Advantage for Disney
4 - 8 ► 20% of customers come from outside the USA ► Economic model includes gross domestic product, cross-exchange rates, arrivals into the USA ► A staff of 35 analysts and 70 field people survey 1 million park guests, employees, and travel professionals each year Forecasting Provides a Competitive Advantage for Disney
4 - 9 ► Inputs to the forecasting model include airline specials, Federal Reserve policies, Wall Street trends, vacation/holiday schedules for 3,000 school districts around the world ► Average forecast error for the 5-year forecast is 5% ► Average forecast error for annual forecasts is between 0% and 3% Forecasting Provides a Competitive Advantage for Disney
4 - 10 What is Forecasting? ► Process of predicting a future event ► Underlying basis of all business decisions ► Production ► Inventory ► Personnel ► Facilities ??
4 - 11 1. Short-range forecast ► Up to 1 year, generally less than 3 months ► Purchasing, job scheduling, workforce levels, job assignments, production levels 2. Medium-range forecast ► 3 months to 3 years ► Sales and production planning, budgeting 3. Long-range forecast ► 3+ years ► New product planning, facility location, research and development Forecasting Time Horizons
4 - 12 Distinguishing Differences 1. Medium/long range forecasts deal with more comprehensive issues and support management decisions regarding planning and products, plants and processes 2. Short-term forecasting usually employs different methodologies than longer-term forecasting 3. Short-term forecasts tend to be more accurate than longer-term forecasts
4 - 13 Influence of Product Life Cycle ► Introduction and growth require longer forecasts than maturity and decline ► As product passes through life cycle, forecasts are useful in projecting ► Staffing levels ► Inventory levels ► Factory capacity Introduction – Growth – Maturity – Decline
4 - 14 Product Life Cycle Best period to increase market share R&D engineering is critical Practical to change price or quality image Strengthen niche Poor time to change image, price, or quality Competitive costs become critical Defend market position Cost control critical Introduction Growth Maturity Decline Company Strategy/Issues Figure 2.5 Internet search engines Sales Drive-through restaurants DVDs Analog TVs Boeing 787 Electric vehicles iPods 3-D game players 3D printers Xbox 360
4 - 15 Product Life Cycle Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality Introduction Growth Maturity Decline OM Strategy/Issues Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focus Enhance distribution Standardization Fewer product changes, more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity Figure 2.5
4 - 16 Types of Forecasts 1. Economic forecasts ► Address business cycle – inflation rate, money supply, housing starts, etc. 2. Technological forecasts ► Predict rate of technological progress ► Impacts development of new products 3. Demand forecasts ► Predict sales of existing products and services
4 - 17 Strategic Importance of Forecasting ► Supply-Chain Management – Good supplier relations, advantages in product innovation, cost and speed to market ► Human Resources – Hiring, training, laying off workers ► Capacity – Capacity shortages can result in undependable delivery, loss of customers, loss of market share
4 - 18 Seven Steps in Forecasting 1. Determine the use of the forecast 2. Select the items to be forecasted 3. Determine the time horizon of the forecast 4. Select the forecasting model(s) 5. Gather the data needed to make the forecast 6. Make the forecast 7. Validate and implement results
4 - 19 The Realities! ► Forecasts are seldom perfect, unpredictable outside factors may impact the forecast ► Most techniques assume an underlying stability in the system ► Product family and aggregated forecasts are more accurate than individual product forecasts
4 - 20 Forecasting Approaches ► Used when situation is vague and little data exist ► New products ► New technology ► Involves intuition, experience ► e.g., forecasting sales on Internet Qualitative Methods
4 - 21 Forecasting Approaches ► Used when situation is ‘stable’ and historical data exist ► Existing products ► Current technology ► Involves mathematical techniques ► e.g., forecasting sales of color televisions Quantitative Methods
4 - 22 Overview of Qualitative Methods 1. Jury of executive opinion ► Pool opinions of high-level experts, sometimes augment by statistical models 2. Delphi method ► Panel of experts, queried iteratively
4 - 23 Overview of Qualitative Methods 3. Sales force composite ► Estimates from individual salespersons are reviewed for reasonableness, then aggregated 4. Market Survey ► Ask the customer
4 - 24 ► Involves small group of high-level experts and managers ► Group estimates demand by working together ► Combines managerial experience with statistical models ► Relatively quick ► ‘Group-think’ disadvantage Jury of Executive Opinion
4 - 25 Delphi Method ► Iterative group process, continues until consensus is reached ► 3 types of participants ► Decision makers ► Staff ► Respondents Staff (Administering survey) Decision Makers (Evaluate responses and make decisions) Respondents (People who can make valuable judgments)
4 - 26 Sales Force Composite ► Each salesperson projects his or her sales ► Combined at district and national levels ► Sales reps know customers’ wants ► May be overly optimistic
4 - 27 Market Survey ► Ask customers about purchasing plans ► Useful for demand and product design and planning ► What consumers say, and what they actually do may be different ► May be overly optimistic
4 - 28 Overview of Quantitative Approaches 1. Naive approach 2. Moving averages 3. Exponential smoothing 4. Trend projection 5. Linear regression Time-series models Associative model
4 - 29 ► Set of evenly spaced numerical data ► Obtained by observing response variable at regular time periods ► Forecast based only on past values, no other variables important ► Assumes that factors influencing past and present will continue influence in future Time-Series Forecasting
4 - 30 Trend Seasonal Cyclical Random Time-Series Components
4 - 31 Components of Demand Demand for product or service | | | | 1 2 3 4 Time (years) Average demand over 4 years Trend component Actual demand line Random variation Figure 4.1 Seasonal peaks
4 - 32 ► Persistent, overall upward or downward pattern ► Changes due to population, technology, age, culture, etc. ► Typically several years duration Trend Component
4 - 33 ► Regular pattern of up and down fluctuations ► Due to weather, customs, etc. ► Occurs within a single year Seasonal Component PERIOD LENGTH “SEASON” LENGTH NUMBER OF “SEASONS” IN PATTERN Week Day 7 Month Week 4 – 4.5 Month Day 28 – 31 Year Quarter 4 Year Month 12 Year Week 52
4 - 34 ► Repeating up and down movements ► Affected by business cycle, political, and economic factors ► Multiple years duration ► Often causal or associative relationships Cyclical Component 0 5 10 15 20
4 - 35 ► Erratic, unsystematic, ‘residual’ fluctuations ► Due to random variation or unforeseen events ► Short duration and nonrepeating Random Component M T W T F
4 - 36 Naive Approach ► Assumes demand in next period is the same as demand in most recent period ► e.g., If January sales were 68, then February sales will be 68 ► Sometimes cost effective and efficient ► Can be good starting point
4 - 37 ► MA is a series of arithmetic means ► Used if little or no trend ► Used often for smoothing ► Provides overall impression of data over time Moving Average Method
4 - 38 Moving Average Example MONTH ACTUAL SHED SALES 3-MONTH MOVING AVERAGE January 10 February 12 March 13 April 16 May 19 June 23 July 26 August 30 September 28 October 18 November 16 December 14 (10 + 12 + 13)/3 = 11 2 /3 (12 + 13 + 16)/3 = 13 2 /3 (13 + 16 + 19)/3 = 16 (16 + 19 + 23)/3 = 19 1 /3 (19 + 23 + 26)/3 = 22 2 /3 (23 + 26 + 30)/3 = 26 1 /3 (29 + 30 + 28)/3 = 28 (30 + 28 + 18)/3 = 25 1 /3 (28 + 18 + 16)/3 = 20 2 /3 10 12 13
4 - 39 ► Used when some trend might be present ► Older data usually less important ► Weights based on experience and intuition Weighted Moving Average Weighted moving average
