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Operations

Management
Forecasting

2008 Prentice Hall, Inc.

41

Forecasting & Prediction


Forecasting

Prediction

Objective

Subjective

Scientific

Intuitive

Free from BIAS

Individual BIAS

Reproducible

Non - Reproducible

Error Analysis Possible

Error Analysis Limited

2008 Prentice Hall, Inc.

42

Forecasting at Disney World


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

2008 Prentice Hall, Inc.

43

Forecasting at Disney World


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

2008 Prentice Hall, Inc.

44

Forecasting at Disney World


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

2008 Prentice Hall, Inc.

45

Forecasting at Disney World


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%
2008 Prentice Hall, Inc.

46

What is Forecasting?
Process of
predicting a future
events
Underlying basis of
all business
decisions

??

Production
Inventory
Personnel
Facilities
2008 Prentice Hall, Inc.

47

Forecasting Time Horizons


Short-range forecast
Up to 1 year, generally less than 3 months
Purchasing, job scheduling, workforce levels,
job assignments, production levels

Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting

Long-range forecast
3+ years
New product planning, facility location,
research and development
2008 Prentice Hall, Inc.

48

Distinguishing Differences
Medium/long range forecasts deal with
more comprehensive issues and support
management decisions regarding
planning and products, plants and
processes
Short-term forecasting usually employs
different methodologies than longer-term
forecasting
Short-term forecasts tend to be more
accurate than longer-term forecasts
2008 Prentice Hall, Inc.

49

Influence of Product Life


Cycle
Introduction Growth Maturity Decline
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
2008 Prentice Hall, Inc.

4 10

Product Life Cycle


Company Strategy/Issues

Introduction

Growth

Maturity

Best period to
increase market
share

Practical to change
price or quality
image

Poor time to
change image,
price, or quality

R&D engineering is
critical

Strengthen niche

Competitive costs
become critical
Defend market
position

Internet search engines


LCD & plasma TVs
Sales

Drive-through
restaurants

Decline
Cost control
critical

CD-ROMs
Analog TVs

iPods
Xbox 360

3 1/2
Floppy
disks
Figure 2.5

2008 Prentice Hall, Inc.

4 11

OM Strategy/Issues

Product Life Cycle


Introduction

Growth

Maturity

Decline

Product design
and
development
critical
Frequent
product and
process design
changes
Short production
runs
High production
costs
Limited models

Forecasting
critical
Product and
process
reliability
Competitive
product
improvements
and options
Increase capacity

Standardization
Less rapid
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

Attention to
quality

Shift toward
product focus
Enhance
distribution

Figure 2.5
2008 Prentice Hall, Inc.

4 12

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 products and
services
2008 Prentice Hall, Inc.

4 13

Strategic Importance of
Forecasting
Human Resources Hiring, training,
laying off workers
Capacity Capacity shortages can
result in undependable delivery, loss
of customers, loss of market share
Supply Chain Management Good
supplier relations and price
advantages
2008 Prentice Hall, Inc.

4 14

Seven Steps in Forecasting


Determine the use of the forecast
Select the items to be forecasted
Determine the time horizon of the
forecast
Select the forecasting model(s)
Gather the data
Make the forecast
Validate and implement results
2008 Prentice Hall, Inc.

4 15

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

2008 Prentice Hall, Inc.

4 16

Forecasting Approaches
Qualitative Methods
Used when situation is vague
and little data exist
New products
New technology

Involves intuition, experience


e.g., forecasting sales on Internet
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4 17

Forecasting Approaches
Quantitative Methods
Used when situation is stable and
historical data exist
Existing products
Current technology

Involves mathematical techniques


e.g., forecasting sales of color
televisions
2008 Prentice Hall, Inc.

4 18

Overview of Qualitative
Methods
Jury of executive opinion
Pool opinions of high-level experts,
sometimes augment by statistical
models

Delphi method
Panel of experts, queried iteratively

2008 Prentice Hall, Inc.

4 19

Overview of Qualitative
Methods
Sales force composite
Estimates from individual
salespersons are reviewed for
reasonableness, then aggregated

Consumer Market Survey


Ask the customer

2008 Prentice Hall, Inc.

4 20

Jury of Executive Opinion


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
2008 Prentice Hall, Inc.

