McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc. 2007, All Rights Reserved

Forecasting
Chapter 11
11-2
Chapter 11 Outline
Why Forecasting?
Frequently there is a time lag between awareness
Of an Impending event or need & occurrence of
That event.
The lead time is a main reason for planning &
Forecasting. If lead time is zero or very small no
Need of planning
11-3
Chapter 11 Outline
Why Forecasting?
Forecast depends on un-controllable external
Event & decision making on controllable internal
event. Planning is link to integrate both.
11-4
Forecasting
A Forecasting Framework
Qualitative Forecasting Methods
Time-Series Forecasting
Moving Average
Exponential Smoothing
Forecast Errors
Advanced Time-Series Forecasting
Causal Forecasting Methods
Selecting a Forecasting Method
Collaborative Planning, Forecasting and Replenishment
11-5
Forecasting

Pyramid forecasting
Channel stuffing
Hokey stick effect
Bull whip effect
Forecasting followed in JIT
11-6
A Forecasting Framework
Focus of the chapter is on the forecasting of demand
for output from the operations function.
Demand may differ from sales
Difference between forecasting and planning
Forecasting: what we think will happen
Planning: what we think should happen
Forecasting application in various decision areas of
operations (capacity planning, inventory
management, others)
Forecasting uses and methods (See Table 11.1)
11-7
Features of Forecast
Assumes causal system
past ==> future
Forecasts rarely perfect because of
randomness
Forecasts more accurate for
groups vs. individuals
Forecast accuracy decreases
as time horizon increases

11-8
Elements of good Forecast
Timely
Accurate
Reliable
Written
11-9
Steps in forecasting process
Step 1 Determine purpose of forecast
Step 2 Establish a time horizon
Step 3 Select a forecasting technique
Step 4 Obtain, clean and analyze data
Step 5 Make the forecast
Step 6 Monitor the forecast
The forecast
11-10
Use of Forecasting: Operations Decisions
Time
Horizon
Accuracy
Required
Number of
Forecasts
Management
Level
Forecasting
Method
Process
design
Long Medium Single or few Top
Qualitative
or causal
Capacity
planning,
facilities
Long Medium Single or few Top
Qualitative
and causal
Aggregate
planning
Medium High Few Middle
Causal and
time series
Scheduling Short Highest Many Lower Time series
Inventory
management
Short Highest Many Lower Time series
11-11
Use of Forecasting: Marketing & Finance
Time
Horizon
Accuracy
Required
Number of
Forecasts
Management
Level
Forecasting
Method
Long-range
marketing
programs
Long Medium Single or few Top Qualitative
Pricing
decisions
Short High Many Middle Time series
New product
introduction
Medium Medium Single Top
Qualitative
and causal
Cost
estimating
Short High Many Lower Time series
Capital
budgeting
Medium Highest Few Top
Causal and
time series
11-12
Pyramid forecasting
Pyramid forecasting
Roll up
Force down
X1
X2
Z1 Z..
Zn
Individual item X unit
price
Product family wise line
Wise
Family forecast X average
price
Total
Business
level
11-13
Trumpet of doom
As forecast horizon increases,
accuracy decreases, e.g.,
Reduce production & delivery leadtimes

Dell pick-to-light system for assembly

Reduce information delays

EDI transmission of daily consumer up through multiple levels in
the supply chain
0
Forecast Error Range over Time
Time Until Forecast Event 0
Percentage
Forecast
Error
11-14
Hockey stick effect
Volume tends to pick up towards the end of a reporting period . . . why?





Relevant for forecasting if disaggregating long term time buckets into short term
time buckets

E.g., monthly forecast to generate weekly forecasts

Also, look for ways to lessen the effect contributes to inefficiency, poor service
Jan Feb
11-15
Qualitative Forecasting Methods
Based upon managerial judgment when
there is a lack of data. No specific model.
Major methods:
Delphi Technique
Market Surveys
Life-cycles Analogy
Informed Judgment (nave models)

11-16
Qualitative Forecasting Methods
Executive opinions
Sales force opinions
Consumer surveys
Outside opinion
Delphi method
Opinions of managers and staff
Achieves a consensus forecast