4 - 40 Weighted Moving Average MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE January 10 February 12 March 13 April 16 May 19 June 23 July 26 August 30 September 28 October 18 November 16 December 14 WEIGHTS APPLIED PERIOD 3 Last month 2 Two months ago 1 Three months ago 6 Sum of the weights Forecast for this month = 3 x Sales last mo. + 2 x Sales 2 mos. ago + 1 x Sales 3 mos. ago Sum of the weights [(3 x 13) + (2 x 12) + (10)]/6 = 12 1 /6 10 12 13
4 - 41 Weighted Moving Average MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE January 10 February 12 March 13 April 16 May 19 June 23 July 26 August 30 September 28 October 18 November 16 December 14 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1 /6 10 12 13 [(3 x 16) + (2 x 13) + (12)]/6 = 14 1 /3 [(3 x 19) + (2 x 16) + (13)]/6 = 17 [(3 x 23) + (2 x 19) + (16)]/6 = 20 1 /2 [(3 x 26) + (2 x 23) + (19)]/6 = 23 5 /6 [(3 x 30) + (2 x 26) + (23)]/6 = 27 1 /2 [(3 x 28) + (2 x 30) + (26)]/6 = 28 1 /3 [(3 x 18) + (2 x 28) + (30)]/6 = 23 1 /3 [(3 x 16) + (2 x 18) + (28)]/6 = 18 2 /3
4 - 42 ► Increasing n smooths the forecast but makes it less sensitive to changes ► Does not forecast trends well ► Requires extensive historical data Potential Problems With Moving Average
4 - 43 Graph of Moving Averages | | | | | | | | | | | | J F M A M J J A S O N D Sales demand 30 – 25 – 20 – 15 – 10 – 5 – Month Actual sales Moving average Weighted moving average Figure 4.2
4 - 44 ► Form of weighted moving average ► Weights decline exponentially ► Most recent data weighted most ► Requires smoothing constant () ► Ranges from 0 to 1 ► Subjectively chosen ► Involves little record keeping of past data Exponential Smoothing
4 - 45 Exponential Smoothing New forecast = Last period’s forecast +  (Last period’s actual demand – Last period’s forecast) Ft = Ft – 1 + (At – 1 - Ft – 1) where Ft = new forecast Ft – 1 = previous period’s forecast  = smoothing (or weighting) constant (0 ≤  ≤ 1) At – 1 = previous period’s actual demand
4 - 46 Exponential Smoothing Example Predicted demand = 142 Ford Mustangs Actual demand = 153 Smoothing constant  = .20
4 - 47 Exponential Smoothing Example Predicted demand = 142 Ford Mustangs Actual demand = 153 Smoothing constant  = .20 New forecast = 142 + .2(153 – 142)
4 - 48 Exponential Smoothing Example Predicted demand = 142 Ford Mustangs Actual demand = 153 Smoothing constant  = .20 New forecast = 142 + .2(153 – 142) = 142 + 2.2 = 144.2 ≈ 144 cars
4 - 49 Effect of Smoothing Constants ▶ Smoothing constant generally .05 ≤  ≤ .50 ▶ As  increases, older values become less significant WEIGHT ASSIGNED TO SMOOTHING CONSTANT MOST RECENT PERIOD () 2ND MOST RECENT PERIOD (1 – ) 3RD MOST RECENT PERIOD (1 – )2 4th MOST RECENT PERIOD (1 – )3 5th MOST RECENT PERIOD (1 – )4  = .1 .1 .09 .081 .073 .066  = .5 .5 .25 .125 .063 .031
4 - 50 Impact of Different  225 – 200 – 175 – 150 – | | | | | | | | | 1 2 3 4 5 6 7 8 9 Quarter Demand  = .1 Actual demand  = .5
4 - 51 Impact of Different  225 – 200 – 175 – 150 – | | | | | | | | | 1 2 3 4 5 6 7 8 9 Quarter Demand  = .1 Actual demand  = .5 ► Chose high values of  when underlying average is likely to change ► Choose low values of  when underlying average is stable
4 - 52 Choosing  The objective is to obtain the most accurate forecast no matter the technique We generally do this by selecting the model that gives us the lowest forecast error Forecast error = Actual demand – Forecast value = At – Ft
4 - 53 Common Measures of Error Mean Absolute Deviation (MAD)
4 - 54 Determining the MAD QUARTER ACTUAL TONNAGE UNLOADED FORECAST WITH  = .10 FORECAST WITH  = .50 1 180 175 175 2 168 175.50 = 175.00 + .10(180 – 175) 177.50 3 159 174.75 = 175.50 + .10(168 – 175.50) 172.75 4 175 173.18 = 174.75 + .10(159 – 174.75) 165.88 5 190 173.36 = 173.18 + .10(175 – 173.18) 170.44 6 205 175.02 = 173.36 + .10(190 – 173.36) 180.22 7 180 178.02 = 175.02 + .10(205 – 175.02) 192.61 8 182 178.22 = 178.02 + .10(180 – 178.02) 186.30 9 ? 178.59 = 178.22 + .10(182 – 178.22) 184.15
4 - 55 Determining the MAD QUARTER ACTUAL TONNAGE UNLOADED FORECAST WITH  = .10 ABSOLUTE DEVIATION FOR a = .10 FORECAST WITH  = .50 ABSOLUTE DEVIATION FOR a = .50 1 180 175 5.00 175 5.00 2 168 175.50 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 Sum of absolute deviations: 82.45 98.62 MAD = Σ|Deviations| 10.31 12.33 n
4 - 56 Common Measures of Error Mean Squared Error (MSE)
4 - 57 Determining the MSE QUARTER ACTUAL TONNAGE UNLOADED FORECAST FOR  = .10 (ERROR)2 1 180 175 52 = 25 2 168 175.50 (–7.5)2 = 56.25 3 159 174.75 (–15.75)2 = 248.06 4 175 173.18 (1.82)2 = 3.31 5 190 173.36 (16.64)2 = 276.89 6 205 175.02 (29.98)2 = 898.80 7 180 178.02 (1.98)2 = 3.92 8 182 178.22 (3.78)2 = 14.29 Sum of errors squared = 1,526.52
4 - 58 Common Measures of Error Mean Absolute Percent Error (MAPE)
4 - 59 Determining the MAPE QUARTER ACTUAL TONNAGE UNLOADED FORECAST FOR  = .10 ABSOLUTE PERCENT ERROR 100(ERROR/ACTUAL) 1 180 175.00 100(5/180) = 2.78% 2 168 175.50 100(7.5/168) = 4.46% 3 159 174.75 100(15.75/159) = 9.90% 4 175 173.18 100(1.82/175) = 1.05% 5 190 173.36 100(16.64/190) = 8.76% 6 205 175.02 100(29.98/205) = 14.62% 7 180 178.02 100(1.98/180) = 1.10% 8 182 178.22 100(3.78/182) = 2.08% Sum of % errors = 44.75%
4 - 60 Comparison of Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded  = .10  = .10  = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62
4 - 61 Comparison of Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded a = .10 a = .10  = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62 MAD = ∑ |deviations| n = 82.45/8 = 10.31 For  = .10 = 98.62/8 = 12.33 For  = .50
4 - 62 Comparison of Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded a = .10 a = .10  = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62 MAD 10.31 12.33 = 1,526.54/8 = 190.82 For  = .10 = 1,561.91/8 = 195.24 For  = .50 MSE = ∑ (forecast errors)2 n
4 - 63 Comparison of Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded a = .10 a = .10 a = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62 MAD 10.31 12.33 MSE 190.82 195.24 = 44.75/8 = 5.59% For  = .10 = 54.05/8 = 6.76% For  = .50 MAPE = ∑100|deviationi|/actuali n n i = 1
4 - 64 Comparison of Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded  = .10  = .10  = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62 MAD 10.31 12.33 MSE 190.82 195.24 MAPE 5.59% 6.76%
4 - 65 Exponential Smoothing with Trend Adjustment When a trend is present, exponential smoothing must be modified MONTH ACTUAL DEMAND FORECAST (Ft) FOR MONTHS 1 – 5 1 100 Ft = 100 (given) 2 200 Ft = F1 + (A1 – F1) = 100 + .4(100 – 100) = 100 3 300 Ft = F2 + (A2 – F2) = 100 + .4(200 – 100) = 140 4 400 Ft = F3 + (A3 – F3) = 140 + .4(300 – 140) = 204 5 500 Ft = F4 + (A4 – F4) = 204 + .4(400 – 204) = 282
4 - 66 Exponential Smoothing with Trend Adjustment Forecast including (FITt) = trend Exponentially Exponentially smoothed (Ft) + smoothed (Tt) forecast trend Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1) Tt = (Ft - Ft - 1) + (1 - )Tt - 1 where Ft = exponentially smoothed forecast average Tt = exponentially smoothed trend At = actual demand  = smoothing constant for average (0 ≤  ≤ 1)  = smoothing constant for trend (0 ≤≤ 1)
4 - 67 Exponential Smoothing with Trend Adjustment Step 1: Compute Ft Step 2: Compute Tt Step 3: Calculate the forecast FITt = Ft + Tt
4 - 68 Exponential Smoothing with Trend Adjustment Example MONTH (t) ACTUAL DEMAND (At) MONTH (t) ACTUAL DEMAND (At) 1 12 6 21 2 17 7 31 3 20 8 28 4 19 9 36 5 24 10 ?  = .2  = .4
4 - 69 Exponential Smoothing with Trend Adjustment Example TABLE 4.1 Forecast with  - .2 and  = .4 MONTH ACTUAL DEMAND SMOOTHED FORECAST AVERAGE, Ft SMOOTHED TREND, Tt FORECAST INCLUDING TREND, FITt 1 12 11 2 13.00 2 17 3 20 4 19 5 24 6 21 7 31 8 28 9 36 10 — F2 = A1 + (1 – )(F1 + T1) F2 = (.2)(12) + (1 – .2)(11 + 2) = 2.4 + (.8)(13) = 2.4 + 10.4 = 12.8 units Step 1: Average for Month 2 12.80
4 - 70 Exponential Smoothing with Trend Adjustment Example TABLE 4.1 Forecast with  - .2 and  = .4 MONTH ACTUAL DEMAND SMOOTHED FORECAST AVERAGE, Ft SMOOTHED TREND, Tt FORECAST INCLUDING TREND, FITt 1 12 11 2 13.00 2 17 12.80 3 20 4 19 5 24 6 21 7 31 8 28 9 36 10 — T2 = (F2 - F1) + (1 - b)T1 T2 = (.4)(12.8 - 11) + (1 - .4)(2) = .72 + 1.2 = 1.92 units Step 2: Trend for Month 2 1.92
