Manufacturing

Planning and Control

MPC 6th Edition

Chapter 3

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Forecasting

The forecasting process involves

much more than just the estimation
of future demand. The forecast also
needs to take into consideration the
intended use of the forecast, the
methodology for aggregating and
disaggregating the forecast, and
assumptions about future
conditions.
3-2
Agenda

3-3
 Forecast Information
 The forecast information and technique must match the
intended application
 For strategic decisions such as capacity or market
expansion highly aggregated estimates of general trends
are necessary
 Sales and operations planning activities require more
detailed forecasts in terms of product families and time
periods
 Master production scheduling and control demand highly
detailed forecasts, which only need to cover a short period
of time

3-4
 Forecasting for Strategic
Business Planning
 Forecast is presented in general terms (sales dollars,
tons, hours)
 Aggregation level may be related to broad indicators
(gross national product, income)
 Causal models and regression/correlation analysis are
typical tools
 Managerial insight is critical and top management
involvement is intense
 Forecast is generally prepared annually and covers a
period of years

3-5
 Forecasting for Sales and
Operations Planning
 Forecast is presented in aggregate measures (dollars,
units)
 Aggregation level is related to product families
(common family measurement)
 Forecast is typically generated by summing forecasts
for individual products
 Managerial involvement is moderate and limited to
adjustment of aggregate values
 Forecast is generally prepared several times each year
and covers a period of several months to a year

3-6
 Forecasting for Master
Production Scheduling and
Control
 Forecast is presented in terms of individual products
(units)
 Forecast is typically generated by mathematical
procedures, often using software
 Projection
techniques are common
 Assumption is that the past is a valid predictor of the
future
 Managerial involvement is minimal
 Forecast is updated almost constantly and covers a
period of days or weeks
3-7
 Regression Analysis

 Regression identifies a relationship between

two or more correlated variables
 Linear regression is a special case where the
relationship is defined by a straight line, used
for both time series and causal forecasting
 Y = a + bX
Y is value of dependent variable, a is the y-
intercept of the line, b is the slope, and X is
the value of the independent variable

3-8
 Least Squares Method
 Objective–find the Y – calculated dependent variable value
line that minimizes
yi – actual dependent variable point
the sum of the
squares of the a – y intercept

vertical distance b – slope of the line

between each data x – time period

point and the line
Y = a + bx
Sum of Squares  ( y1  Y1 ) 2  ( y2  Y2 ) 2    ( yi  Yi ) 2
3-9
 Least Squares Example
Quarter (x) Sales (y) xy x2 y2 Y
1 600 600 1 360,000 801.3
2 1,550 3,100 4 2,402,500 1,160.9
3 1,500 4,500 9 2,250,000 1,520.5
4 1,500 6,000 16 2,250,000 1,880.1
5 2,400 12,000 25 5,760,000 2,239.7
6 3,100 18,600 36 9,610,000 2,599.4
7 2,600 18,200 49 6,760,000 2,959.0
8 2,900 23,200 64 8,410,000 3,318.6
9 3,800 34,200 81 14,440,000 3,678.2
10 4,500 45,000 100 20,250,000 4,037.8
11 4,000 44,000 121 16,000,000 4,397.4
12 4,900 58,800 144 24,010,000 4,757.1
Sum 78 33,350 268,200 650 112,502,500
3-10
 Least Squares Example
Quarter Sales
b
 xy  n x y 
268,200  12 * 6.5 * 2,779.17
 359.6153
1 600
 x  n( x )
2 2
650  12 * 6.5 2

2 1,550
3 1,500 a  y  b x  2,779.17  6.5(359.6153)  441.6666
4 1,500
5 2,400
6 3,100 Y  a  bx  441.67  359.6 x
7 2,600
8 2,900
9 3,800
10 4,500
11 4,000
12 4,900
3-11
Least Squares Regression
Line

Regression
errors are
the vertical
distance
from the
point to the
line

3-12
 Least Squares Example
Quarter Calculation Forecast
13 Y13=441.6+359.6(13) 5,119.4
14 Y14=441.6+359.6(14) 5,476.0
15 Y15=441.6+359.6(15) 5,835.6
16 Y16=441.6+359.6(16) 6,195.2

Standard Error of Estimate (Syx) – how well the line fits the data

(y i  Yi ) 2
(600  801.3) 2  (1,550  1,160.9) 2  (1,500  1,520.5) 2    (4,900  4,757.1) 2
S yx  i 1

n2 10

3-13
Time Series Decomposition

3-14
Seasonality
 Seasonality may (or may not) be
relative to the general demand trend
 Additive seasonal variation is
constant regardless of changes in
average demand
 Multiplicative seasonal variation
maintains a consistent relationship
to the average demand (this is the
more common case)