11-17
Focused Forecasting
Combines a common sense, grass-roots investigation
with a computer simulation process to assess the
effectiveness of the respondents decision rules.
Method:
Asks managers to suggest rules of thumb that should be
followed when developing forecasts .
These rules are embedded in a simulation model.
Rules usefulness is tested using past demand data.
Forecaster selects rule or combination of rules that would
have provided the best forecasts for the past demands.
Using the selected rules, forecasts are then created for
future demands.
11-18
Time-Series Forecasting
Trend - long-term movement in data
Seasonality - short-term regular variations in
data
Cycle wavelike variations of more than one
years duration
Irregular variations - caused by unusual
circumstances
Random variations - caused by chance
11-19
Time-Series Forecasting
Trend
Irregular
variatio
n
Seasonal variations
Cycles
11-20
Naive Forecasts
Uh, give me a minute....
We sold 250 wheels last
week.... Now, next week
we should sell....
The forecast for any period equals
the previous periods actual value.
11-21
Nave Forecasts
Simple to use
Virtually no cost
Quick and easy to prepare
Data analysis is nonexistent
Easily understandable
Cannot provide high accuracy
Can be a standard for accuracy
11-22
Nave Forecasts
Stable time series data
F(t) = A(t-1)
Seasonal variations
F(t) = A(t-n)
Data with trends
F(t) = A(t-1) + (A(t-1) A(t-2))
11-23
Time-Series Forecasting
Components of time-series data:
Trendgeneral direction (up or down)
Seasonalityshort term recurring cycles
Cyclelong term business cycle
Error (random or irregular component)
Decomposition of time-series
Data are broken into the four components
Moving Averages
Exponential Smoothing
11-24
Assumes no trend, seasonal or cyclical
components.
Simple Moving Average:



Weighted Moving Average:

Moving Average
N
D D D
A
N t t t
t
1 1
......
+
+ + +
=
t t
A F
= +1
1 1 2 1 1
......
+ +
+ + + = =
N t N t t t t
D W D W D W A F
11-25


Moving Average
Period Actual Demand Forecast
1 10
2 18
3 29
4 19
(10+18+29)/3 = 19
Period 5 will be (18+29+actual for period 4)/3
Compute three period moving average (number of periods is the decision of the forecaster)
11-26
Time-Series Data Plot
Note: The more periods, the smoother the forecast.
11-27
The new average is computed from the old average:


The value of the smoothing constant (o) is a choice.
It determines how much the calculation smooths out
the random variations. Its value can be set between
zero (0) and one (1). Normally it is in the 0.1 to 0.2
range.
Exponential Smoothing
( )
1
1

+ =
t t t
A D A o o
11-28
Simple Exponential Smoothing


The forecast:

F=forecast of demand (both this period and next)
D = actual demand (this period)
t = time period
No trend, cyclical or seasonal components.
Note: we are adjusting F
t
to get F
t+1
( )
t t t t
F D F F + =
+
o
1
11-29
Exponential Smoothing-
calculation
Facts:
September forecast for sales was 15
September actual sales were 13
Alpha ( ) is 0.2
What is the forecast for October?
Calculation
October Forecast = September forecast +
(September actual-September forecast)
=15+0.2(13-15)=15+0.2(-2)=15-0.4=14.6
11-30
Effect of Exponential
Smoothing constant
35
40
45
50
1 2 3 4 5 6 7 8 9 10 11 12
Period
D
e
m
a
n
d
o = .1
o = .4
Actual
11-31
Common nonlinear trends
Parabolic
Exponential
Growth
11-32
Linear trend-calculation
F
t
= a + bt
0 1 2 3 4 5 t
F
t
Ft = Forecast for period t
t = Specified number of time periods
a = Value of Ft at t = 0
b = Slope of the line`
11-33
Linear trend-calculation
b =
n (ty) - t y
n t
2
- ( t)
2
a =
y - b t
n



