Chapter 4 Forecasting
PowerPoint presentation to accompany Heizer/Render Principles of Operations Management, 6e Operations Management, 8e
41
Outline
What Is Forecasting?
Forecasting Time Horizons The Influence of Product Life Cycle
Types Of Forecasts
42
Outline Continued
The Strategic Importance Of Forecasting
Human Resources Capacity SupplySupply-Chain Management
43
Outline Continued
Forecasting Approaches
Overview of Qualitative Methods Overview of Quantitative Methods
44
Outline Continued
TimeTime-series Forecasting
Decomposition of a Time Series Nave Approach Moving Averages Exponential Smoothing Exponential Smoothing with Trend Adjustment Trend Projections Seasonal Variations in Data Cyclical Variations in Data
2006 Prentice Hall, Inc. 45
Outline Continued
Associative Forecasting Methods: Regression And Correlation Analysis
Using Regression Analysis to Forecast Standard Error of the Estimate Correlation Coefficients for Regression Lines MultipleMultiple-Regression Analysis
2006 Prentice Hall, Inc. 46
Outline Continued
Monitoring And Controlling Forecasts
Adaptive Smoothing Focus Forecasting
47
Learning Objectives
When you complete this chapter, you should be able to :
Identify or Define:
Forecasting Types of forecasts Time horizons Approaches to forecasts
48
Learning Objectives
When you complete this chapter, you should be able to :
Describe or Explain:
Moving averages Exponential smoothing Trend projections Regression and correlation analysis Measures of forecast accuracy
2006 Prentice Hall, Inc. 49
Forecasting at Tupperware
Each of 50 profit centers around the world is responsible for computerized monthly, quarterly, and 12-month sales projections 12These projections are aggregated by region, then globally, at Tupperwares World Headquarters Tupperware uses all techniques discussed in text
2006 Prentice Hall, Inc. 4 10
Tupperwares Process
4 11
Forecast by Consensus
Although inputs come from sales, marketing, finance, and production, final forecasts are the consensus of all participating managers The final step is Tupperwares version of the jury of executive opinion
4 13
What is Forecasting?
Process of predicting a future event Underlying basis of all business decisions
Production Inventory Personnel Facilities
2006 Prentice Hall, Inc. 4 14
??
MediumMedium-range forecast
3 months to 3 years Sales and production planning, budgeting
LongLong-range forecast
3+ years New product planning, facility location, research and development
2006 Prentice Hall, Inc. 4 15
Distinguishing Differences
Medium/long range forecasts deal with more comprehensive issues and support management decisions regarding planning and products, plants and processes ShortShort-term forecasting usually employs different methodologies than longer-term longerforecasting ShortShort-term forecasts tend to be more accurate than longer-term forecasts longer 2006 Prentice Hall, Inc. 4 16
Growth
Practical to change price or quality image Strengthen niche
Maturity
Poor time to change image, price, or quality Competitive costs become critical Defend market position
Decline
Cost control critical
Fax machines
FlatFlat-screen monitors
DVD
Figure 2.5
2006 Prentice Hall, Inc. 4 18
Growth
Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focus Enhance distribution
Maturity
Standardization Less rapid product changes more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting
Decline
Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity
OM Strategy/Issues
Figure 2.5
2006 Prentice Hall, Inc. 4 19
Types of Forecasts
Economic forecasts
Address business cycle inflation rate, money supply, housing starts, etc.
Technological forecasts
Predict rate of technological progress Impacts development of new products
Demand forecasts
Predict sales of existing product
4 20
4 21
The Realities!
Forecasts are seldom perfect Most techniques assume an underlying stability in the system Product family and aggregated forecasts are more accurate than individual product forecasts
4 23
Forecasting Approaches
Qualitative Methods Used when situation is vague and little data exist
New products New technology
4 24
Forecasting Approaches
Quantitative Methods Used when situation is stable and historical data exist
Existing products Current technology
Delphi method
Panel of experts, queried iteratively
4 26
4 27
4 29
Delphi Method
Iterative group process, continues until consensus is reached Staff (Administering 3 types of survey) participants
Decision makers Staff Respondents
2006 Prentice Hall, Inc.
4 31
TimeTime-Series Models
Associative Model
4 32
Seasonal
Random
4 34
Components of Demand
Demand for product or service
Random variation
| 1 | 2
Trend Component
Persistent, overall upward or downward pattern Changes due to population, technology, age, culture, etc. Typically several years duration
4 36
Seasonal Component
Regular pattern of up and down fluctuations Due to weather, customs, etc. Occurs within a single year
Period Week Month Month Year Year Year
2006 Prentice Hall, Inc.
Cyclical Component
Repeating up and down movements Affected by business cycle, political, and economic factors Multiple years duration Often causal or associative relationships
