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Chapter 13
Demand Management
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OBJECTIVES
Demand
Management Qualitative Forecasting Methods Simple & Weighted Moving Average Forecasts Exponential Smoothing Simple Linear Regression Web-Based Forecasting
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Demand Management
Independent Demand: Finished Goods
A
B(4)
C(2)
D(2)
E(1)
D(3)
F(2)
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Can
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Types of Forecasts
Qualitative
(Judgmental)
Quantitative
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Components of Demand
Average
x x x x x
Linear
x x x
Sales
x x x
xx x x xx x x x x x x x x x x x x x x x xxxx
x x
x
x x
x x
Trend
Year
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Qualitative Methods
Executive Judgment
Grass Roots
Historical analogy
Qualitative
Methods
Market Research
Delphi Method
Panel Consensus
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Delphi Method
l. Choose the experts to participate representing a variety of knowledgeable people in different areas 2. Through a questionnaire (or E-mail), obtain forecasts (and any premises or qualifications for the forecasts) from all participants 3. Summarize the results and redistribute them to the participants along with appropriate new questions 4. Summarize again, refining forecasts and conditions, and again develop new questions 5. Repeat Step 4 as necessary and distribute the final results to all participants
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The simple moving average model assumes an average is a good estimator of future behavior The formula for the simple moving average is:
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Week 1 2 3 4 5 6 7 8 9 10 11 12
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Demand 650 678 720 785 859 920 850 758 892 920 789 844
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Week 1 2 3 4 5 6 7 8 9 10 11 12
Demand 3-Week 6-Week 650 F4=(650+678+720)/3 678 =682.67 720 F7=(650+678+720 +785+859+920)/6 785 682.67 859 727.67 =768.67 920 788.00 850 854.67 768.67 758 876.33 802.00 892 842.67 815.33 920 833.33 844.00 789 856.67 866.50 844 867.00 854.83
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Plotting the moving averages and comparing them shows how the lines smooth out to reveal the overall upward trend in this example
1000 900
Demand
Note how the 3-Week is smoother than the Demand, and 6-Week is even smoother
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Simple Moving Average Problem (2) Data Question: What is the 3 week moving average forecast for this data? Assume you only have 3 weeks and 5 weeks of actual demand data for the respective forecasts
Week 1 2 3 4 5 6 7
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3-Week
=758.33
5-Week
F4=(820+775+680)/3
710.00 666.00
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w
i=1
=1
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Note that the weights place more emphasis on the most recent data, that is time period t-1
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Week 1 2 3 4
F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
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Week 1 2 3 4
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F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
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Premise: The most recent observations might have the highest predictive value Therefore, we should give more weight to the more recent time periods when forecasting
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Exponential Smoothing Problem (1) Data Question: Given the weekly demand data, what are Week Demand the exponential 1 820 smoothing forecasts for 2 775 periods 2-10 using a=0.10 3 680 and a=0.60? 4 655 Assume F =D 1 1 5 750
6 7 8 9 10
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Answer: The respective alphas columns denote the forecast values. Note that you can only forecast one time period into the future.
Week 1 2 3 4 5 6 7 8 9 10
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Demand 820 775 680 655 750 802 798 689 775
0.1 820.00 820.00 815.50 801.95 787.26 783.53 785.38 786.64 776.88 776.69
0.6 820.00 820.00 793.00 725.20 683.08 723.23 770.49 787.00 728.20 756.28
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900
Deman d
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Week 1 2 3 4 5
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A
MAD =
t=1
- Ft
The ideal MAD is zero which would mean there is no forecasting error
The larger the MAD, the less the accurate the resulting model
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Sales Forecast 220 n/a 250 255 210 205 300 320 325 315
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40
A
MAD =
t=1
- Ft
40 = = 10 4
Note that by itself, the MAD only lets us know the mean error in a set of forecasts
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The Tracking Signal or TS is a measure that indicates whether the forecast average is keeping pace with any genuine upward or downward changes in demand. Depending on the number of MADs selected, the TS can be used like a quality control chart indicating when the model is generating too much error in its forecasts. The TS formula is:
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a
0 1 2 3 4 5 x (Time)
Yt = a + bx
Yt is the regressed forecast value or dependent variable in the model, a is the intercept value of the the regression line, and b is similar to the slope of the regression line. However, since it is calculated with the variability of the data in mind, its formulation is not as straight forward as our usual notion of slope.
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a = y - bx
xy - n(y)(x) x - n(x )
2 2
b=
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Week 1 2 3 4 5
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Answer: First, using the linear regression formulas, we can compute a and b
Week Week*Week Sales Week*Sales 1 1 150 150 2 4 157 314 3 9 162 486 4 16 166 664 5 25 177 885 3 55 162.4 2499 Average Sum Average Sum xy - n( y)(x) 2499 - 5(162.4)(3) 63 b= = = 6.3 2 2 55 5(9 ) 10 x - n(x )
a = y - bx = 162.4 - (6.3)(3) = 143.5
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Yt = 143.5 + 6.3x
Now if we plot the regression generated forecasts against the actual sales we obtain the following chart: 180 175 170 165 Sales 160 155 Forecast 150 145 140 135 1 2 3 4 5 Perio d Sales
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Collaborative Planning, Forecasting, and Replenishment (CPFR) a Web-based tool used to coordinate demand forecasting, production and purchase planning, and inventory replenishment between supply chain trading partners. Used to integrate the multi-tier or n-Tier supply chain, including manufacturers, distributors and retailers. CPFRs objective is to exchange selected internal information to provide for a reliable, longer term future views of demand in the supply chain. CPFR uses a cyclic and iterative approach to derive consensus forecasts.
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End of Chapter 13
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