TERM -2 (2019)

Dr. Subrat Sarangi

Email: [email protected]
 To maximize gains
from events, which
are the results of
To maximize gains actions taken by To minimize losses
from events the organization associated with
external to the uncontrollable
organization (from events external to
the external the organization
environment)

To develop Reasons To offset the

policies that apply for Demand actions of
to people who are Forecasting competitor
not part of the organizations
organization
As an input to
To develop Aggregate
administrative plans Production Planning
and policy internal to and / or Material
an organization (e.g. Requirements
personnel or budget)
In order to perform In decision making Planning (MRP)
adequate staffing for Facility
to support Capacity Planning
production and for Capital
requirements Budgeting
 15-3

 There are five basic patterns of most

demand time series (time dependent).
◦ Horizontal—the fluctuation of data around a
constant mean.
◦ Trend—the systematic increase or decrease in
the mean of the series over time.
◦ Seasonal—a repeatable pattern of increases or
decreases in demand, depending on time of
day, week, month, or season.
◦ Cyclical—the less predictable gradual
increases or decreases in demand over longer
periods of time (years or decades).
 Seasonal variation

x
x x Linear
x x
x x Trend
x x
x x x
x
x
xx
Sales

x xx x x
x
x
Average
x x x x x x
x x x x x x
x x x
x xxxxx
x
x x

1 2 3 4
Year
 Demand Forecasting

Qualitative Analysis Quantitative Analysis

Customer Survey Sales Force Composite

Time Series Analysis Causal Analysis

Executive Delphi
Opinion Method Simple Moving Simple Trend Analysis
Average Exponential
Smoothing

Past
Analogy Holt’s Double Winters’s Triple
Exponential Exponential
Smoothing Smoothing

Forecast by Linear
Regression
Analysis
 The simple moving average model assumes an average is a
good estimator of future behavior - when demand for product
is stable and there is no seasonality
 The formula for the simple moving average is:

A t-1 + A t-2 + A t-3 +...+A t- n

Ft =
n
Ft = Forecast for the coming period
N = Number of periods to be averaged
A t-1 = Actual occurrence in the past period for up to “n”
periods
 A t-1 + A t-2 + A t-3 +...+A t- n
Week Demand Ft =
1 650 n
2 678
3 720 Question: What are the 3-
4 785 week and 6-week moving
5 859 average forecasts for
6 920 demand?
7
8
850
758
Assume you only have 3
9 892 weeks and 6 weeks of
10 920 actual demand data for the
11 789 respective forecasts
12 844
Calculating the moving averages gives us:
Week Demand 3-Week 6-Week
1 650 F4=(650+678+720)/3
2 678 =682.67
3 720 F7=(650+678+720
4 785 682.67 +785+859+920)/6
5 859 727.67 =768.67
6 920 788.00
7 850 854.67 768.67
8 758 876.33 802.00
9 892 842.67 815.33
10 920 833.33 844.00
11 789 856.67 866.50
12 844 867.00 854.83
©The McGraw-Hill Companies, Inc., 2004
Plotting the moving averages and comparing
them shows how the lines smooth out to reveal
the overall upward trend in this example

Actual
6 Week
3 Week

Note how the

3-Week is
smoother than
the Demand,
and 6-Week is
even smoother
 Question: What is the
Week Demand 3 week moving
1 820 average forecast for
2 775 this data?
3 680 Assume you only
4 655 have 3 weeks and 5
5 620 weeks of actual
6 600
demand data for
7 575
the respective
forecasts
Week Demand 3-Week 5-Week
1 820 F4=(820+775+680)/3
2 775 =758.33
3 680 F6=(820+775+680
+655+620)/5
4 655 758.33 =710.00
5 620 703.33
6 600 651.67 710.00
7 575 625.00 666.00
While the moving average formula implies an equal weight being placed on each
value that is being averaged, the weighted moving average permits an unequal
weighting on prior time periods

The formula for the moving average is:

Ft = w 1 A t -1 + w 2 A t - 2 + w 3 A t -3 + ...+ w n A t - n

n
wt = weight given to time period “t”
occurrence (weights must add to one) w
i=1
i =1
Question: Given the weekly demand and weights, what is
the forecast for the 4th period or Week 4?

