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What is a Production Planning?

Production planning: The

planning of the acquisition of the
resources and raw materials, as
well as the planning of the
production activities, required to
transform raw materials into
finished products meeting
customer demand in the most
efficient or economical way
possible.

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Hierarchy of Production Planning Decisions
▪ A hierarchy of decisions, during which some aggregate planning has to be done before detailed
planning and scheduling can be made.

Forecast of aggregate demand

for ‘t’ period planning horizon

Aggregate Production Plan

Determination of aggregate production and
workforce levels for ‘t’ period planning horizon

Master Production Schedule (MPS)

Schedule of production quantities by product and
time period

Material Requirements Planning System (MRP)

Detailed timetable for production and assembly of
components and subassemblies
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Decision matrix in supply chain management

Decision matrix in supply chain management (Ivanov et al. 2017)

Why Forecasting?

The Effect of Inaccurate Forecasting on the Supply Chain

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Types of Forecasting Methods

Forecasting
Methods

Qualitative Quantitative

▪ No data available Applied; when two conditions are

▪ Methods: satisfied:
o Market surveys 1. Numerical information about the
o Delphi method past is available;
o etc. 2. Assume that some aspects of the past
patterns will continue into the future.

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Time Series Forecasting
Forecasting of fast demand

Forecasting for intermittent demand

Highly Irregular

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Time series Exploration
Demand Patterns Over Time: Any time series (i.e. data over time) is composed of the following:
DATA = Level + Trend + Seasonality + Random Variation
DATA = PATTERN + Random Variation
(a) Level or Horizontal Pattern: Data follow a
(b) Trend Pattern: Data are progressively
horizontal pattern around the mean
increasing (shown) or decreasing
Quantity

Quantity
Time Time

(c) Seasonal Pattern: Data exhibit a regularly (d) Cycle: Data increase or decrease over time
repeating pattern (Data patterns created by economic fluctuations)

Quantity
Quantity

Time (Quarters) 8
Time (Quarters)
Time series Exploration…
DATA = Level + Trend + Seasonality + Random Variation
DATA = PATTERN + Random Variation

Time series Decomposition: Time series comprising three components:

o a trend
o a seasonal
o a remainder (containing anything else in the time series).

o Additive: 𝒚𝒕 = 𝑻𝒕 + 𝑺𝒕 + 𝜺𝒕 o Multiplicative: 𝒚𝒕 = (𝑻𝒕 )(𝑺𝒕 ) (𝜺𝒕 )

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Measures of Forecast Accuracy: Two Approaches

Forecast
Accuracy
Approaches

In-Sample Out-of-sample
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Beware of over-fitting
▪ A model which fits the data well does not necessarily forecast well.

▪ Over-fitting a model to data is as bad as failing to identify the systematic pattern in the data.

▪ Problems can be overcome by measuring true out-of-sample forecast accuracy. That is, total data divided
into “training” set and “test” set.

Available data
Training set Test set
(e.g., 80%) (e.g., 20%)
Training set used to estimate parameters. Forecasts are made for test set.

▪ The test set must not be used for any aspect of model development or calculation of forecasts.

▪ Forecast accuracy is based only on the test set. (Out-of-sample)

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Measures of Forecast Accuracy
Let 𝑦𝑡 denote the 𝑡 𝑡ℎ observation and 𝐹𝑡 denote its forecast based on all previous data, where 𝑡 = 1, … , 𝑇.
Then the following measures are useful.