4 21

Sales Force Composite


Each salesperson projects his or
her sales
Combined at district and national
levels
Sales reps know customers wants
Tends to be overly optimistic

2008 Prentice Hall, Inc.

4 22

Delphi Method
Iterative group
process,
continues until
consensus is
reached
Staff
(Administering
3 types of
survey)
participants
Decision makers
Staff
Respondents
2008 Prentice Hall, Inc.

Decision Makers
(Evaluate
responses and
make decisions)

Respondents
(People who can
make valuable
judgments)
4 23

Consumer Market Survey


Ask customers about purchasing
plans
What consumers say, and what
they actually do are often different
Sometimes difficult to answer

2008 Prentice Hall, Inc.

4 24

Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential
smoothing

Time-Series
Models

4. Trend projection
5. Linear regression
2008 Prentice Hall, Inc.

Associative
Model
4 25

Time Series Forecasting


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
2008 Prentice Hall, Inc.

4 26

Time Series Components


Trend

Cyclical

Seasonal

Random

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4 27

Demand for product or service

Components of Demand
Trend
component
Seasonal peaks

Actual
demand

Random
variation
|
1

|
2

|
3
Year

2008 Prentice Hall, Inc.

Average
demand over
four years
|
4
Figure 4.1
4 28

Trend Component
Persistent, overall upward or
downward pattern
Changes due to population,
technology, age, culture, etc.
Typically several years
duration

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4 29

Seasonal Component
Regular pattern of up and
down fluctuations
Due to weather, customs, etc.
Occurs within a single year

2008 Prentice Hall, Inc.

Period

Length

Number of
Seasons

Week
Month
Month
Year
Year
Year

Day
Week
Day
Quarter
Month
Week

7
4-4.5
28-31
4
12
52
4 30

Cyclical Component
Repeating up and down movements
Affected by business cycle,
political, and economic factors
Multiple years duration
Often causal or
associative
relationships
0
2008 Prentice Hall, Inc.

10

15

20
4 31

Random Component
Erratic, unsystematic, residual
fluctuations
Due to random variation or
unforeseen events
Short duration and
nonrepeating

M
2008 Prentice Hall, Inc.

F
4 32

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
2008 Prentice Hall, Inc.

4 33

Moving Average Method


MA is a series of arithmetic means
Used if little or no trend
Used often for smoothing
Provides overall impression of data
over time
demand in previous n periods
Moving average =
n
2008 Prentice Hall, Inc.

4 34

Moving Average Example


Month
January
February
March
April
May
June
July

2008 Prentice Hall, Inc.

Actual
Shed Sales
10
12
13
16
19
23
26

3-Month
Moving Average

(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

4 35

Shed Sales

Graph of Moving Average


30
28
26
24
22
20
18
16
14
12
10

2008 Prentice Hall, Inc.

Moving
Average
Forecast

Actual
Sales

|
J

|
F

|
M

|
A

|
M

|
J

|
J

|
A

|
S

|
O

|
N

|
D
4 36

Weighted Moving Average


Used when trend is present
Older data usually less important

Weights based on experience and


intuition
Weighted
=
moving average

2008 Prentice Hall, Inc.

(weight for period n)


x (demand in period n)
weights

4 37

Weights Applied

Period

3
Last
month
Weighted Moving
Average
2
1
6

Month

Actual
Shed Sales

January
February
March
April
May
June
July

10
12
13
16
19
23
26

2008 Prentice Hall, Inc.

Two months ago


Three months ago
Sum of weights

3-Month Weighted
Moving Average

[(3 x 13) + (2 x 12) + (10)]/6 = 121/6


[(3 x 16) + (2 x 13) + (12)]/6 = 141/3
[(3 x 19) + (2 x 16) + (13)]/6 = 17
[(3 x 23) + (2 x 19) + (16)]/6 = 201/2
4 38

Potential Problems With


Moving Average
Increasing n smooths the forecast
but makes it less sensitive to
changes
Do not forecast trends well
Require extensive historical data

2008 Prentice Hall, Inc.

4 39

Moving Average And


Weighted Moving Average
Weighted
moving
average

30
Sales demand

25
20

Actual
sales

15

Moving
average

10
5
|

Figure 4.2
2008 Prentice Hall, Inc.

|
F

|
M

|
A

|
M

|
J

|
J

|
A

|
S

|
O

|
N

|
D
4 40

Exponential Smoothing
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
2008 Prentice Hall, Inc.