4 - 71 Exponential Smoothing with Trend Adjustment Example TABLE 4.1 Forecast with  - .2 and  = .4 MONTH ACTUAL DEMAND SMOOTHED FORECAST AVERAGE, Ft SMOOTHED TREND, Tt FORECAST INCLUDING TREND, FITt 1 12 11 2 13.00 2 17 12.80 1.92 3 20 4 19 5 24 6 21 7 31 8 28 9 36 10 — FIT2 = F2 + T2 FIT2 = 12.8 + 1.92 = 14.72 units Step 3: Calculate FIT for Month 2 14.72
4 - 72 Exponential Smoothing with Trend Adjustment Example TABLE 4.1 Forecast with  - .2 and  = .4 MONTH ACTUAL DEMAND SMOOTHED FORECAST AVERAGE, Ft SMOOTHED TREND, Tt FORECAST INCLUDING TREND, FITt 1 12 11 2 13.00 2 17 12.80 1.92 14.72 3 20 15.18 2.10 17.28 4 19 17.82 2.32 20.14 5 24 19.91 2.23 22.14 6 21 22.51 2.38 24.89 7 31 24.11 2.07 26.18 8 28 27.14 2.45 29.59 9 36 29.28 2.32 31.60 10 — 32.48 2.68 35.16
4 - 73 Exponential Smoothing with Trend Adjustment Example Figure 4.3 | | | | | | | | | 1 2 3 4 5 6 7 8 9 Time (months) Product demand 40 – 35 – 30 – 25 – 20 – 15 – 10 – 5 – 0 – Actual demand (At) Forecast including trend (FITt) with  = .2 and  = .4
4 - 74 Trend Projections Fitting a trend line to historical data points to project into the medium to long-range Linear trends can be found using the least squares technique y = a + bx ^ where y= computed value of the variable to be predicted (dependent variable) a= y-axis intercept b= slope of the regression line x= the independent variable ^
4 - 75 Least Squares Method Figure 4.4 Deviation1 (error) Deviation5 Deviation7 Deviation2 Deviation6 Deviation4 Deviation3 Actual observation (y-value) Trend line, y = a + bx ^ Time period Values of Dependent Variable (y-values) | | | | | | | 1 2 3 4 5 6 7 Least squares method minimizes the sum of the squared errors (deviations)
4 - 76 Least Squares Method Equations to calculate the regression variables
4 - 77 Least Squares Example YEAR ELECTRICAL POWER DEMAND YEAR ELECTRICAL POWER DEMAND 1 74 5 105 2 79 6 142 3 80 7 122 4 90
4 - 78 Least Squares Example YEAR (x) ELECTRICAL POWER DEMAND (y) x2 xy 1 74 1 74 2 79 4 158 3 80 9 240 4 90 16 360 5 105 25 525 6 142 36 852 7 122 49 854 Σx = 28 Σy = 692 Σx2 = 140 Σxy = 3,063
4 - 79 Least Squares Example YEAR (x) ELECTRICAL POWER DEMAND (y) x2 xy 1 74 1 74 2 79 4 158 3 80 9 240 4 90 16 360 5 105 25 525 6 142 36 852 7 122 49 854 Σx = 28 Σy = 692 Σx2 = 140 Σxy = 3,063 Demand in year 8 = 56.70 + 10.54(8) = 141.02, or 141 megawatts
4 - 80 Least Squares Example | | | | | | | | | 1 2 3 4 5 6 7 8 9 160 – 150 – 140 – 130 – 120 – 110 – 100 – 90 – 80 – 70 – 60 – 50 – Year Power demand (megawatts) Trend line, y = 56.70 + 10.54x ^ Figure 4.5
4 - 81 Least Squares Requirements 1. We always plot the data to insure a linear relationship 2. We do not predict time periods far beyond the database 3. Deviations around the least squares line are assumed to be random
4 - 82 Seasonal Variations In Data The multiplicative seasonal model can adjust trend data for seasonal variations in demand
4 - 83 Seasonal Variations In Data 1. Find average historical demand for each month 2. Compute the average demand over all months 3. Compute a seasonal index for each month 4. Estimate next year’s total demand 5. Divide this estimate of total demand by the number of months, then multiply it by the seasonal index for that month Steps in the process for monthly seasons:
4 - 84 Seasonal Index Example DEMAND MONTH YEAR 1 YEAR 2 YEAR 3 AVERAGE YEARLY DEMAND AVERAGE MONTHLY DEMAND SEASONAL INDEX Jan 80 85 105 Feb 70 85 85 Mar 80 93 82 Apr 90 95 115 May 113 125 131 June 110 115 120 July 100 102 113 Aug 88 102 110 Sept 85 90 95 Oct 77 78 85 Nov 75 82 83 Dec 82 78 80 90 80 85 100 123 115 105 100 90 80 80 80 Total average annual demand = 1,128
4 - 85 Seasonal Index Example DEMAND MONTH YEAR 1 YEAR 2 YEAR 3 AVERAGE YEARLY DEMAND AVERAGE MONTHLY DEMAND SEASONAL INDEX Jan 80 85 105 90 94 Feb 70 85 85 80 94 Mar 80 93 82 85 94 Apr 90 95 115 100 94 May 113 125 131 123 94 June 110 115 120 115 94 July 100 102 113 105 94 Aug 88 102 110 100 94 Sept 85 90 95 90 94 Oct 77 78 85 80 94 Nov 75 82 83 80 94 Dec 82 78 80 80 94 Total average annual demand = 1,128 Average monthly demand
4 - 86 Seasonal Index Example DEMAND MONTH YEAR 1 YEAR 2 YEAR 3 AVERAGE YEARLY DEMAND AVERAGE MONTHLY DEMAND SEASONAL INDEX Jan 80 85 105 90 94 Feb 70 85 85 80 94 Mar 80 93 82 85 94 Apr 90 95 115 100 94 May 113 125 131 123 94 June 110 115 120 115 94 July 100 102 113 105 94 Aug 88 102 110 100 94 Sept 85 90 95 90 94 Oct 77 78 85 80 94 Nov 75 82 83 80 94 Dec 82 78 80 80 94 Total average annual demand = 1,128 Seasonal index .957( = 90/94)
4 - 87 Seasonal Index Example DEMAND MONTH YEAR 1 YEAR 2 YEAR 3 AVERAGE YEARLY DEMAND AVERAGE MONTHLY DEMAND SEASONAL INDEX Jan 80 85 105 90 94 .957( = 90/94) Feb 70 85 85 80 94 .851( = 80/94) Mar 80 93 82 85 94 .904( = 85/94) Apr 90 95 115 100 94 1.064( = 100/94) May 113 125 131 123 94 1.309( = 123/94) June 110 115 120 115 94 1.223( = 115/94) July 100 102 113 105 94 1.117( = 105/94) Aug 88 102 110 100 94 1.064( = 100/94) Sept 85 90 95 90 94 .957( = 90/94) Oct 77 78 85 80 94 .851( = 80/94) Nov 75 82 83 80 94 .851( = 80/94) Dec 82 78 80 80 94 .851( = 80/94) Total average annual demand = 1,128
4 - 88 Seasonal Index Example MONTH DEMAND MONTH DEMAND Jan 1,200 x .957 = 96 July 1,200 x 1.117 = 112 12 12 Feb 1,200 x .851 = 85 Aug 1,200 x 1.064 = 106 12 12 Mar 1,200 x .904 = 90 Sept 1,200 x .957 = 96 12 12 Apr 1,200 x 1.064 = 106 Oct 1,200 x .851 = 85 12 12 May 1,200 x 1.309 = 131 Nov 1,200 x .851 = 85 12 12 June 1,200 x 1.223 = 122 Dec 1,200 x .851 = 85 12 12 If we expect the next year’s demand to be 1200 units then the Seasonal forecast for Year 4
4 - 89 Seasonal Index Example 140 – 130 – 120 – 110 – 100 – 90 – 80 – 70 – | | | | | | | | | | | | J F M A M J J A S O N D Time Demand Year 4 Forecast Year 3 Demand Year 2 Demand Year 1 Demand
4 - 90 San Diego Hospital 10,200 – 10,000 – 9,800 – 9,600 – 9,400 – 9,200 – 9,000 – | | | | | | | | | | | | Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 67 68 69 70 71 72 73 74 75 76 77 78 Month Inpatient Days 9530 9551 9573 9594 9616 9637 9659 9680 9702 9724 9745 9766 Figure 4.6 Trend Data
4 - 91 San Diego Hospital Seasonality Indices for Adult Inpatient Days at San Diego Hospital MONTH SEASONALITY INDEX MONTH SEASONALITY INDEX January 1.04 July 1.03 February 0.97 August 1.04 March 1.02 September 0.97 April 1.01 October 1.00 May 0.99 November 0.96 June 0.99 December 0.98
4 - 92 San Diego Hospital 1.06 – 1.04 – 1.02 – 1.00 – 0.98 – 0.96 – 0.94 – 0.92 – | | | | | | | | | | | | Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 67 68 69 70 71 72 73 74 75 76 77 78 Month Index for Inpatient Days 1.04 1.02 1.01 0.99 1.03 1.04 1.00 0.98 0.97 0.99 0.97 0.96 Figure 4.7 Seasonal Indices
4 - 93 San Diego Hospital Period 67 68 69 70 71 72 Month Jan Feb Mar Apr May June Forecast with Trend & Seasonality 9,911 9,265 9,164 9,691 9,520 9,542 Period 73 74 75 76 77 78 Month July Aug Sept Oct Nov Dec Forecast with Trend & Seasonality 9,949 10,068 9,411 9,724 9,355 9,572
4 - 94 San Diego Hospital 10,200 – 10,000 – 9,800 – 9,600 – 9,400 – 9,200 – 9,000 – | | | | | | | | | | | | Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 67 68 69 70 71 72 73 74 75 76 77 78 Month Inpatient Days Figure 4.8 9911 9265 9764 9520 9691 9411 9949 9724 9542 9355 10068 9572 Combined Trend and Seasonal Forecast
4 - 95 Adjusting Trend Data Quarter I: Quarter II: Quarter III: Quarter IV:
4 - 96 Associative Forecasting Used when changes in one or more independent variables can be used to predict the changes in the dependent variable Most common technique is linear regression analysis We apply this technique just as we did in the time-series example
4 - 97 Associative Forecasting Forecasting an outcome based on predictor variables using the least squares technique y = a + bx ^ where y = value of the dependent variable (in our example, sales) a = y-axis intercept b = slope of the regression line x = the independent variable ^