11-34
Linear trend-calculation
t y
Week t
2
Sales ty
1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885
E t = 15 E t
2
= 55 E y = 812 E ty = 2499
(E t)
2
= 225
11-35
Linear trend-calculation
y = 143.5 + 6.3t
a =
812 - 6.3(15)
5
=
b =
5 (2499) - 15(812)
5(55) - 225
=
12495 - 12180
275 - 225
= 6.3
143.5
11-36
Technique for Seasonality
Seasonal variations
Regularly repeating movements in series values that
can be tied to recurring events.
Seasonal relative
Percentage of average or trend
Centered moving average
A moving average positioned at the center of the data
that were used to compute it.
11-37
Forecast Errors
Cumulative Sum of Forecast Error (CFE) and
Mean Error (ME)
Mean Square Error (MSE)
Mean Absolute Deviation (MAD)measure of
deviation in units.
Mean Absolute Percentage Error (MAPE)
Tracking Signal (TS)relative measure of
bias
11-38
Forecast Errors: Formulas
t
n
=1 i
e = CFE

Cumulative sum of
Forecast Errors
n
t
n
=1 i
e
= MSE
2

Mean Square Error

n
|
e
|
= MAD
t
n
=1 i

Mean Absolute
Deviation
n
|
D
e
|
= MAPE
t
t
n
=1 i
100

Mean Absolute
Percentage Error
MAD
e
= TS
t
n
=1 i

Tracking Signal
n
t
n
=1 i
e
= ME

Mean Error
11-39
Tracking Signal
Analogous to control charts in quality
control, viz. if there is no bias, its values
should fluctuate around zero.
Is a relative measure, i.e. the numbers mean
the same for any forecast.

11-40
MAD, MSE and MAPE
MAD
Easy to compute
Weights errors linearly
MSE
Squares error
More weight to large errors
MAPE
Puts errors in perspective
11-41
Advanced Time-Series Forecasting
Adaptive exponential smoothing
Smoothing coefficient (o) is varied
Box-Jenkins method
Requires about 60 periods of past data
11-42
Time Series vs. Causal Models
Time series compares data being forecast over
time, i.e. Time is the independent variable or
x- axis or x-variable.
Causal models compare data being forecast
against some other data set which the
forecaster may think is a cause of the
forecasted data, e.g. population size causes
newspaper sales.
11-43
Causal Forecasting Models
The general regression model:


Other forms of causal model:
Econometric
Input-output
Simulation models
x b a y + =

11-44
Causal Forecasting Models
Predictor variables - used to predict values of
variable interest Y( Dependent variable)
Regression - technique for fitting a line to a set
of points
Least squares line - minimizes sum of squared
deviations around the line
11-45
Linear Model Seems Reasonable
0
10
20
30
40
50
0 5 10 15 20 25
X Y
7 15
2 10
6 13
4 15
14 25
15 27
16 24
12 20
14 27
20 44
15 34
7 17
Computed
relationship
A straight line is fitted to a set of sample points.
11-46
Linear Regression Assumptions
Variations around the line are random
Deviations around the line normally distributed
Predictions are being made only within the range
of observed values
For best results:
Always plot the data to verify linearity
Check for data being time-dependent
Small correlation may imply that other variables are
important
11-47
Example of Time Series Model
t D
t
F
t
1 120 119.52
2 124 121.18
3 119 122.84
4 124 124.5
5 125 126.15
6 130 127.81
7 129.47
Intercept (a) 117.8667
Slope (b) 1.657143
Y
t
= a + b(t)
F
7
= 117.87 + 1.66 (7) = 129.47 = sales forecast for next year
D
t
= actual sales
F
t
= forecasted sales
t = time period (e.g. year)
11-48
Example of Causal Model
I
t
D
t
F
t
34.6 120 121.15
35.7 124 123.79
36.3 119 125.22
35.2 124 122.59
35.7 125 123.79
36.4 130 125.46
37.6 128.34
Intercept (a) 38.23094
Slope (b) 2.396514
Y
t
= a + b(t)
F
7
= 38.23 + 2.397 (7) = 128.34 = sales forecast for next year (year 7)
D
t
= actual sales in year t
F
t
= forecasted sales
I
t
= median family
income (000s)
11-49
Selecting a Forecasting Method
User and system sophistication
People reluctant to use what they dont understand
Time and resources available
When is forecast needed?
What is value of forecast?
Use or decision characteristics, e.g. horizon
Data availability and quality
Data pattern
Dont force the data to fit the model!
Forecast Horizons and Forecast
Accuracy
The longer the forecast horizon, the less
accurate the forecast
Long lead times require long forecast horizons
Lean, responsive companies have the goal of
decreasing lead times so they are shorter than
the forecast horizon
11-51
Collaborative Planning, Forecasting
and Replenishment (CPFR)
Aim is to achieve more accurate forecasts
Share information in the supply chain with
customers and suppliers.
Compare forecasts
If discrepancy, look for reason
Agree on consensus forecast
Works best in BtoB with few customers
11-52
Controlling the Forecast
Control chart
A visual tool for monitoring forecast errors
Used to detect non-randomness in errors
Forecasting errors are in control if
All errors are within the control limits
No patterns, such as trends or cycles, are present
11-53
Sources of Forecast errors
Model may be inadequate
Irregular variations
Incorrect use of forecasting technique

