Master Planning of Resources

Session 2 Forecasting Demand

What is a Forecast?
Forecast An estimate of future demand. A forecast can be determined by mathematical means using historical data, it can be created subjectively by using estimates from informal sources, or it can represent a combination of both techniques. Forecast Error The difference between actual demand and forecast demand, stated as an absolute value or as a percentage. Forecast Management The process of making, checking, correcting, and using forecasts. It also includes determination of the forecast horizon.

Why Forecast?
 

 

 

To plan for the future by reducing uncertainty To facilitate a company in taking control of operations. Without forecast, it would be a chaos. To anticipate and manage change To increase communication and integration of planning teams To anticipate inventory and capacity demands and manage lead times To project costs of operations into budgeting processes To improve competitiveness and productivity through decreased costs and improved delivery and responsiveness to customer needs

Areas Impacted by the Forecast

     

Investment decisions Capital equipment decisions Inventory planning Capacity planning Operations budgets Lead-time management

Forecast System Design Issues

         

Determine information that needs to be forecasted Assign responsibility for the forecast Set up forecast system parameters Select forecasting models and techniques Collect data Test models Record actual demand Report accuracy Determine root cause of variance Review forecasting system for improved performance

General Forecasting Techniques



Qualitative Techniquesbased on intuitive or judgmental evaluation Quantitative Techniquesbased on computational projection of a numeric relationship

Qualitative Techniques
     

Expert opinion Market research Focus groups Historical analogy Delphi method Panel consensus

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Quantitative Techniques
      

Moving average Exponential smoothing Regression analysis Adaptive smoothing Graphical methods Econometric modeling Life-cycle modeling

General Forecasting Data Methods



Intrinsic forecasting methods are based on historical patterns of the data itself from company data Extrinsic forecasting methods are based on external patterns from information outside the company such as published data and data available from the Internet

Qualitative and quantitative forecasts may be generated based on intrinsic or extrinsic information.

Internal (Intrinsic) Factors



 

Product life-cycle management Planned price changes Changes in the sales force Resource constraints Marketing and sales promotion Advertising
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External (Extrinsic) Factors

  

     

Competition New customers Plans of major customers Government policies Regulatory concerns Economic conditions Environmental issues Weather conditions Global trends
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Leading Indicators
Indicator (Causal Factor) Housing starts Birth rate Health trends Desire for Healthier lifestyle Influences volume of Building materials Home furnishings Baby products Medical supplies Nutritional products Fitness products
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Demand
A need for a particular product or component

Independent demand is demand for an item that is unrelated to the demand for other items. Independent demand items are saleable products or services that are added to the master schedule. Dependent demand can be calculated directly from the demand for other products. It is related to the bill of material structure.
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Sources of Demand
Demand can come from many sources:
      

Consumers Customers Referrers Dealers Distributors Interplant Service parts

Demand Characteristics
Internal Factors
 

External Factors
    

Product promotion Product substitution

Random fluctuation Seasonality Trend Economic cycle Changing customer preferences and demands

Seasonality
Sales in cases by month
800 700 600 500 400 300 200 100 0 J F M A M J J A S O N D

Year 1 Year 2

Seasonality Calculation
Measures seasonal variation of demand Relates the average demand in a particular period to the average demand for all periods
period average demand The Seasonal Index ! average demand for all periods

Calculation of Seasonal Index

Sales of Ice Cream
Month January February March April May June July August September October November December Total Average Year 1 10 10 10 50 150 400 600 700 350 100 10 10 2400 Year 2 12 12 12 55 160 420 620 730 360 105 12 12 2510 Total 22 22 22 105 310 820 1220 1430 710 205 22 22 4910 409.17 Round to 409 Calculation 22/409 22/409 22/409 105/409 310/409 820/409 1220/409 1430/409 710/409 205/409 22/409 22/409 Index 0.05 0.05 0.05 0.26 0.76 2.00 2.98 3.49 1.74 0.50 0.05 0.05

Seasonality Exercise

Economic Cycle
Sales by Quarter
35 30 25 20 15 10 5 0 1 3 5 7 9 11 13 15 17 19 Quarter

Pyramid Forecasting
Total business volume (dollars)

Product family volume (units/dollars)

Product/item volume (units)

Pyramid Forecasting

Pyramid Forecasting

TechniquePyramid Forecasting Example

ROLL-UP  Product-level forecast X1 units8,200 price$20.61  Family-level forecast Family-adjusted forecast FORCE-DOWN


X2 units4,845 price$10.00 units13,045 Family avg price$16.67 units15,000

X1 X2

15,000 8,200 = 9,429 units 13,045 15,000 4,845 = 5,571 units 13,045

Pyramid Forecasting Using Revenue

A X1 units 1 2 3 4 9,429 $20.61 5,571 $10.00 15,000 price units 8,200 $20.61 B C X2 price D E Totals Qty $ $217,452 1.15 $250,042 $250,070 F

4,845 $10.00 13,045

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Pyramid Forecasting Exercise

Historical Demand Product A Region 1 150 Region 2 300 Selling Price $4.50 Product B Region 1 300 Region 2 450 Selling Price $8.50

Management has determined that next years demand will be $10,000 total. CALCULATE the projected demand in units for products A and B in each region.