0
2006 Prentice Hall, Inc.
10
15
20
4 38
Random Component
Erratic, unsystematic, residual fluctuations Due to random variation or unforeseen events Short duration and nonrepeating
M
2006 Prentice Hall, Inc.
F
4 39
Naive Approach
Assumes demand in next period is the same as demand in most recent period
e.g., If May sales were 48, then June sales will be 48
4 40
(10 + 12 + 13)/3 = 11 2/3 13)/3 (12 + 13 + 16)/3 = 13 2/3 (13 + 16 + 19)/3 = 16 (16 + 19 + 23)/3 = 19 1/3
4 42
Shed Sales
| F
| M
| A
| M
| J
| J
| A
| S
| O
| N
| D
4 43
4 44
Weights Applied
Period
Two months ago Three months ago Sum of weights 3-Month Weighted Moving Average
Month
January February March April May June July
+ (2 x 12) + (10)]/6 = 121/6 12) (10)]/6 + (2 x 13) + (12)]/6 = 141/3 + (2 x 16) + (13)]/6 = 17 + (2 x 19) + (16)]/6 = 201/2
4 45
4 46
| F
| M
| A
| M
| J
| J
| A
| S
| O
| N
| D
4 47
Exponential Smoothing
Form of weighted moving average
Weights decline exponentially Most recent data weighted most
Exponential Smoothing
New forecast = last periods forecast + E (last periods actual demand last periods forecast) forecast) Ft = Ft 1 + E(At 1 - Ft 1)
where Ft = new forecast Ft 1 = previous forecast E = smoothing (or weighting) constant (0 e E u 1)
2006 Prentice Hall, Inc. 4 49
4 50
4 51
4 52
4 53
Impact of Different E
225
Demand
200
Actual demand
E = .5
175
E = .1
150 | 1 | 2 | 3 | 4 | 5 Quarter
2006 Prentice Hall, Inc. 4 54
| 6
| 7
| 8
| 9
Choosing E
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
2006 Prentice Hall, Inc. 4 55
MAPE =
4 57
1 2 3 4 5 6 7 8
5 8 16 2 17 30 2 4 84
5 10 14 9 20 25 13 4 100
4 58
Unloaded
E = .10
E = .10
5 8 16 2 17 12.50 30 2 4 84
5 10 14 9 20 25 13 4 100
4 59
(forecast errors) Rounded Absolute MSE = Actual Forecast Deviation n Tonage with for
Quarter
5 10 14 9 20 25 13 4 100 12.50
4 60
1 2 3 4 5 6 7 8
100 |deviationi|/actuali n
Absolute Deviation for E = .10
1 2 3 4 5 6 7 8
175 176 175 173 173 175 178 178 MAD MSE MAPE
4 63
Smoothed Forecast, Ft 11
Smoothed Trend, Tt 2
Actual Smoothed Smoothed Demand (At) Forecast, Ft Trend, Tt 12 11 2 17 20 19 Step 1: Forecast for Month 2 24 21 F2 = EA1 + (1 - E)(F1 + T1) 31 28 F2 = (.2)(12) + (1 - .2)(11 + 2) 36
Actual Smoothed Smoothed Demand (At) Forecast, Ft Trend, Tt 12 11 2 17 12.80 20 19 Step 2: Trend for Month 2 24 21 T2 = F(F2 - F1) + (1 - F)T1 31 28 T2 = (.4)(12.8 - 11) + (1 - .4)(2) 36
Actual Smoothed Smoothed Demand (At) Forecast, Ft Trend, Tt 12 11 2 17 12.80 1.92 20 19 Step 3: Calculate FIT for Month 2 24 21 FIT2 = F2 + T1 31 28 FIT2 = 12.8 + 1.92 36
= 14.72 units
Smoothed Forecast, Ft 11 12.80 15.18 17.82 19.91 22.51 24.11 27.14 29.28 32.48
Smoothed Trend, Tt 2 1.92 2.10 2.32 2.23 2.38 2.07 2.45 2.32 2.68
Forecast Including Trend, FITt 13.00 14.72 17.28 20.14 22.14 24.89 26.18 29.59 31.60 35.16
| 2
| 3
| 4
| 5
| 6
| 7
| 8
| 9
Time (month)
Figure 4.3
4 70
Trend Projections
Fitting a trend line to historical data points to project into the medium-to-long-range medium-to-longLinear 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 yb = slope of the regression line x = the independent variable
2006 Prentice Hall, Inc. 4 71
Deviation6
^ Trend line, y = a + bx
Time period
2006 Prentice Hall, Inc.
Figure 4.4
4 72
Deviation6
Least squares method minimizes the sum of the Deviation squared errors (deviations)