11-54
Choosing a Forecasting Technique
No single technique works in every situation
Two most important factors
Cost
Accuracy
Other factors include the availability of:
Historical data
Computers
Time needed to gather and analyze the data
Forecast horizon

11-55
Summary
A Forecasting Framework
Qualitative Forecasting Methods
Time-Series Forecasting
Moving Average
Exponential Smoothing
Forecast Errors
Advanced Time-Series Forecasting
Causal Forecasting Methods
Selecting a Forecasting Method
Collaborative Planning, Forecasting and Replenishment
11-56
Demand Signalling/forecasting
Think of the beer game experience.
Orders you received were a signal of demand.
Why did that create problems?
Information Sharing Channel Alignment Operational Effy

Undestanding V M I Lead Time Reduction
S Dynamics
Use POS Data Discount for Echelon Based
EDI Information Sharing Inventory Control
Interrnet Consumer Direct
CAO

Order Batching
Coincidental ordering common in practice due to
institutional habits
MRP jitters due to MRP planning cycles.
Hockey stick due to institutional incentive systems
Transportation Economics
Information Sharing Channel Alignment Operational Effy
EDI Discount for FTL assortment Reduction in Fixed Cost of
Internet Ordering Delivery Appointments of Ordering by EDI of
Consolidation or Electronic Commerce
Logistics Outsourcing Computer Assisted Ordering
Shortage Gaming
Short term shortage of products requires supplier to
apply rationing. Allocation frequently is based on order
size.
Each retailer knows that aggregate order quantity may
exceed available supply, resulting in potential rationing.
Every retailer is as smart as everyone else, resulting in a
gaming situation.
Information Sharing Channel Alignment Operational Effy

Sharing Sales,Capacity Allocation Based
and Inventory Data on Past Sales

Price Fluctuations
Promotions as a way of doing business in many
products.
Forward buysbuying on special deals account for
up to 50% of all goods sold.
Information Sharing Channel Alignment Operational Effy

Continuous Replenishment Every Day Low Price
Programme(CRP) (EDLP)
Every Day Low Cost(EDLC) Activity Based Costing
(ABC)
What Causes the Bullwhip?
Demand
Signaling
Order
Batching
Price
Fluctuations
Shortage
Gaming
Contributing Factors

No visibility of end demand
Multiple forecasts
Long lead times
High order cost
Full truck load economics

Hi-Lo pricing
Synchronized delivery &
purchasing

Proportional rationing
Ignorance of supply
Unrestrictive orders/returns
Mitigating the Bullwhip
Demand
Signaling
Order
Batching
Price
Fluctuations
Shortage
Gaming
Contributing Factors Counter-Measures
No visibility of end demand
Multiple forecasts
Long lead times
High order cost
Full truck load economics