3-15
 Seasonal Factor
 To account for seasonality within the
forecast, the seasonal factor is calculated
 The amount of correction needed in a time
series to adjust for the season of the year
Season Past Average Sales Seasonal Factor
Sales for Each Season
Spring 200 1000/4=250 Actual/Average=200/250=0.8
Summer 350 1000/4=250 350/250=1.4
Fall 300 1000/4=250 300/250=1.2
Winter 150 1000/4=250 150/250=0.6
Total 1000
3-16
 Seasonal Factor
 If we expect (forecast) next year’s sales to
be 1,100 units, the seasonal forecast is
calculated using the seasonal factors
Season Expected Average Sales for Seasonal Forecast
Sales Each Season Factor
Spring 1100/4=275 X 0.8 = 220
Summer 1100/4=275 X 1.4 = 385
Fall 1100/4=275 X 1.2 = 330
Winter 1100/4=275 X 0.6 = 165
Total 1,100

3-17
 Seasonality–Trend and
Season Estimate of trend, use
Quarter Amount linear regression software
to obtain more precise
I – 2008 300 results
II – 2008 200
III – 2008 220
IV – 2008 530
I – 2009 520
Trend = 170 +55t
II – 2009 420
III – 2009 400
IV - 2009 700

3-18
 Seasonality–Trend and
Season
 Seasonal factors are calculated for each
season, then averaged for similar seasons
 Seasonal Factor = Actual/Trend

3-19
 Seasonality–Trend and
Season
 Forecasts are calculated by extending the linear
regression and then adjusting by the appropriate
seasonal factor
 FITS–Forecast Including Trend and Seasonal
Factors

3-20
 Decomposition Using Least
Squares Regression
1. Decompose the time series into its components
a. Find seasonal component
b. Deseasonalize the demand
c. Find trend component
2. Forecast future values for each component
a. Project trend component into future
b. Multiply trend component by seasonal
component

3-21
 Decomposition Using Least
Squares Regression
Period Quarter Actual Average of Same Quarter Seasonal
Demand of Each Year Factor
1 I 600 (600+2400+3800)/3=2266.7
2 II 1,550
3 III 1,500 Calculate average of
same period values
4 IV 1,500
5 I 2,400
6 II 3,100
7 III 2,600
8 IV 2,900
9 I 3,800
10 II 4,500
11 III 4,000
12 IV 4,900
Total 33,350
3-22
 Decomposition Using Least
Squares Regression
Period Quarter Actual Average of Same Quarter Seasonal
Demand of Each Year Factor
1 I 600 (600+2400+3800)/3=2266.7
2 II 1,550 (1550+3100+4500)/3=3050
3 III 1,500 (1500+2600+4000)/3=2700
4 IV 1,500 (1500+2900+4900)/3=3100
5 I 2,400
6 II 3,100
7 III 2,600
8 IV 2,900
9 I 3,800
10 II 4,500
11 III 4,000
12 IV 4,900
Total 33,350
3-23
 Decomposition Using Least
Squares Regression
Period Quarter Actual Average of Same Quarter Seasonal Factor
Deman of Each Year
d
1 I 600 (600+2400+3800)/3=2266.7 2266.7/(33350/12)=0.82
2 II 1,550 (1550+3100+4500)/3=3050
3 III 1,500 (1500+2600+4000)/3=2700
4 IV 1,500 (1500+2900+4900)/3=3100
5 I 2,400
Calculate seasonal factor
6 II 3,100
for each period
7 III 2,600
8 IV 2,900
9 I 3,800
10 II 4,500
11 III 4,000
12 IV 4,900
Total 33,350 3-24
 Decomposition Using Least
Squares Regression
Period Quarter Actual Average of Same Quarter Seasonal Factor
Demand of Each Year
1 I 600 (600+2400+3800)/3=2266.7 2266.7/(33350/12)=0.82
2 II 1,550 (1550+3100+4500)/3=3050 3050/(33350/12)=1.10
3 III 1,500 (1500+2600+4000)/3=2700 2700/(33350/12)=0.97
4 IV 1,500 (1500+2900+4900)/3=3100 3100/(33350/12)=1.12
5 I 2,400 0.82
6 II 3,100 1.10
7 III 2,600 0.97 Seasonal
8 IV 2,900 1.12 factors
9 I 3,800 0.82 repeat each
10 II 4,500 1.10 year
11 III 4,000 0.97
12 IV 4,900 1.12
Total 33,350
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 Decomposition Using Least
Squares Regression
Period Quarter Actual Seasonal Deseasonalized Demand
Demand Factor (Actual/Seasonal Factor)
1 I 600 0.82 600/0.82=735.7
2 II 1,550 1.10 1550/1.10=1412.4
3 III 1,500 0.97 1500/0.97=1544.0
4 IV 1,500 1.12 1500/1.12=1344.8
5 I 2,400 0.82 2942.6
6 II 3,100 1.10 2824.7
Calculate deseasonalized
demand for each period
7 III 2,600 0.97 2676.2
8 IV 2,900 1.12 2599.9
9 I 3,800 0.82 4659.2
10 II 4,500 1.10 4100.4
11 III 4,000 0.97 4117.3
12 IV 4,900 1.12 4392.9

