Bai 3
Bai 3
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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.
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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).
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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.
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Components of Demand
Average
demand for a Trend
period of time
Seasonal Cyclical
element elements
Random Autocorrelation
variation Excel: Components
of Demand
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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
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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).
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Time Series Analysis
Using the past to predict the future
Short term – forecasting less than 3 months
• Useful for detecting general trends and identifying major turning points
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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
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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
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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.
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Simple Moving Average Formula
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Simple Moving Average – Example
Excel
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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.
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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.
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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.
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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.
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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.
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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.
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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)
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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
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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
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Exponential Smoothing – Effect of
Trends
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Example – Exponential Smoothing with
Trend Adjustment
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Choosing Alpha and Delta
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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
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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
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Example 18.2 – Calculations
1 600 600 1 360,000 801.3
2 1,550 3,100 4 2,402,500 1,160.9
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Time Series Decomposition
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Seasonal Variation
Seasonal variation may be either additive or
multiplicative (shown here with a changing trend).
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Example:
Additive: "Increase by 20 units every December.“
Multiplicative: "Increase by 20% every December."
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Determining Seasonal Factors :
Simple Proportions Example 18.3
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Determining Seasonal Factors :
Simple Proportions Example 18.3
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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.
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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
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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
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Decompostion – Step 5
Create the final forecast by adjusting the regression
line by the seasonal factor.
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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
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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).
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Computing Forecast Error
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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.
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Qualitative Forecasting Techniques
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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.
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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.
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Collaborative Planning, Forecasting, and
Replenishment (CPFR)
Inventory replenishment
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CPFR Steps
Creation of a Development of
front-end Joint business demand Sharing Inventory
partnership planning forecasts forecasts replenishment
agreement
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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.
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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.
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