4 - 98 Associative Forecasting Example NODEL’S SALES (IN $ MILLIONS), y AREA PAYROLL (IN $ BILLIONS), x NODEL’S SALES (IN $ MILLIONS), y AREA PAYROLL (IN $ BILLIONS), x 2.0 1 2.0 2 3.0 3 2.0 1 2.5 4 3.5 7 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions)
4 - 99 Associative Forecasting Example SALES, y PAYROLL, x x2 xy 2.0 1 1 2.0 3.0 3 9 9.0 2.5 4 16 10.0 2.0 2 4 4.0 2.0 1 1 2.0 3.5 7 49 24.5 Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5
4 - 100 Associative Forecasting Example SALES, y PAYROLL, x x2 xy 2.0 1 1 2.0 3.0 3 9 9.0 2.5 4 16 10.0 2.0 2 4 4.0 2.0 1 1 2.0 3.5 7 49 24.5 Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5
4 - 101 Associative Forecasting Example SALES, y PAYROLL, x x2 xy 2.0 1 1 2.0 3.0 3 9 9.0 2.5 4 16 10.0 2.0 2 4 4.0 2.0 1 1 2.0 3.5 7 49 24.5 Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions)
4 - 102 Associative Forecasting Example If payroll next year is estimated to be $6 billion, then: Sales (in $ millions) = 1.75 + .25(6) = 1.75 + 1.5 = 3.25 Sales = $3,250,000
4 - 103 Associative Forecasting Example If payroll next year is estimated to be $6 billion, then: Sales (in$ millions) = 1.75 + .25(6) = 1.75 + 1.5 = 3.25 Sales = $3,250,000 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions) 3.25
4 - 104 Standard Error of the Estimate ► A forecast is just a point estimate of a future value ► This point is actually the mean of a probability distribution Figure 4.9 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions) 3.25 Regression line,
4 - 105 Standard Error of the Estimate where y = y-value of each data point yc = computed value of the dependent variable, from the regression equation n = number of data points
4 - 106 Standard Error of the Estimate Computationally, this equation is considerably easier to use We use the standard error to set up prediction intervals around the point estimate
4 - 107 Standard Error of the Estimate The standard error of the estimate is $306,000 in sales 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions) 3.25
4 - 108 ► How strong is the linear relationship between the variables? ► Correlation does not necessarily imply causality! ► Coefficient of correlation, r, measures degree of association ► Values range from -1 to +1 Correlation
4 - 109 Correlation Coefficient
4 - 110 Correlation Coefficient y x (a) Perfect negative correlation y x (c) No correlation y x (d) Positive correlation y x (e) Perfect positive correlation y x (b) Negative correlation High Moderate Low Correlation coefficient values High Moderate Low | | | | | | | | | –1.0 –0.8 –0.6 –0.4 –0.2 0 0.2 0.4 0.6 0.8 1.0 Figure 4.10
4 - 111 Correlation Coefficient y x x2 xy y2 2.0 1 1 2.0 4.0 3.0 3 9 9.0 9.0 2.5 4 16 10.0 6.25 2.0 2 4 4.0 4.0 2.0 1 1 2.0 4.0 3.5 7 49 24.5 12.25 Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5 Σy2 = 39.5
4 - 112 ► Coefficient of Determination, r2 , measures the percent of change in y predicted by the change in x ► Values range from 0 to 1 ► Easy to interpret Correlation For the Nodel Construction example: r = .901 r2 = .81
4 - 113 Multiple-Regression Analysis If more than one independent variable is to be used in the model, linear regression can be extended to multiple regression to accommodate several independent variables Computationally, this is quite complex and generally done on the computer
4 - 114 Multiple-Regression Analysis In the Nodel example, including interest rates in the model gives the new equation: An improved correlation coefficient of r = .96 suggests this model does a better job of predicting the change in construction sales Sales = 1.80 + .30(6) - 5.0(.12) = 3.00 Sales = $3,000,000
4 - 115 ► Measures how well the forecast is predicting actual values ► Ratio of cumulative forecast errors to mean absolute deviation (MAD) ► Good tracking signal has low values ► If forecasts are continually high or low, the forecast has a bias error Monitoring and Controlling Forecasts Tracking Signal
4 - 116 Monitoring and Controlling Forecasts Tracking signal Cumulative error MAD =
4 - 117 Tracking Signal Tracking signal + 0 MADs – Upper control limit Lower control limit Time Signal exceeding limit Acceptable range Figure 4.11
4 - 118 Tracking Signal Example QTR ACTUAL DEMAND FORECAST DEMAND ERROR CUM ERROR ABSOLUTE FORECAST ERROR CUM ABS FORECAST ERROR MAD TRACKING SIGNAL (CUM ERROR/MAD) 1 90 100 –10 –10 10 10 10.0 –10/10 = –1 2 95 100 –5 –15 5 15 7.5 –15/7.5 = –2 3 115 100 +15 0 15 30 10. 0/10 = 0 4 100 110 –10 –10 10 40 10. 10/10 = –1 5 125 110 +15 +5 15 55 11.0 +5/11 = +0.5 6 140 110 +30 +35 30 85 14.2 +35/14.2 = +2.5 At the end of quarter 6,
4 - 119 Adaptive Smoothing ► It’s possible to use the computer to continually monitor forecast error and adjust the values of the  and  coefficients used in exponential smoothing to continually minimize forecast error ► This technique is called adaptive smoothing
4 - 120 Focus Forecasting ► Developed at American Hardware Supply, based on two principles: 1. Sophisticated forecasting models are not always better than simple ones 2. There is no single technique that should be used for all products or services ► Uses historical data to test multiple forecasting models for individual items ► Forecasting model with the lowest error used to forecast the next demand
4 - 121 Forecasting in the Service Sector ► Presents unusual challenges ► Special need for short term records ► Needs differ greatly as function of industry and product ► Holidays and other calendar events ► Unusual events
4 - 122 Fast Food Restaurant Forecast 20% – 15% – 10% – 5% – 11-12 1-2 3-4 5-6 7-8 9-10 12-1 2-3 4-5 6-7 8-9 10-11 (Lunchtime) (Dinnertime) Hour of day Percentage of sales by hour of day Figure 4.12
4 - 123 FedEx Call Center Forecast 12% – 10% – 8% – 6% – 4% – 2% – 0% – Hour of day A.M. P.M. 2 4 6 8 10 12 2 4 6 8 10 12 Figure 4.12

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hr_om11_ch03_project FORECASTING ppts for forecasting

  • 1.
  • 2.
    4 - 2 Outline ▶Global Company Profile: Walt Disney Parks & Resorts ▶ What Is Forecasting? ▶ The Strategic Importance of Forecasting ▶ Seven Steps in the Forecasting System ▶ Forecasting Approaches
  • 3.
    4 - 3 Outline- Continued ▶ Time-Series Forecasting ▶ Associative Forecasting Methods: Regression and Correlation Analysis ▶ Monitoring and Controlling Forecasts ▶ Forecasting in the Service Sector
  • 4.
    4 - 4 LearningObjectives When you complete this chapter you should be able to : 1. Understand the three time horizons and which models apply for each use 2. Explain when to use each of the four qualitative models 3. Apply the naive, moving average, exponential smoothing, and trend methods
  • 5.
    4 - 5 LearningObjectives When you complete this chapter you should be able to : 4. Compute three measures of forecast accuracy 5. Develop seasonal indices 6. Conduct a regression and correlation analysis 7. Use a tracking signal
  • 6.
    4 - 6 ►Global portfolio includes parks in Hong Kong, Paris, Tokyo, Orlando, and Anaheim ► Revenues are derived from people – how many visitors and how they spend their money ► Daily management report contains only the forecast and actual attendance at each park Forecasting Provides a Competitive Advantage for Disney
  • 7.
    4 - 7 ►Disney generates daily, weekly, monthly, annual, and 5-year forecasts ► Forecast used by labor management, maintenance, operations, finance, and park scheduling ► Forecast used to adjust opening times, rides, shows, staffing levels, and guests admitted Forecasting Provides a Competitive Advantage for Disney
  • 8.
    4 - 8 ►20% of customers come from outside the USA ► Economic model includes gross domestic product, cross-exchange rates, arrivals into the USA ► A staff of 35 analysts and 70 field people survey 1 million park guests, employees, and travel professionals each year Forecasting Provides a Competitive Advantage for Disney
  • 9.
    4 - 9 ►Inputs to the forecasting model include airline specials, Federal Reserve policies, Wall Street trends, vacation/holiday schedules for 3,000 school districts around the world ► Average forecast error for the 5-year forecast is 5% ► Average forecast error for annual forecasts is between 0% and 3% Forecasting Provides a Competitive Advantage for Disney
  • 10.
