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Forecasting

This document discusses forecasting techniques used in production operations management. It covers the key elements of a good forecast, the steps in the forecasting process, and describes qualitative and quantitative forecasting methods. Specifically, it outlines judgmental forecasting using opinions, time series forecasting using historical data trends and seasonality, and quantitative techniques like moving averages, exponential smoothing, and linear regression analysis. The goal of forecasting is to make informed operational decisions by predicting future values like demand. Accurate and timely forecasts are important for planning throughout an organization.

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Atashi Chakma
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0% found this document useful (0 votes)
154 views45 pages

Forecasting

This document discusses forecasting techniques used in production operations management. It covers the key elements of a good forecast, the steps in the forecasting process, and describes qualitative and quantitative forecasting methods. Specifically, it outlines judgmental forecasting using opinions, time series forecasting using historical data trends and seasonality, and quantitative techniques like moving averages, exponential smoothing, and linear regression analysis. The goal of forecasting is to make informed operational decisions by predicting future values like demand. Accurate and timely forecasts are important for planning throughout an organization.

Uploaded by

Atashi Chakma
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Production Operations Management

Forecasting

3-1
Learning Objectives

• List the elements of a good forecast.


• Outline the steps in the forecasting process.
• Describe at least three qualitative forecasting techniques and the
advantages and disadvantages of each.
• Compare and contrast qualitative and quantitative approaches to
forecasting.

3-2
Learning Objectives

• Briefly describe averaging techniques, trend and seasonal


techniques, and regression analysis, and solve typical problems.
• Describe two measures of forecast accuracy.
• Describe two ways of evaluating and controlling forecasts.
• Identify the major factors to consider when choosing a
forecasting technique.

3-3
FORECAST:
• A statement about the future value of a variable of
interest such as demand.
• Forecasting is used to make informed decisions.
• Long-range
• Short-range

3-4
Forecasts

• Forecasts affect decisions and activities throughout an organization


• Accounting, finance
• Human resources
• Marketing
• MIS
• Operations
• Product / service design

3-5
Uses of Forecasts

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

3-6
Features of Forecasts

• Assumes causal system


past ==> future
• Forecasts rarely perfect because of randomness
• Forecasts more accurate for
groups vs. individuals
• Forecast accuracy decreases
as time horizon increases
I see that you will
get an A this semester.

3-7
Elements of a Good Forecast

Timely

Reliable Accurate

l se
f u u
g t o
nin Written
s y
e a E a
M

3-8
Steps in the Forecasting Process

“The forecast”

Step 6 Monitor the forecast


Step 5 Make the forecast
Step 4 Obtain, clean and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast

3-9
Types of Forecasts

• Judgmental - uses subjective inputs


• Time series - uses historical data assuming the future will be
like the past
• Associative models - uses explanatory variables to predict the
future

3-10
Judgmental Forecasts
• Executive opinions
• Sales force opinions
• Consumer surveys
• Outside opinion
• Delphi method
• Opinions of managers and staff
• Achieves a consensus forecast

3-11
Time Series Forecasts
• Trend - long-term movement in data
• Seasonality - short-term regular variations in data
• Cycle – wavelike variations of more than one year’s duration
• Irregular variations - caused by unusual circumstances
• Random variations - caused by chance

3-12
Forecast Variations
Figure 3.1

Irregular
variation

Trend

Cycles

90
89
88
Seasonal variations

3-13
Naive Forecasts

Uh, give me a minute....


We sold 250 wheels last
week.... Now, next week
we should sell....

The forecast for any period equals


the previous period’s actual value.

3-14
Naïve Forecasts
• Simple to use
• Virtually no cost
• Quick and easy to prepare
• Data analysis is nonexistent
• Easily understandable
• Cannot provide high accuracy
• Can be a standard for accuracy

3-15
Uses for Naïve Forecasts
• Stable time series data
• F(t) = A(t-1)
• Seasonal variations
• F(t) = A(t-n)
• Data with trends
• F(t) = A(t-1) + (A(t-1) – A(t-2))

3-16
Techniques for Averaging

• Moving average
• Weighted moving average
• Exponential smoothing

3-17
Moving Averages

• Moving average – A technique that averages a


number of recent actual values, updated as new
values become available.
At-n + … At-2 + At-1
Ft = MAn=
• Weighted moving average – More n recent values in a
series are given more weight in computing the
forecast.

wnAt-n + … wn-1At-2 + w1At-1


Ft = WMAn=
n
3-18
Simple Moving Average

Actual
MA5
47
45
43
41
39
37 MA3
35
1 2 3 4 5 6 7 8 9 10 11 12

At-n + … At-2 + At-1


Ft = MAn=
n
3-19
Exponential Smoothing

Ft = Ft-1 + (At-1 - Ft-1)


• Premise--The most recent observations might have the highest
predictive value.
• Therefore, we should give more weight to the more recent time periods when
forecasting.