3-26
 Least Squares Regression
for Deseasonalized Data
Period Deseasonalized SUMMARY OUTPUT
Demand Use linear regression to
Regression Statistics
1 735.7 Multiple R 0.929653282 fit trend line to
R Square 0.864255225
2 1412.4 Adjusted R Square 0.850680748 deseasonalized data
Standard Error 512.8180268
3 1544.0 Observations 12

4 1344.8 ANOVA
df SS MS F Significance F
5 2942.6 Regression 1 16743469.64 16743469.64 63.66766059 1.20464E-05
Residual 10 2629823.286 262982.3286
6 2824.7 Total 11 19373292.92

7 2676.2 Coefficients Standard Error t Stat P-value

Intercept 555.0045455 315.6176776 1.758471039 0.109173704
8 2599.9 Period 342.1800699 42.88399775 7.979201751 1.20464E-05

9 4659.2
10 4100.4
11
12
4117.3
4392.9
Y= 555.0 + 342.2x
3-27
 Create Forecast by Projecting
Trend and Reseasonalizing
Period Quarter Y from Regression Seasonal Forecast
Factor
13 I 555+342.2*13=5003.5 X 0.82 = 4102.87
14 II 555+342.2*14=5345.7 X 1.10 = 5880.27
15 III 555+342.2*15=5687.9 X 0.97 = 5517.26
16 IV 555+342.2*16=6030.1 X 1.12 = 6753.71

Project Linear Trend Project Seasonality

3-28
 Short-Term Forecasting
Techniques
 Statistical Forecasting Models
 Moving Average–Unweighted average of a
given number of past periods is used to
forecast the future
 Exponential Smoothing–Weighted average of
all past periods is used to forecast the future
 Both assume that there is an underlying
pattern of demand that is consistent over some
period of time

3-29
 Moving Average Forecasting
t

 ActualDemand i
Moving Average Forecast ( MAFt )  i t  n 1

i – period number
n
t – current period
n - number of periods in moving average (smaller n makes forecast more
responsive to recent values

3-30
 Exponential Smoothing
Forecasting
Exponential Smoothing Forecast ( ESFt )  ESFt 1   ( ActualDemand t  ESFt 1 )
  ( ActualDemand t )  (1   ) ESFt 1
α – smoothing constant (0≤α≤1) (higher α makes forecast more responsive to recent values)
t – current period
ESF t-1 – exponential smoothing forecast from previous period

3-31
 Forecast Evaluation

 Is the forecast too high or too low?

 Mean Error (bias)
 What is the magnitude of the forecast error?
 Mean Absolute Deviation (MAD)
 Standard Deviation of forecast error = 1.25*MAD

 Measuring both bias and MAD is critical to

understanding the quality of the forecast

3-32
 Forecast Evaluation
n

 ( ActualDemand i  ForecastDemand i )
Mean Error (bias )  i 1

n
n

 ActualDemand i  ForecastDemand i
Mean Absolute Deviation ( MAD)  i 1

n
i  period number
n  number of periods of data

3-33
 Aggregating Forecasts
 The SOP process reconciles differences in
forecasts from various sources
 Customer/product knowledge
 Sum of individual product detailed forecasts (by
product family, for example)
 SOP result is an aggregate demand forecast
 Long-term and/or aggregate forecasts are more

accurate than short-term, detailed forecasts

3-34
 Pyramid Forecasting

 One means of aggregating and

disaggregating forecasts is pyramid
forecasting
 Ensures consistency as the forecast sources
are integrated
 Provides a logical framework for summing
lower level forecasts and distributing higher
level forecast changes to individual products

3-35
Pyramid Forecasting

3-36
 External Information
 Activities or conditions that may invalidate the
assumption that history is a good predictor must be
accounted for in the forecasting process
 Specialpromotions, product changes, advertising,
competitors’ actions
 Changes to forecasting process may be needed
 Change exponential smoothing parameter to place more
(or less) emphasis on recent history
 Forecast more frequently to identify conditions that result
in higher forecast errors

3-37
 Principles
 Forecast models should be as simple as possible. Simple
models often outperform more complicated approaches.
 Inputs (data) and outputs (forecasts) must be monitored
for quality and appropriateness.
 Information on the sources of variation (seasonality,
market trends, company policies) should be incorporated
into the forecasting system.
 Forecasts from different sources must be reconciled and
made consistent with company plans and constraints.

3-38
 Quiz – Chapter 3
 A forecast used for Master Production Scheduling and Control
is likely to cover a period of _____________.
 Regression analysis where the relationship between variables
is a straight line is called _______ _______.
 In a time series analysis, time is the _________ variable.
 An exponential smoothing forecast considers all past data (T/F).
 In an exponential smoothing forecast, a higher level of alpha (α)
will place more emphasis on recent history (T/F).
 Mean error of a forecast provides information concerning the
forecast’s ________.

3-39