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The document discusses the importance of forecasting in supply chain management, outlining various forecasting techniques such as qualitative methods, time series analysis, and causal relationships. It emphasizes the role of forecasting in decision-making across different management functions, including finance, marketing, and production, and highlights the need for selecting appropriate forecasting models based on time horizons and data availability. Additionally, it covers components of demand, the impact of trends, and methods for calculating forecast errors.
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0% found this document useful (0 votes)
4 views62 pages

Bai 3

The document discusses the importance of forecasting in supply chain management, outlining various forecasting techniques such as qualitative methods, time series analysis, and causal relationships. It emphasizes the role of forecasting in decision-making across different management functions, including finance, marketing, and production, and highlights the need for selecting appropriate forecasting models based on time horizons and data availability. Additionally, it covers components of demand, the impact of trends, and methods for calculating forecast errors.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 62

FORECASTING

Lecturer: Nguyen Van Dung Ph.D.


Slides are based on slides accompanied the book “OPERATIONS AND
SUPPLY CHAIN MANAGEMENT”, with improvement from the lecturer
Chapter Eighteen
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives
 LO18–1: Understand how forecasting is essential to
supply chain planning.
 LO18–2: Evaluate demand using quantitative
forecasting models.
 LO18–3: Apply qualitative techniques to forecast
demand.
 LO18–4: Apply collaborative techniques to forecast
demand.

18-2
The Role of Forecasting
 Forecasting is a vital function and affects every significant
management decision.
 Finance and accounting use forecasts as the basis for budgeting
and cost control.
 Marketing relies on forecasts to make key decisions such as new
product planning and personnel compensation.
 Production uses forecasts to select suppliers; determine capacity
requirements; and drive decisions about purchasing, staffing, and
inventory.
 Different roles require different forecasting approaches.
 Decisions about overall directions require strategic forecasts.
 Tactical forecasts are used to guide day-to-day decisions.

18-3
Forecasting and Decoupling Point
 Decoupling point: Point at which inventory is stored,
which allows SC to operate independently
 The choice of the decoupling point in a SC is
strategic.
 Forecasting helps determine the level of inventory
needed at the decoupling points.
 The decision will be affected by the error produced
in the forecast and the type of product (easily
inventoried or easily perishable).

18-4
Types of Forecasting
 There are four basic types of forecasts.
1. Qualitative
2. Time series analysis (primary focus of this chapter)
3. Causal relationships
4. Simulation
 Time series analysis is based on the idea that data
relating to past demand can be used to predict
future demand.

18-5
Components of Demand

Average
demand for a Trend
period of time

Seasonal Cyclical
element elements

Random Autocorrelation
variation Excel: Components
of Demand

18-6
Exhibit 18.1 illustrates a demand over a four-year period,
showing the average, trend, and seasonal components and
randomness around the smoothed demand curve

7
Trends
 Identification of trend lines is a common starting
point when developing a forecast.
 Common trend types include linear, S-curve,
asymptotic (tiệm cận), and exponential (hàm mũ).

18-8
Time Series Analysis
 Using the past to predict the future
Short term – forecasting less than 3 months

• Used mainly for tactical (chiến thuật) decisions

Medium term – forecasting 3 months to 2 years

• Used to develop a strategy that will be implemented over the next 6 to


18 months (e.g., meeting demand)

Long term – forecasting greater than 2 years

• Useful for detecting general trends and identifying major turning points

18-9
Model Selection
 Choosing an appropriate forecasting model
depends upon
1. Time horizon to be forecast
2. Data availability
3. Accuracy required
4. Size of forecasting budget
5. Availability of qualified personnel

18-10
Forecasting Method Selection Guide
Forecasting Method Amount of Historical Data Pattern Forecast
Data Horizon
Simple moving average 6 to 12 months; Stationary (i.e., no Short
(Trung bình động đơn weekly data are often trend or seasonality)
giản) used
Weighted moving average 5 to 10 observations Stationary Short
and simple exponential needed to start
smoothing (Trung bình động
có trọng số và làm mịn
theo hàm mũ đơn giản)
Exponential smoothing with 5 to 10 observations Stationary and Short
trend (Làm mịn theo hàm needed to start trend
mũ với xu hướng)
Linear regression 10 to 20 observations Stationary, trend, Short to
and seasonality medium

18-11
Simple Moving Average
 Forecast is the average of a fixed number of past
periods.
 Useful when demand is not growing or declining
rapidly and no seasonality is present.
 Removes some of the random fluctuation from the
data.
 Selecting the period length is important.
 Longer periods provide more smoothing.
 Shorter periods react to trends more quickly.

18-12
Simple Moving Average Formula

18-13
Simple Moving Average – Example

Excel

18-14
Weighted Moving Average
 The simple moving average formula implies equal
weighting for all periods.
 A weighted moving average allows unequal
weighting of prior time periods.
 The sum of the weights must be equal to one.
 Often, more recent periods are given higher weights
than periods farther in the past.