Hi-Lo pricing
Synchronized delivery
& purchasing
Proportional rationing
Ignorance of supply
Unrestrictive orders/returns
Sell-thru, POS
VMI
Lead time reduction
EDI, CAO, setup reduction
Consolidation, third-party
logistics,
mixed SKU TLs
EDLP, EDLC
Separation of purchase contract
& delivery schedule
Allocation based on sales
Shared capacity & supply info.
Restrictive order contracts
11-62
Coping with the Bullwhip Effect
in Leading Companies
Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
Reduce Lead Times
- EDI
- Cross Docking
Alliance Arrangements
Vendor managed inventory
On-site vendor representatives
Summary
Bullwhip effects are harmful to the efficiency of a
supply chain.
Understanding the causes of the bullwhip is critical to
devise counter-strategies.
Industry responses require:
information coordination;
collaborative efforts;
ways to split investments and gains;
overcoming cultural barriers.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc. 2007, All Rights Reserved
Demand
Management
and Forecasting
11-65
Module Objectives
Explain the role of demand planning in the operations
management system, in the firm, and in the supply
chain.
Differentiate between demand planning, demand
forecasting, and demand management activities.
Recognize and apply various qualitative and
quantitative demand forecasting procedures.
Demonstrate methods to measure and correct
forecasting error.
Identify improvements to product design and the
operations management system that ease demand
planning.

11-66
Key Terms
Demand planning: a process whereby managers
strive to build a match between the demands of
customers and the productive capacity that the
Operations Management system provides.

Demand forecasting: a reactive approach in which
managers predict demand and make production plans
accordingly.

Demand management: a proactive approach in
which managers attempt to influence either the
pattern or consistency of demand.
11-67
Elements of Demand Planning
Demand Forecasting Demand Management
Market, Operating, and Business Environment
P
a
s
t

d
e
m
a
n
d

v
a
l
u
e
s

E
n
v
i
r
o
n
m
e
n
t
a
l

f
a
c
t
o
r
s

E
x
p
e
r
t

j
u
d
g
m
e
n
t
s

P
r
i
c
i
n
g

P
r
o
m
o
t
i
o
n

O
r
d
e
r

s
c
h
e
d
u
l
i
n
g

Forecasts
Plans
Materials and
Capacity Planning
and Scheduling
11-68
Levels of Demand Planning
Strategic level planning: generates long term
forecasts of demand (more than one year into the
future), that are used to make grand technology or
facility plans.

Tactical planning: generates forecasts of demand for
product families or for particular geographic locations
in order to facilitate intermediate (6 to 18 months)
capacity and resource plans.

Detailed operational forecasts: used to do short term
(daily or weekly) product scheduling.
11-69
Basic Forecasting Process
Subjective
Inputs
Forecasting
Process
Error
Analysis
Forecast
Analytical
Data
Actual
Feedback
11-70
5 Steps to Forecast Process
Design
Step 1. Identify the internal customers and decision-making processes that the
forecast will support, which includes the five steps below
Time Horizon.
Level of Detail and Accuracy.
Control Vs Planning.
Consistency.
Existing Business Processes.

Step 2. Identify likely sources of the best data inputs.

Step 3. Select forecasting techniques that will most effectively transform data into
timely, reliable forecast information over the appropriate planning horizon.

Step 4. Apply the proposed technique to the data gathered for the appropriate
business process.

Step 5. Monitor the performance of the forecasting process for continuous-
improvement.
11-71
Qualitative, Judgment-Based
Forecasting

The most common approaches include:
Grass-Roots Forecasting
Executive Judgment.
Historical Analogy.
Marketing Research.
Delphi Method.
11-72
Quantitative, Model-Based
Forecasting

This forecasting type transforms numerical data
into forecasts and can be broken down into three
main categories:

Time-series studies: extrapolate forecasts from past
demand data.

Causal studies: look for causal relationships between
leading variables and forecasted variables.

Simulation models: try to represent past phenomena in
mathematical relationships and then evaluate data to
project future outcomes.
11-73
Comparison
of Different
Quantitative
Forecasting
Techniques

Forecasting
Method
Amount of
Historical
Data

Data Pattern
Forecast
Horizon
Preparation
Time
Personnel
Backgr ound
Simple
exponential
smoothing
5 to 10
observations to
set the weight

Data should be
stationary

Short


Short

Little
sophistication
Holts
exponential
smoothing
10 to 15
observations to
set both
weights

Trend but no
seasonality

Short to
medi um

Short

Slight
sophistication
Winters
exponential
smoothing
At least 4 to 5
observations
per season

Trend and
seasonality

Short to
medium

Short

Moderate
sophistication

Regression
trend models
10 to 20; for
sea sonality at
least 5 per
season

Trend and
seasonality

Short to
medium

Short

Moderate
sophistication
Causal
regression
models
10
observations
per ind .
variable

Can handle
complex
patterns

Short,
medium,
or long
Lo ng de v -
elopment time,
short time for
im p lementation

Consider able
sophistication

Time series
decomposition

Enough to see
2 peaks and
troughs
Handles
cyclical and
s ea s o n a l
pat terns; may
ID turning p ts .