    4 - 10 Whatis Forecasting? ► Process of predicting a future event ► Underlying basis of all business decisions ► Production ► Inventory ► Personnel ► Facilities ??
  • 11.
    4 - 11 1.Short-range forecast ► Up to 1 year, generally less than 3 months ► Purchasing, job scheduling, workforce levels, job assignments, production levels 2. Medium-range forecast ► 3 months to 3 years ► Sales and production planning, budgeting 3. Long-range forecast ► 3+ years ► New product planning, facility location, research and development Forecasting Time Horizons
  • 12.
    4 - 12 DistinguishingDifferences 1. Medium/long range forecasts deal with more comprehensive issues and support management decisions regarding planning and products, plants and processes 2. Short-term forecasting usually employs different methodologies than longer-term forecasting 3. Short-term forecasts tend to be more accurate than longer-term forecasts
  • 13.
    4 - 13 Influenceof Product Life Cycle ► Introduction and growth require longer forecasts than maturity and decline ► As product passes through life cycle, forecasts are useful in projecting ► Staffing levels ► Inventory levels ► Factory capacity Introduction – Growth – Maturity – Decline
  • 14.
    4 - 14 ProductLife Cycle Best period to increase market share R&D engineering is critical Practical to change price or quality image Strengthen niche Poor time to change image, price, or quality Competitive costs become critical Defend market position Cost control critical Introduction Growth Maturity Decline Company Strategy/Issues Figure 2.5 Internet search engines Sales Drive-through restaurants DVDs Analog TVs Boeing 787 Electric vehicles iPods 3-D game players 3D printers Xbox 360
  • 15.
    4 - 15 ProductLife Cycle Product design and development critical Frequent product and process design changes Short production runs High production costs Limited models Attention to quality Introduction Growth Maturity Decline OM Strategy/Issues Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focus Enhance distribution Standardization Fewer product changes, more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity Figure 2.5
  • 16.
    4 - 16 Typesof Forecasts 1. Economic forecasts ► Address business cycle – inflation rate, money supply, housing starts, etc. 2. Technological forecasts ► Predict rate of technological progress ► Impacts development of new products 3. Demand forecasts ► Predict sales of existing products and services
  • 17.
    4 - 17 StrategicImportance of Forecasting ► Supply-Chain Management – Good supplier relations, advantages in product innovation, cost and speed to market ► Human Resources – Hiring, training, laying off workers ► Capacity – Capacity shortages can result in undependable delivery, loss of customers, loss of market share
  • 18.
    4 - 18 SevenSteps in Forecasting 1. Determine the use of the forecast 2. Select the items to be forecasted 3. Determine the time horizon of the forecast 4. Select the forecasting model(s) 5. Gather the data needed to make the forecast 6. Make the forecast 7. Validate and implement results
  • 19.
    4 - 19 TheRealities! ► Forecasts are seldom perfect, unpredictable outside factors may impact the forecast ► Most techniques assume an underlying stability in the system ► Product family and aggregated forecasts are more accurate than individual product forecasts
  • 20.
    4 - 20 ForecastingApproaches ► Used when situation is vague and little data exist ► New products ► New technology ► Involves intuition, experience ► e.g., forecasting sales on Internet Qualitative Methods
  • 21.
    4 - 21 ForecastingApproaches ► Used when situation is ‘stable’ and historical data exist ► Existing products ► Current technology ► Involves mathematical techniques ► e.g., forecasting sales of color televisions Quantitative Methods
  • 22.
    4 - 22 Overviewof Qualitative Methods 1. Jury of executive opinion ► Pool opinions of high-level experts, sometimes augment by statistical models 2. Delphi method ► Panel of experts, queried iteratively
  • 23.
    4 - 23 Overviewof Qualitative Methods 3. Sales force composite ► Estimates from individual salespersons are reviewed for reasonableness, then aggregated 4. Market Survey ► Ask the customer
  • 24.
    4 - 24 ►Involves small group of high-level experts and managers ► Group estimates demand by working together ► Combines managerial experience with statistical models ► Relatively quick ► ‘Group-think’ disadvantage Jury of Executive Opinion
  • 25.
    4 - 25 DelphiMethod ► Iterative group process, continues until consensus is reached ► 3 types of participants ► Decision makers ► Staff ► Respondents Staff (Administering survey) Decision Makers (Evaluate responses and make decisions) Respondents (People who can make valuable judgments)
  • 26.
    4 - 26 SalesForce Composite ► Each salesperson projects his or her sales ► Combined at district and national levels ► Sales reps know customers’ wants ► May be overly optimistic
  • 27.
    4 - 27 MarketSurvey ► Ask customers about purchasing plans ► Useful for demand and product design and planning ► What consumers say, and what they actually do may be different ► May be overly optimistic
  • 28.
    4 - 28 Overviewof Quantitative Approaches 1. Naive approach 2. Moving averages 3. Exponential smoothing 4. Trend projection 5. Linear regression Time-series models Associative model
  • 29.
    4 - 29 ►Set of evenly spaced numerical data ► Obtained by observing response variable at regular time periods ► Forecast based only on past values, no other variables important ► Assumes that factors influencing past and present will continue influence in future Time-Series Forecasting
  • 30.
  • 31.
    4 - 31 Componentsof Demand Demand for product or service | | | | 1 2 3 4 Time (years) Average demand over 4 years Trend component Actual demand line Random variation Figure 4.1 Seasonal peaks
  • 32.
    4 - 32 ►Persistent, overall upward or downward pattern ► Changes due to population, technology, age, culture, etc. ► Typically several years duration Trend Component
  • 33.
    4 - 33 ►Regular pattern of up and down fluctuations ► Due to weather, customs, etc. ► Occurs within a single year Seasonal Component PERIOD LENGTH “SEASON” LENGTH NUMBER OF “SEASONS” IN PATTERN Week Day 7 Month Week 4 – 4.5 Month Day 28 – 31 Year Quarter 4 Year Month 12 Year Week 52
  • 34.
    4 - 34 ►Repeating up and down movements ► Affected by business cycle, political, and economic factors ► Multiple years duration ► Often causal or associative relationships Cyclical Component 0 5 10 15 20
  • 35.
    4 - 35 ►Erratic, unsystematic, ‘residual’ fluctuations ► Due to random variation or unforeseen events ► Short duration and nonrepeating Random Component M T W T F
  • 36.
    4 - 36 NaiveApproach ► Assumes demand in next period is the same as demand in most recent period ► e.g., If January sales were 68, then February sales will be 68 ► Sometimes cost effective and efficient ► Can be good starting point
  • 37.
    4 - 37 ►MA is a series of arithmetic means ► Used if little or no trend ► Used often for smoothing ► Provides overall impression of data over time Moving Average Method
  • 38.
    4 - 38 MovingAverage Example MONTH ACTUAL SHED SALES 3-MONTH MOVING AVERAGE January 10 February 12 March 13 April 16 May 19 June 23 July 26 August 30 September 28 October 18 November 16 December 14 (10 + 12 + 13)/3 = 11 2 /3 (12 + 13 + 16)/3 = 13 2 /3 (13 + 16 + 19)/3 = 16 (16 + 19 + 23)/3 = 19 1 /3 (19 + 23 + 26)/3 = 22 2 /3 (23 + 26 + 30)/3 = 26 1 /3 (29 + 30 + 28)/3 = 28 (30 + 28 + 18)/3 = 25 1 /3 (28 + 18 + 16)/3 = 20 2 /3 10 12 13
  • 39.
    4 - 39 ►Used when some trend might be present ► Older data usually less important ► Weights based on experience and intuition Weighted Moving Average Weighted moving average
  • 40.
    4 - 40 WeightedMoving Average MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE January 10 February 12 March 13 April 16 May 19 June 23 July 26 August 30 September 28 October 18 November 16 December 14 WEIGHTS APPLIED PERIOD 3 Last month 2 Two months ago 1 Three months ago 6 Sum of the weights Forecast for this month = 3 x Sales last mo. + 2 x Sales 2 mos. ago + 1 x Sales 3 mos. ago Sum of the weights [(3 x 13) + (2 x 12) + (10)]/6 = 12 1 /6 10 12 13
  • 41.
    4 - 41 WeightedMoving Average MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE January 10 February 12 March 13 April 16 May 19 June 23 July 26 August 30 September 28 October 18 November 16 December 14 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1 /6 10 12 13 [(3 x 16) + (2 x 13) + (12)]/6 = 14 1 /3 [(3 x 19) + (2 x 16) + (13)]/6 = 17 [(3 x 23) + (2 x 19) + (16)]/6 = 20 1 /2 [(3 x 26) + (2 x 23) + (19)]/6 = 23 5 /6 [(3 x 30) + (2 x 26) + (23)]/6 = 27 1 /2 [(3 x 28) + (2 x 30) + (26)]/6 = 28 1 /3 [(3 x 18) + (2 x 28) + (30)]/6 = 23 1 /3 [(3 x 16) + (2 x 18) + (28)]/6 = 18 2 /3
  • 42.
    4 - 42 ►Increasing n smooths the forecast but makes it less sensitive to changes ► Does not forecast trends well ► Requires extensive historical data Potential Problems With Moving Average
  • 43.
    4 - 43 Graphof Moving Averages | | | | | | | | | | | | J F M A M J J A S O N D Sales demand 30 – 25 – 20 – 15 – 10 – 5 – Month Actual sales Moving average Weighted moving average Figure 4.2
  • 44.