18-15
16
17
18
Selecting Weights
 Experience and/or trial-and-error are the simplest
approaches.
 The recent past is often the best indicator of the
future, so weights are generally higher for more
recent data.
 If the data are seasonal, weights should reflect this
appropriately.

18-19
Exponential Smoothing
 A weighted average method that includes all past data in
the forecasting calculation
 More recent results weighted more heavily
 The most used of all forecasting techniques
 An integral part of computerized forecasting
 Well accepted for six reasons
1. Exponential models are surprisingly accurate.
2. Formulating an exponential model is relatively easy.
3. The user can understand how the model works.
4. Little computation is required to use the model.
5. Computer storage requirements are small.
6. Tests for accuracy are easy to compute.

18-20
Exponential Smoothing
 In the exponential smoothing method, only three pieces
of data are needed to forecast the future:
 most recent forecast
 actual demand that occurred for that forecast period
 smoothing constant alpha (α). This smoothing constant
determines the level of smoothing and the speed of reaction
to differences between forecasts and actual occurrences.
The value for the constant is determined both by the nature
of the product and by the manager’s sense of what
constitutes a good response rate.

18-21
Exponential Smoothing
 Example: if a firm produced a standard item with
relatively stable demand, the reaction rate to
differences between actual and forecast demand would
tend to be small, perhaps just 5 or 10 percentage
points.
 However, if the firm were experiencing growth, it would
be desirable to have a higher reaction rate, perhaps
15 to 30 percentage points, to give greater importance
to recent growth experience.
 The more rapid the growth, the higher the reaction rate
should be.

18-22
Exponential Smoothing
 Sometimes users of the simple moving average
switch to exponential smoothing but like to keep the
forecasts about the same as the simple moving
average.
 In this case, α is approximated by 2 ÷ (n + 1),
where n is the number of time periods in the
corresponding simple moving average.

18-23
Exponential Smoothing Model

This equation states that the new forecast is equal to the old
forecast plus a portion of the error (the difference between the
previous forecast and what actually occurred)
18-24
Exponential Smoothing Model
 Assume that the long-run demand for the product under study
is relatively stable and a smoothing constant (α) of 0.05 is
considered appropriate.
 If the exponential smoothing method were used as a continuing
policy, a forecast would have been made for last month.
Assume that last month’s forecast (Ft–1) was 1,050 units.
 If 1,000 actually were demanded, rather than 1,050, the
forecast for this month would be

Because the smoothing coefficient is small, the


reaction of the new forecast to an error of 50
units is to decrease the next month’s forecast
by only 2½ units.
18-25
Exponential Smoothing – Effect of
Trends
 An upward or downward trend in data collected over a sequence of
time periods causes the exponential forecast to always lag behind
(be above or below) the actual occurrence.
 Exponentially smoothed forecasts can be corrected somewhat by
adding in a trend adjustment.
 To correct the trend, we need two smoothing constants. Besides the
smoothing constant α, the trend equation also uses a smoothing
constant delta (δ).
 Both alpha and delta reduce the impact of the error that occurs
between the actual and the forecast. If both alpha and delta are
not included, the trend overreacts to errors.

18-26
Exponential Smoothing – Effect of
Trends
 To get the trend equation going, the first time it is used the trend value must
be entered manually. This initial trend value can be an educated guess or a
computation based on observed past data.
 The equations to compute the forecast including trend (FIT) are

18-27
Exponential Smoothing – Effect of
Trends

18-28
Example – Exponential Smoothing with
Trend Adjustment

18-29
Choosing Alpha and Delta

18-30
Linear Regression Analysis
 Regression is used to identify the functional
relationship between two or more correlated
variables, usually from observed data.
 One variable (the dependent variable) is predicted
for given values of the other variable (the
independent variable).
 Linear regression is a special case that assumes the
relationship between the variables can be explained
with a straight line.

Y = a + bt

18-31
Example 18.2 – Least Squares Method
Quarter Sales Quarter Sales
The least squares method determines the
1 600 7 2,600
parameters a and b such that the sum of
the squared errors is minimized – “least 2 1,550 8 2,900
squares” 3 1,500 9 3,800
4 1,500 10 4,500
5 2,400 11 4,000
6 3,100 12 4,900

18-32
Example 18.2 – Calculations
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


The forecast is extended to periods 13-16
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 18-33


Regression with Excel
 Microsoft
Excel includes
data analysis
tools, which
can perform
least squares
regression on
a data set.

18-34
Time Series Decomposition

 Chronologically ordered data are referred to as a


time series.
 A time series may contain one or many elements.
 Trend,seasonal, cyclical (theo chu kỳ), autocorrelation,
and random
 Identifying these elements and separating the time
series data into these components is known as
decomposition.

18-35
Seasonal Variation
 Seasonal variation may be either additive or
multiplicative (shown here with a changing trend).