Short to
medium

Short to
moderate

Little
sophistication
Box J enkins
50 or more
observations
Must be
stationary or be
transformed to
stationarity

Short,
medium,
or long

Long

High
sophistication
11-74
Time Series Analysis
Three Common Time Series Demand Patterns
Time series forecasting techniques seek to uncover patterns in
historical demand data and to extrapolate them to the future.
11-75
Time Series Analysis
The forecaster assumes that the future is a summation of 6
components of demand:
F
t
is the forecasted demand for the next time period in the future;
B
t
is the base (or starting point) forecast for time period t;
S
t
is the seasonal component of demand forecasted for time period t;
T is the trend component of demand forecasted for time period t;
C
t
is the cyclical component of demand forecasted for time period t;
P
t
is the forecasted impact on demand of a planned promotion in time
period t; and,
c
t
is the error term for time period t.
F
t
= (B
t
+ S
t
+ T + C
t
+ P
t
) +
t

11-76
Weighted Moving Average
Model assigns a different weight to each periods
demand according to its importance, giving, for
example, the latter periods more importance than the
earlier periods.
Ft = a
t-1
d
t-1
+ a
t-2
d
t-2
+ a
t-3
d
t-3
+ . + a
t-n
d
t-n

n
F
t
is the forecast for the next period
d
t-1
is the demand from the most recent period
a
t-1
is the weight given to the demand value in period t-1
(the sum of all at should equal 1)
n is the number of periods used to compute the moving
average
11-77
Exponential Smoothing
A form of weighted moving average that factors in a negative
exponential decline of the weighting coefficients for more
distant demands. Each weight is smaller by a fixed percentage
than the weight assigned to data for the previous period. We
can express the equation in two forms:

The first form states the forecast for the next period as a linear
combination of the most recent periods results, d
t-1
, and its
forecast, F
t-1
:
Ft = dt-1 + (1 )Ft-1
The second form states the new forecast as the prior forecast
plus an adjustment to account for forecast error
Ft = Ft-1 + (dt-1 Ft-1)

11-78
How Different Methods Track
Actual Demand
0
50
100
150
200
250
300
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Period
S
a
l
e
s
Actual Demand
2 period MA
4 period MA
ES, alpha = .1
ES, alpha = .9
11-79
Exponential Smoothing with Trend
Effects
(1) FIT
t
= F
t
+ T
t

Equation 1 is the sum of the forecasts for the base and trend
components of demand
(2) F
t
= FIT
t-1
+ (d
t-1
FIT
t-1
)
(3) T
t
= T
t-1
+ (F
t
FIT
t-1
)

Equations 2 and 3 are used together to compute the new smoothed
forecasts for the base and trend components.

FIT
t
= the forecast including trend for period t
F
t
= the base forecast for period t from the simple exponential smoothing
model
T
t
= the forecast of the trend component of demand for period t
= the trend smoothing coefficient.
11-80
Common Non-linear Trends
11-81
Quarterly Sales and Seasonal
Indices
Year 1 1
st
Quarter 2
nd
Quarter 3
rd
Quarter 4
th
Quarter Total
Actual demand 50 64 42 30 186
Expected demand 46.5 46.5 46.5 46.5
Seasonal index 1.07 1.38 0.90 0.64
Year 2
Actual demand 54 66 41 31 192
% annual total 48 48 48 48
Seasonal index 1.12 1.38 0.86 0.60
Year 3
Actual demand 56 63 43 29 191
% annual total 47.75 47.75 47.75 47.75
Seasonal index 1.17 1.32 0.90 0.61