    4 - 44 ►Form of weighted moving average ► Weights decline exponentially ► Most recent data weighted most ► Requires smoothing constant () ► Ranges from 0 to 1 ► Subjectively chosen ► Involves little record keeping of past data Exponential Smoothing
  • 45.
    4 - 45 ExponentialSmoothing New forecast = Last period’s forecast +  (Last period’s actual demand – Last period’s forecast) Ft = Ft – 1 + (At – 1 - Ft – 1) where Ft = new forecast Ft – 1 = previous period’s forecast  = smoothing (or weighting) constant (0 ≤  ≤ 1) At – 1 = previous period’s actual demand
  • 46.
    4 - 46 ExponentialSmoothing Example Predicted demand = 142 Ford Mustangs Actual demand = 153 Smoothing constant  = .20
  • 47.
    4 - 47 ExponentialSmoothing Example Predicted demand = 142 Ford Mustangs Actual demand = 153 Smoothing constant  = .20 New forecast = 142 + .2(153 – 142)
  • 48.
    4 - 48 ExponentialSmoothing Example Predicted demand = 142 Ford Mustangs Actual demand = 153 Smoothing constant  = .20 New forecast = 142 + .2(153 – 142) = 142 + 2.2 = 144.2 ≈ 144 cars
  • 49.
    4 - 49 Effectof Smoothing Constants ▶ Smoothing constant generally .05 ≤  ≤ .50 ▶ As  increases, older values become less significant WEIGHT ASSIGNED TO SMOOTHING CONSTANT MOST RECENT PERIOD () 2ND MOST RECENT PERIOD (1 – ) 3RD MOST RECENT PERIOD (1 – )2 4th MOST RECENT PERIOD (1 – )3 5th MOST RECENT PERIOD (1 – )4  = .1 .1 .09 .081 .073 .066  = .5 .5 .25 .125 .063 .031
  • 50.
    4 - 50 Impactof Different  225 – 200 – 175 – 150 – | | | | | | | | | 1 2 3 4 5 6 7 8 9 Quarter Demand  = .1 Actual demand  = .5
  • 51.
    4 - 51 Impactof Different  225 – 200 – 175 – 150 – | | | | | | | | | 1 2 3 4 5 6 7 8 9 Quarter Demand  = .1 Actual demand  = .5 ► Chose high values of  when underlying average is likely to change ► Choose low values of  when underlying average is stable
  • 52.
    4 - 52 Choosing The objective is to obtain the most accurate forecast no matter the technique We generally do this by selecting the model that gives us the lowest forecast error Forecast error = Actual demand – Forecast value = At – Ft
  • 53.
    4 - 53 CommonMeasures of Error Mean Absolute Deviation (MAD)
  • 54.
    4 - 54 Determiningthe MAD QUARTER ACTUAL TONNAGE UNLOADED FORECAST WITH  = .10 FORECAST WITH  = .50 1 180 175 175 2 168 175.50 = 175.00 + .10(180 – 175) 177.50 3 159 174.75 = 175.50 + .10(168 – 175.50) 172.75 4 175 173.18 = 174.75 + .10(159 – 174.75) 165.88 5 190 173.36 = 173.18 + .10(175 – 173.18) 170.44 6 205 175.02 = 173.36 + .10(190 – 173.36) 180.22 7 180 178.02 = 175.02 + .10(205 – 175.02) 192.61 8 182 178.22 = 178.02 + .10(180 – 178.02) 186.30 9 ? 178.59 = 178.22 + .10(182 – 178.22) 184.15
  • 55.
    4 - 55 Determiningthe MAD QUARTER ACTUAL TONNAGE UNLOADED FORECAST WITH  = .10 ABSOLUTE DEVIATION FOR a = .10 FORECAST WITH  = .50 ABSOLUTE DEVIATION FOR a = .50 1 180 175 5.00 175 5.00 2 168 175.50 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 Sum of absolute deviations: 82.45 98.62 MAD = Σ|Deviations| 10.31 12.33 n
  • 56.
    4 - 56 CommonMeasures of Error Mean Squared Error (MSE)
  • 57.
    4 - 57 Determiningthe MSE QUARTER ACTUAL TONNAGE UNLOADED FORECAST FOR  = .10 (ERROR)2 1 180 175 52 = 25 2 168 175.50 (–7.5)2 = 56.25 3 159 174.75 (–15.75)2 = 248.06 4 175 173.18 (1.82)2 = 3.31 5 190 173.36 (16.64)2 = 276.89 6 205 175.02 (29.98)2 = 898.80 7 180 178.02 (1.98)2 = 3.92 8 182 178.22 (3.78)2 = 14.29 Sum of errors squared = 1,526.52
  • 58.
    4 - 58 CommonMeasures of Error Mean Absolute Percent Error (MAPE)
  • 59.
    4 - 59 Determiningthe MAPE QUARTER ACTUAL TONNAGE UNLOADED FORECAST FOR  = .10 ABSOLUTE PERCENT ERROR 100(ERROR/ACTUAL) 1 180 175.00 100(5/180) = 2.78% 2 168 175.50 100(7.5/168) = 4.46% 3 159 174.75 100(15.75/159) = 9.90% 4 175 173.18 100(1.82/175) = 1.05% 5 190 173.36 100(16.64/190) = 8.76% 6 205 175.02 100(29.98/205) = 14.62% 7 180 178.02 100(1.98/180) = 1.10% 8 182 178.22 100(3.78/182) = 2.08% Sum of % errors = 44.75%
  • 60.
    4 - 60 Comparisonof Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded  = .10  = .10  = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62
  • 61.
    4 - 61 Comparisonof Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded a = .10 a = .10  = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62 MAD = ∑ |deviations| n = 82.45/8 = 10.31 For  = .10 = 98.62/8 = 12.33 For  = .50
  • 62.
    4 - 62 Comparisonof Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded a = .10 a = .10  = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62 MAD 10.31 12.33 = 1,526.54/8 = 190.82 For  = .10 = 1,561.91/8 = 195.24 For  = .50 MSE = ∑ (forecast errors)2 n
  • 63.
    4 - 63 Comparisonof Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded a = .10 a = .10 a = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62 MAD 10.31 12.33 MSE 190.82 195.24 = 44.75/8 = 5.59% For  = .10 = 54.05/8 = 6.76% For  = .50 MAPE = ∑100|deviationi|/actuali n n i = 1
  • 64.
    4 - 64 Comparisonof Forecast Error Rounded Absolute Rounded Absolute Actual Forecast Deviation Forecast Deviation Tonnage with for with for Quarter Unloaded  = .10  = .10  = .50  = .50 1 180 175 5.00 175 5.00 2 168 175.5 7.50 177.50 9.50 3 159 174.75 15.75 172.75 13.75 4 175 173.18 1.82 165.88 9.12 5 190 173.36 16.64 170.44 19.56 6 205 175.02 29.98 180.22 24.78 7 180 178.02 1.98 192.61 12.61 8 182 178.22 3.78 186.30 4.30 82.45 98.62 MAD 10.31 12.33 MSE 190.82 195.24 MAPE 5.59% 6.76%
  • 65.
    4 - 65 ExponentialSmoothing with Trend Adjustment When a trend is present, exponential smoothing must be modified MONTH ACTUAL DEMAND FORECAST (Ft) FOR MONTHS 1 – 5 1 100 Ft = 100 (given) 2 200 Ft = F1 + (A1 – F1) = 100 + .4(100 – 100) = 100 3 300 Ft = F2 + (A2 – F2) = 100 + .4(200 – 100) = 140 4 400 Ft = F3 + (A3 – F3) = 140 + .4(300 – 140) = 204 5 500 Ft = F4 + (A4 – F4) = 204 + .4(400 – 204) = 282
  • 66.
    4 - 66 ExponentialSmoothing with Trend Adjustment Forecast including (FITt) = trend Exponentially Exponentially smoothed (Ft) + smoothed (Tt) forecast trend Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1) Tt = (Ft - Ft - 1) + (1 - )Tt - 1 where Ft = exponentially smoothed forecast average Tt = exponentially smoothed trend At = actual demand  = smoothing constant for average (0 ≤  ≤ 1)  = smoothing constant for trend (0 ≤≤ 1)
  • 67.
    4 - 67 ExponentialSmoothing with Trend Adjustment Step 1: Compute Ft Step 2: Compute Tt Step 3: Calculate the forecast FITt = Ft + Tt
  • 68.
    4 - 68 ExponentialSmoothing with Trend Adjustment Example MONTH (t) ACTUAL DEMAND (At) MONTH (t) ACTUAL DEMAND (At) 1 12 6 21 2 17 7 31 3 20 8 28 4 19 9 36 5 24 10 ?  = .2  = .4
  • 69.
    4 - 69 ExponentialSmoothing with Trend Adjustment Example TABLE 4.1 Forecast with  - .2 and  = .4 MONTH ACTUAL DEMAND SMOOTHED FORECAST AVERAGE, Ft SMOOTHED TREND, Tt FORECAST INCLUDING TREND, FITt 1 12 11 2 13.00 2 17 3 20 4 19 5 24 6 21 7 31 8 28 9 36 10 — F2 = A1 + (1 – )(F1 + T1) F2 = (.2)(12) + (1 – .2)(11 + 2) = 2.4 + (.8)(13) = 2.4 + 10.4 = 12.8 units Step 1: Average for Month 2 12.80
  • 70.