18-36
Example:
Additive: "Increase by 20 units every December.“
Multiplicative: "Increase by 20% every December."

37
Determining Seasonal Factors :
Simple Proportions Example 18.3

18-38
Determining Seasonal Factors :
Simple Proportions Example 18.3

18-39
40
41
42
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 of each component.
a. Project trend component into the future.
b. Multiply trend component by seasonal component.

18-43
Decomposition – Steps 1 and 2

Using the data for periods 1-12, apply time series analysis
(decomposition, linear regression, trend estimate & seasonal
indices) to forecast for periods 13-16

18-44
Decomposition – Steps 3 and 4
 Develop a least squares regression line for the deseasonalized
data.
 Project the regression line through the period of the forecast.

Regression Results:
Y = 555.0 + 342.2t

Forecast for
periods 13-16

18-45
Decompostion – Step 5
 Create the final forecast by adjusting the regression
line by the seasonal factor.

Period Quarter Y from Regression Seasonal Factor Forecast (F x


Seasonal Factor
13 I 5,003.5 0.82 4,102.87
14 II 5,345.7 1.10 5,880.27
15 III 5,687.9 0.97 5,517.26
16 IV 6,030.1 1.12 6,753.71

18-46
Forecast Errors
 Forecast error is the difference between the forecast value
and what actually occurred.
 All forecasts contain some level of error.
 Sources of error
 Bias – when a consistent mistake is made
 Random – errors that are not explained by the model being used
 Measures of error
 Mean absolute deviation (độ lệch tuyệt đối trung bình) (MAD)
 Mean absolute percent error (sai số phần trăm tuyệt đối trung
bình) (MAPE)
 Tracking signal

18-47
Forecast Error Measurements
 Ideally, MAD will be zero  MAPE scales the forecast error to
(no forecasting error). the magnitude of demand.
 Larger values of MAD
indicate a less accurate
model.
 Tracking signal indicates whether
forecast errors are accumulating
over time (either positive or
negative errors).

18-48
Computing Forecast Error

RSFE = The running sum of forecast


errors, considering the nature of the error.
(For example, negative errors cancel
positive errors and vice versa.)
18-49
Causal Relationship Forecasting

 Causal relationship forecasting uses independent


variables other than time to predict future demand.
 This independent variable must be a leading indicator.
 Many apparently causal relationships are actually
just correlated events – care must be taken when
selecting causal variables.

18-50
51
52
53
Multiple Regression Techniques
 Often, more than one independent variable may be
a valid predictor of future demand.
 In this case, the forecast analyst may utilize multiple
regression.
 Analogous to linear regression analysis, but with
multiple independent variables.
 Multiple regression supported by statistical software
packages.

18-54
55
Qualitative Forecasting Techniques

 Generally used to take advantage of expert


knowledge.
 Useful when judgment is required, when products
are new, or if the firm has little experience in a new
market.
 Examples
 Market research
 Panel consensus
 Historical analogy
 Delphi method

18-56
 Delphi method conceals the identity of the
individuals participating in the study. Everyone has
the same weight.
 Procedurally, a moderator creates a questionnaire
and distributes it to participants.
 Their responses are summed and given back to the
entire group along with a new set of questions.

57
 The step-by-step procedure for the Delphi method:
1. Choose the experts to participate. There should be 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 if necessary. Distribute the final results to all participants.

58
Collaborative Planning, Forecasting, and
Replenishment (CPFR)

 A web-based process used to coordinate the efforts


of a supply chain.
 Demand forecasting
 Production and purchasing

 Inventory replenishment

 Integrates all members of a supply chain –


manufacturers, distributors, and retailers.
 Depends upon the exchange of internal information
to provide a more reliable view of demand.

18-59
CPFR Steps

Creation of a Development of
front-end Joint business demand Sharing Inventory
partnership planning forecasts forecasts replenishment
agreement

18-60
Example of CPFR
 Procter & Gamble and WalmartProcter & Gamble (P&G) and Walmart are a
classic example of successful CPFR implementation. Their collaboration
revolutionized supply chain management in the consumer goods industry.
 Key aspects of their CPFR partnership:
 Shared data and forecasts: P&G and Walmart shared real-time sales data,
point-of-sale information, and demand forecasts. This transparency allowed
both companies to have a unified view of consumer demand.
 Joint planning: The companies collaborated on strategic planning, including
promotions, new product launches, and inventory management. This ensured
that both parties were aligned on their goals and objectives.
 Continuous improvement: The CPFR process was not a one-time event. P&G
and Walmart continuously reviewed and refined their collaboration to
optimize efficiency and reduce costs.

61
Principles
 Forecasting is a fundamental step in any planning
process.
 Forecast effort should be proportional to the
magnitude of decisions being made.
 Web-based systems (CPFR) are growing in
importance and effectiveness.
 All forecasts have errors – understanding and
minimizing this error is the key to effective
forecasting processes.

18-62

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