3-20
Exponential Smoothing

Ft = Ft-1 + (At-1 - Ft-1)


• Weighted averaging method based on previous forecast plus a percentage
of the forecast error
• A-F is the error term,  is the % feedback

3-21
Example 3 - Exponential Smoothing

Period Actual Alpha = 0.1 Error Alpha = 0.4 Error


1 42
2 40 42 -2.00 42 -2
3 43 41.8 1.20 41.2 1.8
4 40 41.92 -1.92 41.92 -1.92
5 41 41.73 -0.73 41.15 -0.15
6 39 41.66 -2.66 41.09 -2.09
7 46 41.39 4.61 40.25 5.75
8 44 41.85 2.15 42.55 1.45
9 45 42.07 2.93 43.13 1.87
10 38 42.36 -4.36 43.88 -5.88
11 40 41.92 -1.92 41.53 -1.53
12 41.73 40.92

3-22
Picking a Smoothing Constant

Actual
50
.4
.1
45
Demand

40

35
1 2 3 4 5 6 7 8 9 10 11 12
Period

3-23
Common Nonlinear Trends
Figure 3.5

Parabolic

Exponential

Growth

3-24
Linear Trend Equation

Ft

Ft = a + bt

0 1 2 3 4 5 t
• Ft = Forecast for period t
• t = Specified number of time periods
• a = Value of Ft at t = 0
• b = Slope of the line

3-25
Calculating a and b

n  (ty) -  t y
b =
n t 2 - (  t) 2

 y - b t
a =
n

3-26
Linear Trend Equation Example
t y
2
W eek t S a le s ty
1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885

2
 t = 15  t = 55  y = 812  ty = 2 4 9 9
2
(  t) = 2 2 5

3-27
Linear Trend Calculation

5 (2499) - 15(812) 12495 -12180


b = = = 6.3
5(55) - 225 275 - 225

812 - 6.3(15)
a = = 143.5
5

y = 143.5 + 6.3t
3-28
Techniques for Seasonality

• Seasonal variations
• Regularly repeating movements in series values that can be tied to recurring
events.
• Seasonal relative
• Percentage of average or trend
• Centered moving average
• A moving average positioned at the center of the data that were used to
compute it.

3-29
Associative Forecasting

• Predictor variables - used to predict values of variable interest


• Regression - technique for fitting a line to a set of points
• Least squares line - minimizes sum of squared deviations around the line

3-30
Linear Model Seems Reasonable
X Y Computed
7 15
relationship
2 10
6 13 50

4 15 40

14 25 30

15 27 20

16 24 10

0
12 20 0 5 10 15 20 25

14 27
20 44
15 34
7 17
A straight line is fitted to a set of sample points.

3-31
Linear Regression Assumptions
• Variations around the line are random
• Deviations around the line normally distributed
• Predictions are being made only within the range of observed values
• For best results:
• Always plot the data to verify linearity
• Check for data being time-dependent
• Small correlation may imply that other variables are important

3-32
Forecast Accuracy
• Error - difference between actual value and predicted
value
• Mean Absolute Deviation (MAD)
• Average absolute error
• Mean Squared Error (MSE)
• Average of squared error
• Mean Absolute Percent Error (MAPE)
• Average absolute percent error

3-33
MAD, MSE, and MAPE

 Actual  forecast
MAD =
n
2
 ( Actual  forecast)
MSE =
n -1

 Actual  forecast / Actual*100)


MAPE =
n
3-34
MAD, MSE and MAPE

• MAD
• Easy to compute
• Weights errors linearly
• MSE
• Squares error
• More weight to large errors
• MAPE
• Puts errors in perspective

3-35
Example 10

Period Actual Forecast (A-F) |A-F| (A-F)^2 (|A-F|/Actual)*100


1 217 215 2 2 4 0.92
2 213 216 -3 3 9 1.41
3 216 215 1 1 1 0.46
4 210 214 -4 4 16 1.90
5 213 211 2 2 4 0.94
6 219 214 5 5 25 2.28
7 216 217 -1 1 1 0.46
8 212 216 -4 4 16 1.89
-2 22 76 10.26

MAD= 2.75
MSE= 10.86
MAPE= 1.28

3-36
Controlling the Forecast

• Control chart
• A visual tool for monitoring forecast errors
• Used to detect non-randomness in errors
• Forecasting errors are in control if
• All errors are within the control limits
• No patterns, such as trends or cycles, are present

3-37
Sources of Forecast errors
• Model may be inadequate
• Irregular variations
• Incorrect use of forecasting technique

3-38
Tracking Signal
•Tracking signal
–Ratio of cumulative error to MAD

Tracking signal =
 (Actual- forecast)
MAD
Bias – Persistent tendency for forecasts to be
Greater or less than actual values.

3-39
Choosing a Forecasting Technique
• No single technique works in every situation
• Two most important factors
• Cost
• Accuracy
• Other factors include the availability of:
• Historical data
• Computers
• Time needed to gather and analyze the data
• Forecast horizon

3-40
Operations Strategy

• Forecasts are the basis for many decisions


• Work to improve short-term forecasts
• Accurate short-term forecasts improve
• Profits
• Lower inventory levels
• Reduce inventory shortages
• Improve customer service levels
• Enhance forecasting credibility

3-41
Supply Chain Forecasts

• Sharing forecasts with supply can


• Improve forecast quality in the supply chain
• Lower costs
• Shorter lead times
• Gazing at the Crystal Ball (reading in text)

3-42
Exponential Smoothing

3-43
Linear Trend Equation

3-44
Simple Linear Regression

3-45

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