    4 - 70 ExponentialSmoothing with Trend Adjustment Example TABLE 4.1 Forecast with  - .2 and  = .4 MONTH ACTUAL DEMAND SMOOTHED FORECAST AVERAGE, Ft SMOOTHED TREND, Tt FORECAST INCLUDING TREND, FITt 1 12 11 2 13.00 2 17 12.80 3 20 4 19 5 24 6 21 7 31 8 28 9 36 10 — T2 = (F2 - F1) + (1 - b)T1 T2 = (.4)(12.8 - 11) + (1 - .4)(2) = .72 + 1.2 = 1.92 units Step 2: Trend for Month 2 1.92
  • 71.
    4 - 71 ExponentialSmoothing with Trend Adjustment Example TABLE 4.1 Forecast with  - .2 and  = .4 MONTH ACTUAL DEMAND SMOOTHED FORECAST AVERAGE, Ft SMOOTHED TREND, Tt FORECAST INCLUDING TREND, FITt 1 12 11 2 13.00 2 17 12.80 1.92 3 20 4 19 5 24 6 21 7 31 8 28 9 36 10 — FIT2 = F2 + T2 FIT2 = 12.8 + 1.92 = 14.72 units Step 3: Calculate FIT for Month 2 14.72
  • 72.
    4 - 72 ExponentialSmoothing with Trend Adjustment Example TABLE 4.1 Forecast with  - .2 and  = .4 MONTH ACTUAL DEMAND SMOOTHED FORECAST AVERAGE, Ft SMOOTHED TREND, Tt FORECAST INCLUDING TREND, FITt 1 12 11 2 13.00 2 17 12.80 1.92 14.72 3 20 15.18 2.10 17.28 4 19 17.82 2.32 20.14 5 24 19.91 2.23 22.14 6 21 22.51 2.38 24.89 7 31 24.11 2.07 26.18 8 28 27.14 2.45 29.59 9 36 29.28 2.32 31.60 10 — 32.48 2.68 35.16
  • 73.
    4 - 73 ExponentialSmoothing with Trend Adjustment Example Figure 4.3 | | | | | | | | | 1 2 3 4 5 6 7 8 9 Time (months) Product demand 40 – 35 – 30 – 25 – 20 – 15 – 10 – 5 – 0 – Actual demand (At) Forecast including trend (FITt) with  = .2 and  = .4
  • 74.
    4 - 74 TrendProjections Fitting a trend line to historical data points to project into the medium to long-range Linear trends can be found using the least squares technique y = a + bx ^ where y= computed value of the variable to be predicted (dependent variable) a= y-axis intercept b= slope of the regression line x= the independent variable ^
  • 75.
    4 - 75 LeastSquares Method Figure 4.4 Deviation1 (error) Deviation5 Deviation7 Deviation2 Deviation6 Deviation4 Deviation3 Actual observation (y-value) Trend line, y = a + bx ^ Time period Values of Dependent Variable (y-values) | | | | | | | 1 2 3 4 5 6 7 Least squares method minimizes the sum of the squared errors (deviations)
  • 76.
    4 - 76 LeastSquares Method Equations to calculate the regression variables
  • 77.
    4 - 77 LeastSquares Example YEAR ELECTRICAL POWER DEMAND YEAR ELECTRICAL POWER DEMAND 1 74 5 105 2 79 6 142 3 80 7 122 4 90
  • 78.
    4 - 78 LeastSquares Example YEAR (x) ELECTRICAL POWER DEMAND (y) x2 xy 1 74 1 74 2 79 4 158 3 80 9 240 4 90 16 360 5 105 25 525 6 142 36 852 7 122 49 854 Σx = 28 Σy = 692 Σx2 = 140 Σxy = 3,063
  • 79.
    4 - 79 LeastSquares Example YEAR (x) ELECTRICAL POWER DEMAND (y) x2 xy 1 74 1 74 2 79 4 158 3 80 9 240 4 90 16 360 5 105 25 525 6 142 36 852 7 122 49 854 Σx = 28 Σy = 692 Σx2 = 140 Σxy = 3,063 Demand in year 8 = 56.70 + 10.54(8) = 141.02, or 141 megawatts
  • 80.
    4 - 80 LeastSquares Example | | | | | | | | | 1 2 3 4 5 6 7 8 9 160 – 150 – 140 – 130 – 120 – 110 – 100 – 90 – 80 – 70 – 60 – 50 – Year Power demand (megawatts) Trend line, y = 56.70 + 10.54x ^ Figure 4.5
  • 81.
    4 - 81 LeastSquares Requirements 1. We always plot the data to insure a linear relationship 2. We do not predict time periods far beyond the database 3. Deviations around the least squares line are assumed to be random
  • 82.
    4 - 82 SeasonalVariations In Data The multiplicative seasonal model can adjust trend data for seasonal variations in demand
  • 83.
    4 - 83 SeasonalVariations In Data 1. Find average historical demand for each month 2. Compute the average demand over all months 3. Compute a seasonal index for each month 4. Estimate next year’s total demand 5. Divide this estimate of total demand by the number of months, then multiply it by the seasonal index for that month Steps in the process for monthly seasons:
  • 84.
    4 - 84 SeasonalIndex Example DEMAND MONTH YEAR 1 YEAR 2 YEAR 3 AVERAGE YEARLY DEMAND AVERAGE MONTHLY DEMAND SEASONAL INDEX Jan 80 85 105 Feb 70 85 85 Mar 80 93 82 Apr 90 95 115 May 113 125 131 June 110 115 120 July 100 102 113 Aug 88 102 110 Sept 85 90 95 Oct 77 78 85 Nov 75 82 83 Dec 82 78 80 90 80 85 100 123 115 105 100 90 80 80 80 Total average annual demand = 1,128
  • 85.
    4 - 85 SeasonalIndex Example DEMAND MONTH YEAR 1 YEAR 2 YEAR 3 AVERAGE YEARLY DEMAND AVERAGE MONTHLY DEMAND SEASONAL INDEX Jan 80 85 105 90 94 Feb 70 85 85 80 94 Mar 80 93 82 85 94 Apr 90 95 115 100 94 May 113 125 131 123 94 June 110 115 120 115 94 July 100 102 113 105 94 Aug 88 102 110 100 94 Sept 85 90 95 90 94 Oct 77 78 85 80 94 Nov 75 82 83 80 94 Dec 82 78 80 80 94 Total average annual demand = 1,128 Average monthly demand
  • 86.
    4 - 86 SeasonalIndex Example DEMAND MONTH YEAR 1 YEAR 2 YEAR 3 AVERAGE YEARLY DEMAND AVERAGE MONTHLY DEMAND SEASONAL INDEX Jan 80 85 105 90 94 Feb 70 85 85 80 94 Mar 80 93 82 85 94 Apr 90 95 115 100 94 May 113 125 131 123 94 June 110 115 120 115 94 July 100 102 113 105 94 Aug 88 102 110 100 94 Sept 85 90 95 90 94 Oct 77 78 85 80 94 Nov 75 82 83 80 94 Dec 82 78 80 80 94 Total average annual demand = 1,128 Seasonal index .957( = 90/94)
  • 87.
    4 - 87 SeasonalIndex Example DEMAND MONTH YEAR 1 YEAR 2 YEAR 3 AVERAGE YEARLY DEMAND AVERAGE MONTHLY DEMAND SEASONAL INDEX Jan 80 85 105 90 94 .957( = 90/94) Feb 70 85 85 80 94 .851( = 80/94) Mar 80 93 82 85 94 .904( = 85/94) Apr 90 95 115 100 94 1.064( = 100/94) May 113 125 131 123 94 1.309( = 123/94) June 110 115 120 115 94 1.223( = 115/94) July 100 102 113 105 94 1.117( = 105/94) Aug 88 102 110 100 94 1.064( = 100/94) Sept 85 90 95 90 94 .957( = 90/94) Oct 77 78 85 80 94 .851( = 80/94) Nov 75 82 83 80 94 .851( = 80/94) Dec 82 78 80 80 94 .851( = 80/94) Total average annual demand = 1,128
  • 88.
    4 - 88 SeasonalIndex Example MONTH DEMAND MONTH DEMAND Jan 1,200 x .957 = 96 July 1,200 x 1.117 = 112 12 12 Feb 1,200 x .851 = 85 Aug 1,200 x 1.064 = 106 12 12 Mar 1,200 x .904 = 90 Sept 1,200 x .957 = 96 12 12 Apr 1,200 x 1.064 = 106 Oct 1,200 x .851 = 85 12 12 May 1,200 x 1.309 = 131 Nov 1,200 x .851 = 85 12 12 June 1,200 x 1.223 = 122 Dec 1,200 x .851 = 85 12 12 If we expect the next year’s demand to be 1200 units then the Seasonal forecast for Year 4
  • 89.
    4 - 89 SeasonalIndex Example 140 – 130 – 120 – 110 – 100 – 90 – 80 – 70 – | | | | | | | | | | | | J F M A M J J A S O N D Time Demand Year 4 Forecast Year 3 Demand Year 2 Demand Year 1 Demand
  • 90.
    4 - 90 SanDiego Hospital 10,200 – 10,000 – 9,800 – 9,600 – 9,400 – 9,200 – 9,000 – | | | | | | | | | | | | Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 67 68 69 70 71 72 73 74 75 76 77 78 Month Inpatient Days 9530 9551 9573 9594 9616 9637 9659 9680 9702 9724 9745 9766 Figure 4.6 Trend Data
  • 91.