σ𝑇𝑡=1 𝐴𝑡 − 𝐹𝑡
𝑀𝐴𝐸 =
𝑇
σ𝑇𝑡=1(𝐴𝑡 − 𝐹𝑡 )2 ▪ MAE, MSE, RMSE are all scale dependent.
𝑀𝑆𝐸 =
𝑇
▪ MAPE is scale independent but is only sensible if 𝐴𝑡 > 0 for all t.
σ𝑇𝑡=1(𝐴𝑡 − 𝐹𝑡 )2
𝑅𝑀𝑆𝐸 = ▪ MASE is also scale independent
𝑇

𝐴𝑡 − 𝐹𝑡
σ𝑇𝑡=1
𝐴𝑡
𝑀𝐴𝑃𝐸 = × 100
𝑇

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Moving Average Method
▪ Simple moving average Ft +1 =  A t / n
where
o Stable demand with no pronounced
behavioral patterns Ft+ 1 = Forecast for period t+1
At = Actual demand in period t
n = number of periods in the moving average
o Uses several demand values during the
recent past to develop a forecast o Moving averages are computed for specific
periods, such as 3 or 5 months.
o The average value over a set time period
(e.g.: the last four weeks) o If the variations in the variable remain
reasonably constant over time, a large n is
recommended.
o Each new forecast drops the oldest data
point & adds a new observation o Otherwise, if the data exhibit change patterns, a
small value of n is advisable.

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Simple Moving Average
Actual 3-SMA Absolute Actual 5-SMA Absolute
Month Error Month Error
Demand Forecast Error Demand Forecast Error

January 437 January 437

February 605 February 605
March 722 March 722
April 893 588 305 305 April 893
May 901 740 161 161 May 901

June 1311 839 472 472 June 1311 712 599 599

July 1055 1035 20 20 July 1055 886 169 169

August 975 1089 -114 114 August 975 976 -1 1

September 822 1114 -292 292 September 822 1027 -205 205

October 893 951 -58 58 October 893 1013 -120 120

November 599 897 -298 298 November 599 1011 -412 412

December 608 771 -163 163 December 608 869 -261 261

January 700 January 779

MAD: 209 MAD: 252

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Weighted Moving Average Method
Adjusts moving average method to more closely reflect data fluctuations.

Ft +1 =  w t A t
where
Ft+ 1 = Forecast for period t+1

wt = the weight for period t, between 0 and 100 percent

 wt = 1.00

At = Actual demand in period t

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Weighted Moving Average
𝑇𝑎𝑘𝑒 𝑤1 = 0.2, 𝑤2 = 0.3, 𝑤3 = 0.5
Actual 3-WMA Absolute Error Absolute %
Month Error
Demand Forecast Error Squared Error

January 437
February 605
March 722
April 893
May 901
June 1311
July 1055
August 975
September 822
October 893
November 599
December 608
January
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Exponential Smoothing Methods
▪ Weighted Moving Average & Simple Exponential Smoothing Method

▪ Simple Exponential Smoothing Method

o More sophisticated version of weighted moving average

o Weights the most recent data more strongly

o Successively assigns lower weights to older observations – the value of the

weights decreases exponentially

o Useful if the recent changes in the data are significant and unpredictable
instead of just random fluctuations

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Simple Exponential Smoothing Method
ℓ 𝑇 = 𝛼𝑦𝑇 + (1 − 𝛼)ℓ 𝑇−1 where  is a smoothing constant between 0 and 1.
= 𝛼𝑦𝑇 + (1 − 𝛼)[𝛼𝑦𝑇−1 + (1 − 𝛼)ℓ 𝑇−2 ]

= 𝛼𝑦𝑇 + (1 − 𝛼)𝛼𝑦𝑇−1 + (1 − 𝛼)2 ℓ 𝑇−2

= 𝛼𝑦𝑇 + (1 − 𝛼)𝛼𝑦𝑇−1 + (1 − 𝛼)2 𝛼𝑦𝑇−2 +. . . +(1 − 𝛼)𝑇−1 𝛼𝑦1 + (1 − 𝛼)𝑇 ℓ0

The coefficients measuring the contributions of the observations decrease exponentially
over time.

▪ The weights can be seen that they

decrease exponentially, hence the
name exponential smoothing.