4 41

Exponential Smoothing
New forecast = Last periods forecast
+ (Last periods actual demand
Last periods forecast)
Ft = Ft 1 + (At 1 - Ft 1)
where

Ft = new forecast
Ft 1 = previous forecast
= smoothing (or weighting)
constant (0 1)

2008 Prentice Hall, Inc.

4 42

Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20

2008 Prentice Hall, Inc.

4 43

Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
New forecast = 142 + .2(153 142)

2008 Prentice Hall, Inc.

4 44

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

2008 Prentice Hall, Inc.

4 45

Effect of
Smoothing Constants
Weight Assigned to
Smoothing
Constant

Most
Recent
Period
( )

2nd Most 3rd Most 4th Most 5th Most


Recent
Recent
Recent
Recent
Period
Period
Period
Period
2
3
(1 - ) (1 - )
(1 - )
(1 - )4

= .1

.1

.09

.081

.073

.066

= .5

.5

.25

.125

.063

.031

2008 Prentice Hall, Inc.

4 46

Impact of Different
225

Demand

= .5

Actual
demand

200
175
150
|
1

|
2

|
3

|
4

|
5

|
6

= .1

|
7

|
8

|
9

Quarter
2008 Prentice Hall, Inc.

4 47

Impact of Different

Demand

225
200

Chose

when underlying average


is likely to change
175
Choose low values of
150

when
underlying average
|
|
|
|
|
is stable
1

= .5

Actual
high values
of
demand

|
6

= .1

|
7

|
8

|
9

Quarter
2008 Prentice Hall, Inc.

4 48

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
2008 Prentice Hall, Inc.

4 49

Common Measures of Error


Mean Absolute Deviation (MAD)
|Actual - Forecast|
MAD =
n

Mean Squared Error (MSE)


(Forecast Errors)2
MSE =
n
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4 50

Common Measures of Error


Mean Absolute Percent Error (MAPE)
n

100|Actuali - Forecasti|/Actuali
MAPE =

2008 Prentice Hall, Inc.

i=1

4 51

Comparison of Forecast
Error
Quarter

Actual
Tonnage
Unloaded

Rounded
Forecast
with
= .10

Absolute
Deviation
for
= .10

1
2
3
4
5
6
7
8

180
168
159
175
190
205
180
182

175
175.5
174.75
173.18
173.36
175.02
178.02
178.22

5.00
7.50
15.75
1.82
16.64
29.98
1.98
3.78
82.45

2008 Prentice Hall, Inc.

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62

4 52

Comparison of Forecast
Error
|deviations|

MADActual
=
Quarter

Tonnage
Unloaded

Rounded
Forecast
n
with
= .10

Absolute
Deviation
for
= .10

For

=
.10
1
180
175
5.00
2
168 = 82.45/8
175.5 = 10.31
7.50
3
4 For
5
6
7
8

2008 Prentice Hall, Inc.

159
174.75
175
= .50 173.18
190
173.36
205 = 98.62/8
175.02
180
178.02
182
178.22

15.75
1.82
16.64
12.33
29.98
1.98
3.78
82.45

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62

4 53

Comparison of Forecast
Error
(forecast errors)
2

MSE = Actual
Quarter

Tonnage
Unloaded

Rounded
Forecast
n
with
= .10

Absolute
Deviation
for
= .10

For

=
.10
1
180
175
5.00
2
168
175.5 = 190.82
7.50
= 1,526.54/8
3
4 For
5
6
7
8

159
174.75
175
= .50 173.18
190
173.36
= 1,561.91/8
205
175.02
180
178.02
182
178.22
MAD

2008 Prentice Hall, Inc.

15.75
1.82
16.64
195.24
29.98
1.98
3.78
82.45
10.31

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33

4 54

Comparison of Forecast
n
Error|/actual
100|deviation
i

i=1
MAPE =Actual
Tonnage
Quarter Unloaded

1
2
3
4
5
6
7
8

Rounded
Absolute
Forecast n Deviation
with
for
= .10
= .10

For 180
= .10 175
5.00
168
175.5
= 44.75/8
= 7.50
5.59%
159
For 175
=
190
205
180
182