3-year average indices 1.12 1.37 0.89 0.62

The seasonal percentages strongly suggests that the causes of
seasonal variations appear to recur in a stable sequence
11-82
Calculating Seasonality with Trend
Effects
Quarter Period
Actual
Demand
Trend
Equation
Estimate
Seasonal
Index
Year 1 1 1 73.8 106.2 0.70
2 2 129.0 113.7 1.13
3 3 177.4 121.3 1.46
4 4 128.4 128.9 1.00
Year 2 1 5 82.0 136.5 0.60
2 6 130.0 144.1 0.90
3 7 199.8 151.6 1.32
4 8 141.1 159.2 0.89

Average Seasonal Indices over 2 years
1 0.65
2 1.02
3 1.39
4 0.95

Using the results shown above we can make
forecasts including trend and seasonal
components (FITS) for the next four quarters:
FITS1 = [98.59 + 7.58(9)](0.65) = 108.4
FITS2 = [98.59 + 7.58(10)](1.02) = 177.9
FITS3 = [98.59 + 7.58(11)](1.39) = 252.9
FITS4 = [98.59 + 7.58(12)](0.95) = 177.6
11-83
Key Terms
Forecast error
the difference between the actual demand and the
forecasted demand for a given time periodthe
difference between dt and Ft
Forecast accuracy
measures how closely the forecast aligns with the
observations over time. Every error, whether positive or
negative, reduces forecast accuracy.
Forecast bias
indicates the tendency of a forecasting technique to over or
under predict.

11-84
Measuring Forecast Bias

Mean Forecast Error = MFE =


Mean Percent Error = MPE =



d
t
F
t
( )
t=1
n

n
n
d
F d
n
t
t
t t
100 *
1

11-85
Measuring Forecast Accuracy
Mean Absolute Deviation (MAD) =

Mean Absolute Percentage Error (MAPE) =

Mean Squared Error (MSE) =

Forecast error variance =

d
t
F
t
t =1
n

n
n
d
F d
n
t
t
t t
100 *
1

( )
1
1
2

=
n
F d
n
t
t t

(e
t
e )
2
t=1
n

n 1
11-86
Computing MFE and MAD
Period
Actual
Demand
Forecast
Model 1
Forecast
Error
Absolute
Error
Forecast
Model 2
Forecast
Error
Absolute
Error
1 100 150 -50 50 104 -4 4
2 100 50 50 50 93 7 7
3 100 150 -50 50 88 12 12
4 100 50 50 50 102 -2 2
5 100 150 -50 50 90 10 10
6 100 50 50 50 107 -7 7
7 100 150 -50 50 89 11 11
8 100 50 50 50 83 17 17
9 100 150 -50 50 110 -10 10
10 100 50 50 50 113 -13 13
Average 0 50 2.1 9.3
MFE MAD MFE MAD

11-87
Tracking Forecast Error
Acceptability
A tracking signal
records the ratio of a
running total of
forecast error to MAD

By tracking this metric
over successive periods
of time, managers can
observe whether
undesirable trends or
outlandish errors are
occurring

(d
t
t=1
n

F
t
)
MAD
Tracking Signal =
11-88
Demand Management
A business process that seeks to coordinate
and influence all sources of demand for the
firms products to help operations managers
target their systems resources efficiently to
promote implementation of the firms
competitive strategy.
Business organizations routinely try to influence
the timing, pattern, and certainty of product
demands by varying product characteristics
including price, promotion, and availability.
11-89
Why seek to regulate demand?
Unregulated demand forces an operating system to
sacrifice either efficiency or effectiveness in one of
four ways:
By maintaining extra resources to expand and contract
capacity to meet varying demand.
By backlogging certain orders to smooth out demand
fluctuations.
By tolerating customer dissatisfaction with the systems
inability to meet all demands.
By buffering the system from demand fluctuations through
the use of safety stock (excess inventory), safety lead time
(lead times inflated to provide a time cushion), or safety
capacity (a buffer consisting of excess resources).
11-90
Symptoms of a Problem with
Demand Management
11-91
3 Basic Tactics to Influence
Demand
Influence the timing or quantity of demand
through pricing changes or promotions.

Manage the timing of order fulfillment

Encourage customers to shift their orders from
one product to another, or from one service
provider to another.
11-92
Improving the System for Demand
Planning
4 key methods:
Better information systems

Reducing lead time

Redesigning the product for postponement

Better collaboration and information sharing