DEMAND AND

PRODUCTION
PLANNING
 FROECASTING TECHNIQUES
1- TIME SERIES MODEL

2- MOVING AVERAGE

3- EXPONENTIAL SMOOTHING

4- TREND AND SEASONALITY

5- DEMAND CONTROL STRATEGIES (MTO, MTA, MTS)

 Time series models
Its based on actual demand of last few years arranged in chronological order referred as ‘Time Series’
Is defined as some quantity that is measured sequentially in time over some interval.
Time series analysis is a statistical technique to analyze the pattern of data points taken over time to forecast
the future.
The major components or pattern that are analyzed through time series are:
Trend Increase or decrease in the series of data over longer a period.
Seasonality Fluctuations in the pattern due to seasonal determinants over a short period.
Cyclical Variations occurring at irregular intervals due to certain circumstances.
Irregularity Instability due to random factors that do not repeat in the pattern.
 TREND
Persistent, overall upward or downward pattern
Changes due to population, technology, age, culture, etc.
Typically several years duration
 SEASONAL COMPONENT
Regular pattern of up and down fluctuations
Due to weather, events (Eid etc), other factors like days offs & lunch timings.
 CYCLICAL COMPONENT
Repeating up and down movements
Affected by business cycle, political, and economic factors
Multiple years duration
Often causal or associative relationships

0 5 10 15 20
 RANDOM COMPONENT
Erratic, unsystematic fluctuations
Due to random variation or unforeseen events
Short duration and nonrepeating

M T W T F
 DISADVANTAGES
The major disadvantages of time series methods are:
They require a large amount of historical data.
They adjust slowly to changes in sales.
A great deal of searching may be needed to find the smoothing weights (alpha, beta, gamma).
They usually fall apart when the forecast horizon is long.
Large fluctuations in current data can throw the forecasts into great errors.
 ADVANTAGES
The major advantages of time series methods are:
They are well suited to situations where demand forecasts are needed for a large number of products.
They work very well for products with a fairly stable sales history.
They can smooth out small random fluctuations.
They are simple to understand and use.
They can be easily systematized and require little data storage.
Software packages for such methods are readily available.
They are generally good at short-term forecasting (one to three periods into the future).
 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

Ft+1 = At
Where
Ft+1 = forecast for next period, t +1
At = actual value for current period, t
t = current time period
 Moving Average Method
 MA is a series of arithmetic means
 Used if little or no fluctuation
 Used often for smoothing
 Provides overall impression of data over time
demand in previous n periods
Moving average = n

∑ At At + At-1 + …+ At-n
Where
Ft+1 = n
=
n
Ft+1 = forecast for next period, t +1
At = actual value for current period, t
t = current time period
 Moving Average Example
Actual 3-Month
Month Shed Sales Moving Average
January 10 10
12
February 12 13
March 13
April 16 (10 + 12 + 13)/3 = 11
(12 + 13 + 16)/3 = 13
May 19
(13 + 16 + 19)/3 = 16
June 23 (16 + 19 + 23)/3 = 19
July 26
GRAPH OF MOVING AVERAGE
 Weighted Moving Average
Used when some trend might be present
Older data usually less important
Weights based on experience and intuition
Note:In the simple moving average each observation is weighted equally. For example, in a three-
period moving average each observation is weighted one-third. In a five-period moving average each
observation is weighted one-fifth.

Weighted (weight for period n) x (demand in period n)

moving average = weights
Ft+1 = ∑ CtAt = C1A1 + C2A2 + . . . + CtAt
Where

Ft+1 = forecast for next period, t +1

Ct = weight placed on the actual value in period t

At = actual value for current period, t

Rule: each observation can be weighted differently provided that all the weights add up to 1.
A manager at Fit Well department store wants to forecast sales of swimsuits for August using a three
period weighted moving average. Sales for May, June, and July are as follows:
Month Actual Sales Forecast
May 400
June 500
July 600

The manager has decided to weight May (0.25), June (0.25), and July (0.50).
Hint = 525
 Exponential Smoothing
The exponential smoothing model is a forecasting model that uses a sophisticated weighted average
procedure to obtain a forecast. Even though it is sophisticated in the way it works, it is easy to use and
understand. To make a forecast for the next time period, you need three pieces of information:
The current period’s forecast,
The current period’s actual value
The value of a smoothing coefficient, , which varies between 0 and 1
Note: Exponential smoothing models are the most frequently used forecasting techniques and are
available on almost all computerized forecasting software.
Next period’s forecast = α (current period’s actual) + (1 - α ) (current period’s forecast)
Ft+1 = α At + (1 – α ) Ft
Ft+1 = forecast for next period, t +1
At = actual value for current period, t
Ft = Forecast for current period
α = Smoothing coefficient
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant a = .20

New forecast = 142 + 0.2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars
The Hot Tamale Mexican restaurant uses exponential smoothing to forecast monthly usage of tabasco
sauce. Its forecast for September was 200 bottles, whereas actual usage in September was 300
bottles. If the restaurant’s managers use an of 0.70, what is their forecast for October?

Ft+1 = α At + (1 – α ) Ft
= 270 bottles
Values of that are high, such as 0.7 or 0.8, place a lot of weight on the current period’s actual
demand and can be influenced by random variations in the data.
Notice that we used the naïve method to derive initial values of forecasts for period 2.
Time Period (t) Actual Demand = 0.10 = 0.60
1 50 — —
2 46 50 50
3 52 49.60 47.60
4 51 49.84 50.24
5 48 49.96 50.70
6 45 49.77 49.08
7 52 49.29 46.63
8 46 49.56 49.85
9 51 49.20 47.54
10 48 49.38 49.62