2008 Prentice Hall, Inc.

174.75
15.75
1.82
.50 173.18
173.36
16.64
= 54.05/8
=29.98
6.76%
175.02
178.02
1.98
178.22
3.78
82.45
MAD
10.31
MSE
190.82

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33
195.24
4 55

Comparison of Forecast
Error
Quarter

Actual
Tonnage
Unloaded

Rounded
Forecast
with
= .10

1
2
3
4
5
6
7
8

180
168
159
175
190
205
180
182

175
175.5
174.75
173.18
173.36
175.02
178.02
178.22
MAD
MSE
MAPE

2008 Prentice Hall, Inc.

Absolute
Deviation
for
= .10

5.00
7.50
15.75
1.82
16.64
29.98
1.98
3.78
82.45
10.31
190.82
5.59%

Rounded
Forecast
with
= .50

175
177.50
172.75
165.88
170.44
180.22
192.61
186.30

Absolute
Deviation
for
= .50

5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33
195.24
6.76%
4 56

Exponential Smoothing with


Trend Adjustment
When a trend is present, exponential
smoothing must be modified
Forecast
including (FITt) =
trend

2008 Prentice Hall, Inc.

Exponentially
smoothed (Ft) + (Tt)
forecast

Exponentially
smoothed
trend

4 57

Exponential Smoothing with


Trend Adjustment
Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1)
Tt = (Ft - Ft - 1) + (1 - )Tt - 1
Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
2008 Prentice Hall, Inc.

4 58

Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)

Smoothed
Forecast, Ft

Smoothed
Trend, Tt

Forecast
Including
Trend, FITt

12
17
20
19
24
21
31
28
36

11

13.00

Table 4.1
2008 Prentice Hall, Inc.

4 59

Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)

Smoothed
Forecast, Ft

Smoothed
Trend, Tt

Forecast
Including
Trend, FITt

12
17
20
19
24
21
31
28
36

11

13.00

Step 1: Forecast for Month 2


F2 = A1 + (1 - )(F1 + T1)
F2 = (.2)(12) + (1 - .2)(11 + 2)
= 2.4 + 10.4 = 12.8 units

Table 4.1
2008 Prentice Hall, Inc.

4 60

Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)

Smoothed
Forecast, Ft

Smoothed
Trend, Tt

Forecast
Including
Trend, FITt

12
17
20
19
24
21
31
28
36

11
12.80

13.00

Step 2: Trend for Month 2


T2 = (F2 - F1) + (1 - )T1
T2 = (.4)(12.8 - 11) + (1 - .4)(2)
= .72 + 1.2 = 1.92 units

Table 4.1
2008 Prentice Hall, Inc.

4 61

Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)

Smoothed
Forecast, Ft

Smoothed
Trend, Tt

12
17
20
19
24
21
31
28
36

11
12.80

2
1.92

Forecast
Including
Trend, FITt
13.00

Step 3: Calculate FIT for Month 2


FIT2 = F2 + T1
FIT2 = 12.8 + 1.92
= 14.72 units

Table 4.1
2008 Prentice Hall, Inc.

4 62

Exponential Smoothing with


Trend Adjustment Example
Month(t)
1
2
3
4
5
6
7
8
9
10

Actual
Demand (At)

Smoothed
Forecast, Ft

Smoothed
Trend, Tt

Forecast
Including
Trend, FITt

12
17
20
19
24
21
31
28
36

11
12.80
15.18
17.82
19.91
22.51
24.11
27.14
29.28
32.48

2
1.92
2.10
2.32
2.23
2.38
2.07
2.45
2.32
2.68

13.00
14.72
17.28
20.14
22.14
24.89
26.18
29.59
31.60
35.16

Table 4.1
2008 Prentice Hall, Inc.

4 63

Exponential Smoothing with


Trend Adjustment Example
35

Product demand

30

Actual demand (At)

25
20
15
10

Forecast including trend (FITt)


with = .2 and = .4

5
0

|
1

|
2

|
3

|
4

|
5

|
6

Time (month)
2008 Prentice Hall, Inc.

|
7

|
8

|
9

Figure 4.3
4 64

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
^

2008 Prentice Hall, Inc.

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 65

Values of Dependent Variable

Least Squares Method


Actual observation
(y value)

Deviation7

Deviation5
Deviation3
Deviation4
Deviation1
(error)

Deviation2

Trend line, y^ = a + bx

Time period
2008 Prentice Hall, Inc.