    4 - 91 SanDiego Hospital Seasonality Indices for Adult Inpatient Days at San Diego Hospital MONTH SEASONALITY INDEX MONTH SEASONALITY INDEX January 1.04 July 1.03 February 0.97 August 1.04 March 1.02 September 0.97 April 1.01 October 1.00 May 0.99 November 0.96 June 0.99 December 0.98
  • 92.
    4 - 92 SanDiego Hospital 1.06 – 1.04 – 1.02 – 1.00 – 0.98 – 0.96 – 0.94 – 0.92 – | | | | | | | | | | | | Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 67 68 69 70 71 72 73 74 75 76 77 78 Month Index for Inpatient Days 1.04 1.02 1.01 0.99 1.03 1.04 1.00 0.98 0.97 0.99 0.97 0.96 Figure 4.7 Seasonal Indices
  • 93.
    4 - 93 SanDiego Hospital Period 67 68 69 70 71 72 Month Jan Feb Mar Apr May June Forecast with Trend & Seasonality 9,911 9,265 9,164 9,691 9,520 9,542 Period 73 74 75 76 77 78 Month July Aug Sept Oct Nov Dec Forecast with Trend & Seasonality 9,949 10,068 9,411 9,724 9,355 9,572
  • 94.
    4 - 94 SanDiego Hospital 10,200 – 10,000 – 9,800 – 9,600 – 9,400 – 9,200 – 9,000 – | | | | | | | | | | | | Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec 67 68 69 70 71 72 73 74 75 76 77 78 Month Inpatient Days Figure 4.8 9911 9265 9764 9520 9691 9411 9949 9724 9542 9355 10068 9572 Combined Trend and Seasonal Forecast
  • 95.
    4 - 95 AdjustingTrend Data Quarter I: Quarter II: Quarter III: Quarter IV:
  • 96.
    4 - 96 AssociativeForecasting Used when changes in one or more independent variables can be used to predict the changes in the dependent variable Most common technique is linear regression analysis We apply this technique just as we did in the time-series example
  • 97.
    4 - 97 AssociativeForecasting Forecasting an outcome based on predictor variables using the least squares technique y = a + bx ^ where y = value of the dependent variable (in our example, sales) a = y-axis intercept b = slope of the regression line x = the independent variable ^
  • 98.
    4 - 98 AssociativeForecasting Example NODEL’S SALES (IN $ MILLIONS), y AREA PAYROLL (IN $ BILLIONS), x NODEL’S SALES (IN $ MILLIONS), y AREA PAYROLL (IN $ BILLIONS), x 2.0 1 2.0 2 3.0 3 2.0 1 2.5 4 3.5 7 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions)
  • 99.
    4 - 99 AssociativeForecasting Example SALES, y PAYROLL, x x2 xy 2.0 1 1 2.0 3.0 3 9 9.0 2.5 4 16 10.0 2.0 2 4 4.0 2.0 1 1 2.0 3.5 7 49 24.5 Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5
  • 100.
    4 - 100 AssociativeForecasting Example SALES, y PAYROLL, x x2 xy 2.0 1 1 2.0 3.0 3 9 9.0 2.5 4 16 10.0 2.0 2 4 4.0 2.0 1 1 2.0 3.5 7 49 24.5 Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5
  • 101.
    4 - 101 AssociativeForecasting Example SALES, y PAYROLL, x x2 xy 2.0 1 1 2.0 3.0 3 9 9.0 2.5 4 16 10.0 2.0 2 4 4.0 2.0 1 1 2.0 3.5 7 49 24.5 Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions)
  • 102.
    4 - 102 AssociativeForecasting Example If payroll next year is estimated to be $6 billion, then: Sales (in $ millions) = 1.75 + .25(6) = 1.75 + 1.5 = 3.25 Sales = $3,250,000
  • 103.
    4 - 103 AssociativeForecasting Example If payroll next year is estimated to be $6 billion, then: Sales (in$ millions) = 1.75 + .25(6) = 1.75 + 1.5 = 3.25 Sales = $3,250,000 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions) 3.25
  • 104.
    4 - 104 StandardError of the Estimate ► A forecast is just a point estimate of a future value ► This point is actually the mean of a probability distribution Figure 4.9 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions) 3.25 Regression line,
  • 105.
    4 - 105 StandardError of the Estimate where y = y-value of each data point yc = computed value of the dependent variable, from the regression equation n = number of data points
  • 106.
    4 - 106 StandardError of the Estimate Computationally, this equation is considerably easier to use We use the standard error to set up prediction intervals around the point estimate
  • 107.
    4 - 107 StandardError of the Estimate The standard error of the estimate is $306,000 in sales 4.0 – 3.0 – 2.0 – 1.0 – | | | | | | | 0 1 2 3 4 5 6 7 Area payroll (in $ billions) Nodel’s sales (in$ millions) 3.25
  • 108.
    4 - 108 ►How strong is the linear relationship between the variables? ► Correlation does not necessarily imply causality! ► Coefficient of correlation, r, measures degree of association ► Values range from -1 to +1 Correlation
  • 109.
  • 110.
    4 - 110 CorrelationCoefficient y x (a) Perfect negative correlation y x (c) No correlation y x (d) Positive correlation y x (e) Perfect positive correlation y x (b) Negative correlation High Moderate Low Correlation coefficient values High Moderate Low | | | | | | | | | –1.0 –0.8 –0.6 –0.4 –0.2 0 0.2 0.4 0.6 0.8 1.0 Figure 4.10
  • 111.
    4 - 111 CorrelationCoefficient y x x2 xy y2 2.0 1 1 2.0 4.0 3.0 3 9 9.0 9.0 2.5 4 16 10.0 6.25 2.0 2 4 4.0 4.0 2.0 1 1 2.0 4.0 3.5 7 49 24.5 12.25 Σy = 15.0 Σx = 18 Σx2 = 80 Σxy = 51.5 Σy2 = 39.5
  • 112.
    4 - 112 ►Coefficient of Determination, r2 , measures the percent of change in y predicted by the change in x ► Values range from 0 to 1 ► Easy to interpret Correlation For the Nodel Construction example: r = .901 r2 = .81
  • 113.
    4 - 113 Multiple-RegressionAnalysis If more than one independent variable is to be used in the model, linear regression can be extended to multiple regression to accommodate several independent variables Computationally, this is quite complex and generally done on the computer
  • 114.
    4 - 114 Multiple-RegressionAnalysis In the Nodel example, including interest rates in the model gives the new equation: An improved correlation coefficient of r = .96 suggests this model does a better job of predicting the change in construction sales Sales = 1.80 + .30(6) - 5.0(.12) = 3.00 Sales = $3,000,000
  • 115.
    4 - 115 ►Measures how well the forecast is predicting actual values ► Ratio of cumulative forecast errors to mean absolute deviation (MAD) ► Good tracking signal has low values ► If forecasts are continually high or low, the forecast has a bias error Monitoring and Controlling Forecasts Tracking Signal
  • 116.
    4 - 116 Monitoringand Controlling Forecasts Tracking signal Cumulative error MAD =
  • 117.
    4 - 117 TrackingSignal Tracking signal + 0 MADs – Upper control limit Lower control limit Time Signal exceeding limit Acceptable range Figure 4.11
  • 118.
    4 - 118 TrackingSignal Example QTR ACTUAL DEMAND FORECAST DEMAND ERROR CUM ERROR ABSOLUTE FORECAST ERROR CUM ABS FORECAST ERROR MAD TRACKING SIGNAL (CUM ERROR/MAD) 1 90 100 –10 –10 10 10 10.0 –10/10 = –1 2 95 100 –5 –15 5 15 7.5 –15/7.5 = –2 3 115 100 +15 0 15 30 10. 0/10 = 0 4 100 110 –10 –10 10 40 10. 10/10 = –1 5 125 110 +15 +5 15 55 11.0 +5/11 = +0.5 6 140 110 +30 +35 30 85 14.2 +35/14.2 = +2.5 At the end of quarter 6,
  • 119.
    4 - 119 AdaptiveSmoothing ► It’s possible to use the computer to continually monitor forecast error and adjust the values of the  and  coefficients used in exponential smoothing to continually minimize forecast error ► This technique is called adaptive smoothing
  • 120.
    4 - 120 FocusForecasting ► Developed at American Hardware Supply, based on two principles: 1. Sophisticated forecasting models are not always better than simple ones 2. There is no single technique that should be used for all products or services ► Uses historical data to test multiple forecasting models for individual items ► Forecasting model with the lowest error used to forecast the next demand
  • 121.
    4 - 121 Forecastingin the Service Sector ► Presents unusual challenges ► Special need for short term records ► Needs differ greatly as function of industry and product ► Holidays and other calendar events ► Unusual events
  • 122.
    4 - 122 FastFood Restaurant Forecast 20% – 15% – 10% – 5% – 11-12 1-2 3-4 5-6 7-8 9-10 12-1 2-3 4-5 6-7 8-9 10-11 (Lunchtime) (Dinnertime) Hour of day Percentage of sales by hour of day Figure 4.12
  • 123.
    4 - 123 FedExCall Center Forecast 12% – 10% – 8% – 6% – 4% – 2% – 0% – Hour of day A.M. P.M. 2 4 6 8 10 12 2 4 6 8 10 12 Figure 4.12