Week Demand Weights:

1 650 t-1 0.5
2 678 t-2 0.3
t-3 0.2
3 720
4

Note that the weights place more emphasis on the

most recent data, that is time period “t-1”
 Week Demand Forecast
1 650
2 678
3 720
4 693.4

F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
Question: Given the weekly demand information and
weights, what is the weighted moving average forecast
of the 5th period or week?

Week Demand Weights:

t-1 .7
1 820 t-2 .2
2 775 t-3 .1
3 680
4 655
 Week Demand Forecast
1 820
2 775
3 680
4 655
5 672

F5 = (0.1)(775)+(0.2)(680)+(0.7)(655)= 672
 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
 The reason for calling exponential smoothing is
because each period is decreased by (1-α)
If α = 0.05,
◦ Most recent weight: α(1- α)^0 = 0.05
◦ 1 time period older: α(1- α)^1 = 0.0475
◦ 2 time period older: α(1- α)^2 = 0.0451
Benefits:
◦ Accuracy is high
◦ Formulation is easy
 Ft = Ft-1 + a(At-1 - Ft-1)
Where :
Ft  Forcast va lue for the coming t time period
Ft - 1  Forecast value in 1 past time period
At - 1  Actual occurance in the past t tim e period
a  Alpha smoothing constant
Alpha determines the level of smoothing and the reaction to the differences to
actual and forecast values. If the product has a standard demand, the alpha
value is smaller
 15-19

Week Demand Question: Given the

1 820 weekly demand
2 775 data, what are the
3 680 exponential
4 655 smoothing
5 750
forecasts for
6 802
periods 2-10
7 798
8 689
using a=0.10 and
9 775 a=0.60?
10 Assume F1=D1
 15-20

Answer: The respective alphas columns denote the forecast values. Note
that you can only forecast one time period into the future.

Week Demand 0.1 0.6

1 820 820.00 820.00
2 775 820.00 820.00
3 680 815.50 793.00
4 655 801.95 725.20
5 750 787.26 683.08
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28
Note how that the smaller alpha results in a smoother line in
this example
Week Demand Question: What are
1 820 the exponential
2 775 smoothing forecasts
3 680 for periods 2-5 using
4 655 a =0.5?
5
Assume F1=D1
F1=820+(0.5)(820-820)=820 F3=820+(0.5)(775-820)=797.75

Week Demand 0.5

1 820 820.00
2 775 820.00
3 680 797.50
4 655 738.75
5 696.88
 Due to variability in demand, Alpha needs to be tracked with a
trend factor. This is Adaptive Forecasting
 Trend adjustment helps to reduce lag in time in the forecast
(either above or below) from actual demand
 A trend adjustment smoothing constant DELTA is added along
with ALPHA
◦ FITt =Ft + Tt
◦ Ft = FITt-1 + α(At-1- FITt-1)
◦ Tt = Tt-1+ δ(Ft -FITt-1)
 Ft = Exponentially smoothed forecast for period t
Tt = Exponentially smoothed trend for period t
FITt = Forecast including trend for period t
FITt -1 = Forecast including trend for prior period
At-1= Actual demand for prior period
α = Smoothing Constant
δ = Trend Smoothing Constant
 o FITt =Ft + Tt ………………………..1
o Ft = FITt-1 + α(At-1- FITt-1)…………..2
o Tt = Tt-1+ δ(Ft -FITt-1)…………..3

A firm producing bottle crowns has shown a high variability in

demand pattern. The Chief Planner decides to change the
forecasting method used earlier by introducing a trend
parameter. He experiments this with the data for the month of
February to forecast for March. The data is as follows:
Trend value = 100 units, Forecast for February = 250 units,
α = 0.3, δ = 0.2, Actual Demand for February = 275 units.
Calculate the forecast for March?
Problem: HiTek Computer Services now wants to develop an
adjusted exponentially smoothed forecast using the 12
months of demand shown in the table below. It will use the
exponentially smoothed forecast with Alpha = 0.5 and a
smoothing constant for trend, Delta of 0.30.
The simple linear regression Y
model seeks to fit a line
through various data over
time
a
0 1 2 3 4 5 x (Time)

Yt = a + bx Is the linear regression model

Yt is the regressed forecast value or dependent

variable in the model, a is the intercept value of the the
regression line, and b is similar to the slope of the
regression line. However, since it is calculated with the
variability of the data in mind, its formulation is not as
straight forward as our usual notion of slope.
Question: Given the data below, what is the simple linear
regression model that can be used to predict sales in future
weeks?

Week Sales
1 150
2 157
3 162
4 166
5 177