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Pyramid Forecasting ExerciseSolution

Based upon historical demand A = 150 + 300 = 450 $4.50 = $2,025 B = 300 + 450 = 750 $8.50 = $6,375 Total = $8,400 $10,000 $8,400 = 1.19 (19% increase)

A: Region 1 = 1.19 150 = 178.5 Region 2 = 1.19 300 = 357.0 B: Region 1 = 1.19 300 = 357.0 Region 2 = 1.19 450 = 535.5 178.5 + 357.0 = 535.5 $4.50 = $2,409.75 357.0 + 535.5 = 892.5 $8.50 = $7,586.25 $9,996.00
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Moving Average Forecasting

Advantages
  

A simple technique that is easy to calculate It can be used to filter out random variation Longer periods provide more smoothing If a trend exists, it is hard to detect Moving averages lag trends
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Limitations
 

Moving Average Exercise

Actual sales Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec 100 500 1000 1500 2800 5100 6200 5700 3200 1200 500 100 Next months forecast variation

Exponential Smoothing
New Forecast = x Actual Demand + (1 - ) x Old Forecast x (Actual Demand Old Forecast) New Forecast = Old Forecast +


 

Provides a routine method of updating item forecasts Alpha is a weighting factor applied to the demand element Works well for items with fairly constant demand Is satisfactory for short-range forecasts Lags trends
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Smoothing Factor
 

Referred to as Alpha (E Determines the weight of historical data on projection Sets responsiveness to changes in demand Range 0

E 1
2 E= n+1
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Smoothing Factor (cont.)



Determines how many periods of actual demand will influence forecast 1.00 = 1 period 0.50 = 3 periods 0.29 = 6 periods 0.15 = 12 periods 0.10 = 19 periods

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Comparison of Exponential Smoothing Alpha Factors

0.1 Low weighting -most smoothing 0.9 High weighting - close to actual

Actual sales

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Exponential Smoothing Examples

New forecast = Old forecast + smoothing factor (E v (actual demand - old forecast) Example: old forecast = 160, actual = 200, E = 0.1 new forecast = 160 + (0.1 v (200 - 160)) = 160 + (0.1 v 40) = 164 Example: old forecast = 160, actual = 200, E = 0.8 new forecast = 160 + (0.8 v (200 - 160)) = 160 + (0.8 v 40) = 192
Adapted from: Manufacturing for Survival, B.R. Williams, Addison Wesley, 1996 2-35

New Product Introduction

Every new product/service is a calculated risk. Every new product/service has the potential to be the next
    

Blockbuster Lifesaver Money loser Disaster Liability nightmare.

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Product Life Cycle

Volume Introduction Growth Maturity Decline

Product Life Cycle Stages

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Time

Focus ForecastingAssumptions/Methods
Assumptions


The most recent past is the best indicator of the future One forecasting model is better than the others All forecasting models for all items forecasted will be compared against recent sales history The model that achieves the closest fit will be used to forecast this item this time Next time, a different model may be selected
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Methods


Data Issues for Forecasting

          

Availability of data Consistency of data Amount of history required Forecast frequency Frequency of model reevaluation Cost and time issues Recording true demand Order date vs. ship date Product units vs. financial units Level of aggregation Customer partnering
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Planning Horizon and Time Periods

Forecast Length

Short

Mid

Long
Planning Horizon

Weeks

Months

Quarters

1 2 3 4 5 6 7 8 9 1011 12 13 17 21 25 29 33 37 41 45 49 53 65

78

91 104

Time Periods (week numbers)

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Data Preparation and Collection



Record sales data in same periods as forecast data (daily, weekly, or monthly) Monitor demand, not sales and/or shipments Record the circumstances of exceptional demand Record demand separately for unique customer groupings and market sectors

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Dealing with Outliers

55 50

25 20 15 10 5 0 J F M A M J J A S O N D J F M A M J J A S O N D
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Decomposition of Data
   

Purify the data Adjust the data Take out the baseline and components Identify demand components
Trend Seasonality Nonannual cycle Random error

  

Measure the random error Project the series Recompose

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Session 2 Review
You should now be able to  Explain why forecasting is important  Identify and describe general methods of forecasting  Identify factors influencing demand  Describe considerations in using data for forecasts  Outline the process of data decomposition
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