Deviation6

Figure 4.4
4 66

Values of Dependent Variable

Least Squares Method


Actual observation
(y value)

Deviation7

Deviation5
Deviation3

Least squares method


minimizes the sum of the
Deviation
squared errors (deviations)
4

Deviation1
Deviation2

Trend line, y^ = a + bx

Time period
2008 Prentice Hall, Inc.

Deviation6

Figure 4.4
4 67

Least Squares Method


Equations to calculate the regression variables
y^ = a + bx
xy - nxy
b=
x2 - nx2
a = y - bx

2008 Prentice Hall, Inc.

4 68

Least Squares Example


Year
2001
2002
2003
2004
2005
2005
2007

Time
Period (x)
1
2
3
4
5
6
7
x = 28
x=4

Electrical Power
Demand
74
79
80
90
105
142
122
y = 692
y = 98.86

x2

xy

1
4
9
16
25
36
49
x2 = 140

74
158
240
360
525
852
854
xy = 3,063

3,063 - (7)(4)(98.86)
xy - nxy
b=
=
= 10.54
140 - (7)(42)
x2 - nx2
a = y - bx = 98.86 - 10.54(4) = 56.70
2008 Prentice Hall, Inc.

4 69

Least Squares Example


Year

Time
Period (x)

Electrical Power
Demand

x2

xy

1999
1
74
1
2000
2
79
4
line is 80
2001The trend
3
9
2002
4
90
16
2003
105
25
y^ 5= 56.70 + 10.54x
2004
6
142
36
2005
7
122
49
x = 28
y = 692
x2 = 140
x=4
y = 98.86

74
158
240
360
525
852
854
xy = 3,063

3,063 - (7)(4)(98.86)
xy - nxy
b = x2 - nx2 =
= 10.54
140 - (7)(42)
a = y - bx = 98.86 - 10.54(4) = 56.70
2008 Prentice Hall, Inc.

4 70

Power demand

Least Squares Example


160
150
140
130
120
110
100
90
80
70
60
50

Trend line,
y^ = 56.70 + 10.54x

|
2001

2008 Prentice Hall, Inc.

|
2002

|
2003

|
2004

|
2005
Year

|
2006

|
2007

|
2008

|
2009
4 71

Seasonal Variations In Data

The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand

2008 Prentice Hall, Inc.

4 73

Seasonal Variations In Data


Steps in the process:
1. Find average historical demand for each
season
2. Compute the average demand over all
seasons
3. Compute a seasonal index for each season
4. Estimate next years total demand
5. Divide this estimate of total demand by the
number of seasons, then multiply it by the
seasonal index for that season
2008 Prentice Hall, Inc.

4 74

Seasonal Index Example


Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
2008 Prentice Hall, Inc.

Demand
2005 2006 2007
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
2005-2007

Average
Monthly

90
80
85
100
123
115
105
100
90
80
80
80

94
94
94
94
94
94
94
94
94
94
94
94

Seasonal
Index

4 75

Seasonal Index Example


Month

Demand
2005 2006 2007

Average
2005-2007

Average
Monthly

Jan
80
85 105
90
94
Feb
70
85
85
80
94
2005-2007
Mar
80
93 average
82
85 monthly demand
94
Seasonal index =
demand
Apr
90
95 115 average monthly
100
94
May
113 125= 90/94
131 = .957 123
94
Jun
110 115 120
115
94
Jul
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
72
83
80
94
Dec
82
78
80
80
94
2008 Prentice Hall, Inc.

Seasonal
Index
0.957

4 76

Seasonal Index Example


Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
2008 Prentice Hall, Inc.

Demand
2005 2006 2007
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
2005-2007

Average
Monthly

Seasonal
Index

90
80
85
100
123
115
105
100
90
80
80
80

94
94
94
94
94
94
94
94
94
94
94
94

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 77

Seasonal Index Example


Month
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
2008 Prentice Hall, Inc.