4
Deviation1 Deviation2
^ Trend line, y = a + bx
Time period
2006 Prentice Hall, Inc.
Figure 4.4
4 73
4 74
xy - nxy x2 - nx2
= 10.54
7y = 692 y = 98.86
3,063 - (7)(4)(98.86) 7xy - nxy b= = = 10.54 140 - (7)(42) 7x2 - nx2 a = y - bx = 98.86 - 10.54(4) = 56.70
2006 Prentice Hall, Inc. 4 76
Power demand
| 2000
| 2001
| 2002
| 2003 Year
| 2004
| 2005
| 2006
| 2007
4 77
4 78
Demand 2003 2004 2005 80 70 80 90 113 110 100 88 85 77 75 82 85 85 93 95 125 115 102 102 90 78 72 78 105 85 82 115 131 120 113 110 95 85 83 80
Average Monthly 94 94 94 94 94 94 94 94 94 94 94 94
Seasonal Index
4 80
4 81
Demand 2003 2004 2005 80 70 80 90 113 110 100 88 85 77 75 82 85 85 93 95 125 115 102 102 90 78 72 78 105 85 82 115 131 120 113 110 95 85 83 80
Average Monthly 94 94 94 94 94 94 94 94 94 94 94 94
Seasonal Index 0.957 0.851 0.904 1.064 1.309 1.223 1.117 1.064 0.957 0.851 0.851 0.851
4 82
Average Monthly
Seasonal Index 0.957 0.851 0.904 1.064 1.309 1.223 1.117 1.064 0.957 0.851 0.851 0.851
4 83
80 85 105 90 94 70 85 Forecast for 2006 85 80 94 80 93 82 85 94 Expected annual demand = 1,200 90 95 115 100 94 113 125 131 123 94 110 115 120 1,200 115 94 Jan x .957 = 96 94 100 102 113 12 105 88 102 110 100 94 1,200 85 90 Feb 95 x90 .851 = 85 94 77 78 85 12 80 94 75 72 83 80 94 82 78 80 80 94
Time
2006 Prentice Hall, Inc. 4 84
9616 9637
9659 9680
9702 9723
9745 9766
| | | | | | | | | | | | 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
Figure 4.7
4 86
| | | | | | | | | | | | 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
Figure 4.8
4 87
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 88
Associative Forecasting
Forecasting an outcome based on predictor variables using the least squares technique
^ y = a + bx
^ where y = computed value of the variable to be predicted (dependent variable) a = y-axis intercept yb = slope of the regression line x = the independent variable though to predict the value of the dependent variable
2006 Prentice Hall, Inc. 4 89
4 90
b=
= .25
| 1
| 2
| | | | 3 4 5 6 Area payroll
| 7
4 93
where y = y-value of each data point yc = computed value of the dependent variable, from the regression equation n = number of data points
2006 Prentice Hall, Inc. 4 94
We use the standard error to set up prediction intervals around the point estimate
2006 Prentice Hall, Inc. 4 95
| 1
| 2
| | | | 3 4 5 6 Area payroll
| 7
4 96
Correlation
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
4 97
Correlation Coefficient
r= n7xy - 7x7y [n7x2 - (7x)2][n7y2 - (7y)2] ][n
4 98
Correlation Coefficient
y
r=
correlation: r = +1
nxy - xy
x
correlation: 0<r<1
Correlation
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
4 101
Tracking Signal
Signal exceeding limit Tracking signal + 0 MADs Lower control limit Time Upper control limit
Acceptable range
4 105
1 2 3 4 5 6
10 5 15 10 15 30
10 15 30 40 55 85
4 106
RSFE
1 2 3 4 5 6
90 100 -1 -10 -10/10 = 95 100 -2 -5 -15/7.5 = 115 0/10 = 0 +15 100 100 110 -10/10 = -1 -10 125 110 +15 +5/11 = +0.5 140 110 +30 +35/14.2 = +2.5
10 5 15 10 15 30
10 15 30 40 55 85
The variation of the tracking signal between -2.0 and +2.5 is within acceptable limits
2006 Prentice Hall, Inc. 4 107
Adaptive Forecasting
Its possible to use the computer to continually monitor forecast error and adjust the values of the E and F coefficients used in exponential smoothing to continually minimize forecast error This technique is called adaptive smoothing
2006 Prentice Hall, Inc. 4 108
Focus Forecasting
Developed at American Hardware Supply, focus forecasting is based on two principles:
1. Sophisticated forecasting models are not always better than simple models 2. There is no single techniques that should be used for all products or services This approach uses historical data to test multiple forecasting models for individual items The forecasting model with the lowest error is then used to forecast the next demand
2006 Prentice Hall, Inc. 4 109
4 110
15% 10% 5%
1111-12
1-2 2-3
3-4 4-5
5-6
7-8 8-9
1212-1 (Lunchtime)
2006 Prentice Hall, Inc.