PRODUCTION PLANNING AND

CONTROL
ASSOC. PROF. PERAL TOKTAŞ-PALUT

Lecture 3
Agenda

 Forecasting
 Forecasting methods (cont’d.)
Choosing 

 The objective is to obtain the most accurate forecast no

matter the technique
 We generally do this by selecting the model that gives us
the lowest forecast error

Forecast error = Actual demand – Forecast value

= D t – Ft
Measures of forecast error

Mean Absolute Deviation (MAD)

∑ |Actual – Forecast|
MAD =
n
Measures of forecast error

Mean Squared Error (MSE)

∑ (Forecast Errors)2
MSE =
n
Measures of forecast error

Mean Absolute Percent Error (MAPE)

∑100|Actual – Forecast|/Actual
MAPE =
n
 Measures of forecast error

Symmetric Mean Absolute Percent Error (SMAPE)

∑100|Actual – Forecast|/[(Actual + Forecast)/2]

SMAPE =
n
Example 1: Comparison of forecast errors

Rounded Absolute Rounded Absolute

Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = 0.10  = 0.10  = 0.50  = 0.50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
Example 1: Comparison of forecast errors

Rounded Absolute Rounded Absolute

Actual ∑ |deviation|
Forecast Deviation Forecast Deviation
MAD =Tonnage with for with for
Quarter Unloaded =n 0.10  = 0.10  = 0.50  = 0.50
1For  =180
0.10 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 = 82.45/8
174.75 = 10.31
15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5For  =190
0.50 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180= 98.62/8
178.02 = 12.33
1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
Example 1: Comparison of forecast errors

Rounded Absolute
2 Rounded Absolute
∑
Actual (forecast error)
Forecast Deviation Forecast Deviation
MSE = Tonnage with for with for
Quarter Unloaded  =n 0.10  = 0.10  = 0.50  = 0.50
1For  =180
0.10 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 =
1591,526.52/8
174.75 = 190.82
15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5For  =190
0.50 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 = 1,561.63/8
180 178.02 = 195.20
1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
Example 1: Comparison of forecast errors

Rounded Absolute Rounded Absolute

∑ 100|deviation|/actual
Actual Forecast Deviation Forecast Deviation
MAPE = Tonnage with for with for
Quarter Unloaded  = 0.10n  = 0.10  = 0.50  = 0.50
1 For  180
= 0.10 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 = 44.75/8
174.75 =15.75
5.59% 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 For  190
= 0.50 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 = 54.04/8
178.02 = 6.76%
1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
Example 1: Comparison of forecast errors

Rounded Absolute Rounded Absolute

∑Actual
200|deviation|/(actual
Forecast Deviation + forecast)
Forecast Deviation
SMAPE = Tonnage with for with for
Quarter Unloaded  = 0.10 n = 0.10  = 0.50  = 0.50
1 For  180
= 0.10 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 = 45.81/8
174.75 =15.75
5.73% 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 For  190
= 0.50 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 = 54.78/8
178.02 = 6.85%
1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
Example 1: Comparison of forecast errors

Rounded Absolute Rounded Absolute

Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = 0.10  = 0.10  = 0.50  = 0.50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.20
MAPE 5.59% 6.76%
SMAPE 5.73% 6.85%
Tracking signal

 Measures how well the forecast is predicting actual

values
 Ratio of cumulative forecast errors to mean absolute
deviation (MAD)
 Good tracking signal has low values
 If forecasts are continually high or low, the forecast has a
bias error
Tracking signal

Tracking Cumulative error

signal =
MAD

∑(Actual demand in
period i −
Forecast demand
Tracking in period i)
signal =
(∑|Actual − Forecast|/n)
Tracking signal

