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Demand Forecasting

The document discusses demand forecasting techniques used in operations management. It focuses on exponential smoothing models, which are commonly used forecasting techniques that weight past demand data exponentially. Simple exponential smoothing forecasts based on the previous forecast and actual demand, while adjusted exponential smoothing also accounts for trends. The key steps in applying exponential smoothing include selecting a smoothing constant between 0 and 1, partitioning data into test and forecast sets, evaluating errors using measures like MAD, and selecting the constant that yields the lowest error. Accurate forecasting is important for planning, organizing, and controlling operations.

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Abebe Janka
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39 views

Demand Forecasting

The document discusses demand forecasting techniques used in operations management. It focuses on exponential smoothing models, which are commonly used forecasting techniques that weight past demand data exponentially. Simple exponential smoothing forecasts based on the previous forecast and actual demand, while adjusted exponential smoothing also accounts for trends. The key steps in applying exponential smoothing include selecting a smoothing constant between 0 and 1, partitioning data into test and forecast sets, evaluating errors using measures like MAD, and selecting the constant that yields the lowest error. Accurate forecasting is important for planning, organizing, and controlling operations.

Uploaded by

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

Chapter 3

Demand Forecasting
Operations Management – Chapter 3
Operations Management – Chapter 3
Forecasting meals on airline flights
 Providing in-flight meals to the airline passengers
is a big business. Few companies’ which have
business are listed below
 Northwest airlines and continental’s food budget
per year: $ 300 million dollars
 Delta serves about 135,000 meals per day
 American airlines spends around $800 million
each ear on food with each meals cost is $8.20.
 With this huge expense, the airlines are
interested in accurately forecasting the number of
meals that will be needed in each flight.
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Importance of Forecasting
 How does forecasting relate to the management
processes of planning, organizing and controlling?
 These processes are not independent processes.
They interrelate and overlap.
 If operations have been properly planned and
organized, control is easier and smoother. This
where forecasting comes in.
 Cost can be reduced and accurately goods and
services can be estimated and this in turn
improves operating efficiency.
 The figure below explain the relationships of P O
C and the forecasting plan.
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Exponential Smoothing: (Time Series Analysis)
 Exponential smoothing models are well known
and often used in operations management.
 Exponential smoothing is a type of moving-
average forecasting technique which weights past
data in an exponential manner so that the most
recent data carry more weights in the moving
average.
 Simple exponential smoothing makes no explicit
adjustment for trend effect, whereas adjusted
exponential smoothing does take trend effects
into account.
Operations Management – Chapter 3
Exponential Smoothing: (Time Series Analysis)
Simple exponential smoothing:
The forecast is made up of the last-period forecast
plus a portion of the difference between the last
period actual demand and the last-period forecast.

Where
Ft =current –period forecast
Ft-1=last period forecast
α = smoothing constant
Dt-1 = last period demand
Operations Management – Chapter 3
Exponential Smoothing: (Time Series Analysis)
 If demand was above the last period forecast, the
correction will be positive and if demand was
below, the correction will be negative.
 The smoothing constant, α actually dictates how
much correction will be made.
 It is number between 0 and 1 used to compute
the forecast Ft.
 The value of α is often kept in the range of 0.005
to 0.30 in order to “Smooth” the forecast.
 The exact value depends upon the response to
demand that is best for the individual firm.
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Smoothing coefficient selection:
 Smoothing coefficient: A numerical parameter
that determines the weighting of old demands
in exponential smoothing.
 Under the stable conditions, an appropriate value
may be 0.1, 0.2, and 0.3. When demand is slightly
unstable smoothing coefficients of 0.4, 0.5 or 0.6
might provide the most accurate forecasts.

Selecting forecasting parameters and comparing


models:
The procedure for selecting forecasting parameters is
given in the first four steps that follow; the fifth step is
used for comparing and selecting models.
Operations Management – Chapter 3
1. Partition the available data into two subjects, one for
fitting parameters (the test set) and the other for
forecasting.
2. Select an error measure to evaluate forecast
accuracy of the parameters to be tried. MAD and
/or bias are useful error measures.
3. Select a range of α values. Using one of the α values
apply the forecasting model to the test set of data,
recording the resulting forecast errors. Then,
selecting a new values in the selected range have
been tested.
4. Select the α value that resulted in the lowest
forecast error when applied to the test set. Your
model is now fitted to the demand data.
Operations Management – Chapter 3
5. Forecast using the balance of the data with the
exponential (or moving average) model that you have
fitted to the test set. Use the results to compare
alternative models that have previously been fitted to
representative demand data.
Forecast Error:
 When we evaluate different forecasting methods, it is
necessary to measure the effectiveness. Forecast error is
the numeric difference of forecasted demand and actual
demand.
Mean Absolute Deviation (MAD):
 A forecast error measure that is the average forecast
error without regard to direction; calculated as the sum
of the absolute value of forecast error for all periods
divided by the total number of periods evaluated.
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3
Operations Management – Chapter 3

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