Demand
2005 2006 2007

Average
2005-2007

Average
Monthly

80
85 105
90
94
for802008
70
85 Forecast
85
94
80
93
82
85
94
annual demand
= 1,200
90Expected
95 115
100
94
113 125 131
123
94
110 115 120 1,200 115
94
Jan
x .957 = 96
100 102 113 12
105
94
88 102 110 1,200 100
94
85
90
Feb 95
x90
.851 = 85 94
12
77
78
85
80
94
75
72
83
80
94
82
78
80
80
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 78

Seasonal Index Example


2008 Forecast
2007 Demand
2006 Demand
2005 Demand

140
130

Demand

120
110
100
90
80
70
|
J

|
F

|
M

|
A

|
M

|
J

|
J

|
A

|
S

|
O

|
N

|
D

Time
2008 Prentice Hall, Inc.

4 79

San Diego Hospital


Trend Data
10,200

Inpatient Days

10,000
9,800
9,600
9,400

9573

9530
9551

9659

9616
9594

9637

9745

9702
9680

9724

9766

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
Figure 4.6

2008 Prentice Hall, Inc.

4 80

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

y^ = a + b1x1 + b2x2
Computationally, this is quite
complex and generally done on the
computer
2008 Prentice Hall, Inc.

4 96

Multiple Regression
Analysis
In the Nodel example, including interest rates in
the model gives the new equation:

y^ = 1.80 + .30x1 - 5.0x2


An improved correlation coefficient of r = .96
means 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
2008 Prentice Hall, Inc.

4 97

Monitoring and Controlling


Forecasts
Tracking Signal
Measures how well the forecast is
predicting actual values
Ratio of running sum of forecast errors
(RSFE) to mean absolute deviation (MAD)
Good tracking signal has low values
If forecasts are continually high or low, the
forecast has a bias error
2008 Prentice Hall, Inc.

4 98

Monitoring and Controlling


Forecasts
Tracking = RSFE
signal
MAD
(Actual demand in
period i Forecast demand
in period i)
Tracking =
signal
|Actual - Forecast|/n)
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4 99

Tracking Signal
Signal exceeding limit
Tracking signal
+

Upper control limit

0 MADs

Acceptable
range

Lower control limit


Time

2008 Prentice Hall, Inc.

4 100

Tracking Signal Example


Actual
Qtr Demand

1
2
3
4
5
6

90
95
115
100
125
140

2008 Prentice Hall, Inc.

Forecast
Demand

Error

RSFE

Absolute
Forecast
Error

100
100
100
110
110
110

-10
-5
+15
-10
+15
+30

-10
-15
0
-10
+5
+35

10
5
15
10
15
30

Cumulative
Absolute
Forecast
Error
MAD

10
15
30
40
55
85

10.0
7.5
10.0
10.0
11.0
14.2

4 101

Tracking Signal Example


Qtr

1
2
3
4
5
6

Tracking
Actual Signal
Forecast
Demand
Demand Error
(RSFE/MAD)

RSFE

Absolute
Forecast
Error

90-10/10
100= -1 -10
95
-15/7.5
100= -2 -5
115 0/10
100
= 0 +15
100-10/10
110= -1 -10
125
+5/11110
= +0.5+15
140
+35/14.2
110= +2.5
+30

-10
-15
0
-10
+5
+35

10
5
15
10
15
30

Cumulative
Absolute
Forecast
Error
MAD

10
15
30
40
55
85

10.0
7.5
10.0
10.0
11.0
14.2

The variation of the tracking signal


between -2.0 and +2.5 is within acceptable
limits
2008 Prentice Hall, Inc.

4 102

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

2008 Prentice Hall, Inc.

4 105

Fast Food Restaurant


Forecast
Percentage of sales

20%
15%
10%
5%

11-12

1-2

12-1
(Lunchtime)

2008 Prentice Hall, Inc.

2-3

3-4

4-5

5-6

7-8

6-7
(Dinnertime)
Hour of day

8-9

9-10

10-11

Figure 4.12
4 106

FedEx Call Center Forecast


12%
10%
8%
6%
4%
2%
0%
2

2008 Prentice Hall, Inc.

6
8
A.M.

10

12

Hour of day

6
8
P.M.

10

12

Figure 4.12
4 107