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Simple Exponential Smoothing Method

0.0    1.0
If  = 0, then
Ft +1 = 0 At + 1 Ft = Ft
Forecast does not reflect recent actual demand

If  = 1, then
Ft +1 = 1 At + 0 Ft = At
Forecast based only on most recent demand i.e. it is the same as the naïve forecast.

If  = 0.20, then Ft +1 = 0.20 At + 0.80 Ft

It means that our forecast for the next period is based on 20 percent of recent demand (At) and 80 percent of past
demand (in the form of forecast Ft; since Ft is derived from previous demands and forecasts)

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 Simple Exponential Smoothing Method: Example
𝑭(𝒕+𝟏) = 𝜶𝒀𝒕 + 𝟏 − 𝜶 𝑭𝒕
𝑭𝟐 = 𝒀𝟏 = 𝟐𝟎𝟎
𝑭𝟑 = 𝟎. 𝟏 𝟏𝟑𝟓 + 𝟎. 𝟗(𝟐𝟎𝟎)

▪ When α = 1; SES equal to Naïve

Method.

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Simple Exponential Smoothing Method: Example # 2
Application of exponential smoothing to inventory demand for product E15
with α = 0.654 chosen by minimizing the MSE.

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Holt's linear method: Example
α = 0.501 & β = 0.072 chosen by minimizing the MSE.

Initialization Values:
Set L1 = Y1 = 143; & b1 = Y2 – Y1 = (152 – 143 = 9)

L2 = 0.501* Y2 +(1 – 0.501)*(L1 + b1)

L2 = 0.501*152+(1 – 0.501)*(143+9) = 152

b2 = 0.072* (L2 – L1) +(1 – 0.072)*( b1)

b2 = 0.072*(152 – 143)+(1 – 0.072)*(9) = 9

F3 = L2 + b2m = (152 + 9 * 1) = 161

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Holt-Winters' trend and seasonality Method
Additive seasonality Multiplicative seasonality

▪ s is the length of seasonality (e.g., number of months or quarters in a year)

▪ To determine initial estimates of the seasonal indices we need to use at least one complete season’s data (i.e., s
periods).
o Level is initialized by taking the average of the first season:
1
• 𝐿𝑠 = 𝑠 𝑌1 + 𝑌2 + ⋯ + 𝑌𝑠
o To initialize trend, it is convenient to use two complete seasons (i.e., 2s periods):
1 𝑌 −𝑌 𝑌 −𝑌 𝑌 −𝑌
• 𝑏𝑠 = 𝑠 𝑠+1𝑠 1 + 𝑠+2𝑠 2 + ⋯ + 𝑠+𝑠𝑠 𝑠

Additive Multiplicative
The seasonal indices are initialized using the ratio of the
𝑆1 = 𝑌1 − 𝐿𝑠 , 𝑆2 = 𝑌2 − 𝐿𝑠 , … , 𝑆𝑠 = 𝑌𝑠 − 𝐿𝑠 first few data values to the mean of the first year so that
𝑌1 𝑌2 𝑌𝑠
𝑆1 = , 𝑆2 = , … , 𝑆𝑠 =
𝐿𝑠 𝐿𝑠 𝐿𝑠
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Holt-Winters' trend and seasonality Method: Example
Quarterly sales data

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Multiplicative Holt-Winters' Method: Example…
α= 0.822, β = 0.055, γ = 0.00
▪ Level Initial Value:
1
o 𝐿4 = 362 + 385 + 432 + 341 = 380
4
▪ Trend Initial Value:
1 382−362 409−385 498−432 387−341
o 𝑏4 = + + + = 9.75
4 4 4 4 4
▪ Seasonal Initial Value:
362 385
o 𝑆1 = = 0.953, 𝑆2 = = 1.013
380 380
432 341
o 𝑆3 = = 1.137, 𝑆4 = = 0.897
380 380

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Multiplicative Holt-Winters' Method: Example…

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Q&A

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