Signal exceeding limit

Tracking signal
Upper control limit
+

0 MADs Acceptable
range

–
Lower control limit

Time

Control limits of ±2 to ±4 MADs are used most frequently

Example 2: Tracking signal

Cumulative
Absolute Absolute
Actual Forecast Cumulative Forecast Forecast
Qtr Demand Demand Error Error Error Error MAD
1 90 100 −10 −10 10 10 10.0
2 95 100 −5 −15 5 15 7.5
3 115 100 +15 0 15 30 10.0
4 100 110 −10 −10 10 40 10.0
5 125 110 +15 +5 15 55 11.0
6 140 110 +30 +35 30 85 14.2
Example 2: Tracking signal

Tracking Cumulative
Absolute Absolute
Signal Forecast
Actual Cumulative Forecast Forecast
Qtr (Cum. Error/MAD)
Demand Demand Error Error Error Error MAD
1 −10/10
90 −1
=100 −10 −10 10 10 10.0
2 −15/7.5
95 −2
=100 −5 −15 5 15 7.5
3 0/10
115 = 0 100 +15 0 15 30 10.0
4 −10/10
100 −1
=110 −10 −10 10 40 10.0
5 +5/11
125 = +0.5
110 +15 +5 15 55 11.0
6 +35/14.2
140 110
= +2.5 +30 +35 30 85 14.2

The variation of the tracking signal between −2.0 and +2.5 is

within acceptable limits
Forecasting methods
Forecasting
methods

Qualitative Quantitative
methods methods

Jury of executive opinion

Sales force composite Time series Associative
Delphi method models model
Consumer market survey

Naive approach Linear regression

Moving average method
Exponential smoothing
Multiplicative seasonal method
 Exponential smoothing with trend
adjustment

Sales

Actual
Regular exponential
Data smoothing lags behind
Forecast the trend
Can we include trend
analysis in exponential
smoothing?

Month
Exponential smoothing with trend
adjustment
 Double exponential smoothing
 Exponential smoothing must be modified when a trend
is present

FITt = Ft + Tt

where FITt : forecast including trend

Ft : exponentially smoothed forecast
Tt : exponentially smoothed trend
Exponential smoothing with trend
adjustment

Ft = (Dt − 1) + (1 − )(Ft − 1 + Tt − 1)

Tt = (Ft − Ft − 1) + (1 − )Tt − 1

where Dt : actual demand

Ft : exponentially smoothed forecast
Tt : exponentially smoothed trend
,  : smoothing constants
Exponential smoothing with trend
adjustment
 Step 1: Compute Ft
 Step 2: Compute Tt
 Step 3: Calculate the forecast FITt = Ft + Tt
Example 3: Exponential smoothing with
trend adjustment
 Let α = 0.20,  = 0.40, F1 = 11, T1 = 2
Forecast
Actual Smoothed Smoothed Including
Month (t) Demand (Dt) Forecast (Ft) Trend (Tt) Trend (FITt)
1 12 11 2 13.00
2 17
3 20
4 19
5 24
6 21
7 31
8 28
9 36
10
Example 3: Exponential smoothing with
trend adjustment

Forecast
Actual Smoothed Smoothed Including
Month (t) Demand (Dt) Forecast (Ft) Trend (Tt) Trend (FITt)
1 12 11 2 13.00
2 17
3 20
4 19
5 24 Step 1: Smoothed Forecast for Month 2
6 21
F2 = D1 + (1 − )(F1 + T1)
7 31
8 28 F2 = (0.2)(12) + (1 − 0.2)(11 + 2)
9 36 = 2.4 + 10.4 = 12.8 units
10
Example 3: Exponential smoothing with
trend adjustment

Forecast
Actual Smoothed Smoothed Including
Month (t) Demand (Dt) Forecast (Ft) Trend (Tt) Trend (FITt)
1 12 11 2 13.00
2 17 12.80
3 20
4 19
5 24 Step 2: Smoothed Trend for Month 2
6 21
T2 = (F2 − F1) + (1 − )T1
7 31
8 28 T2 = (0.4)(12.8 − 11) + (1 − 0.4)(2)
9 36 = 0.72 + 1.2 = 1.92 units
10
Example 3: Exponential smoothing with
trend adjustment

Forecast
Actual Smoothed Smoothed Including
Month (t) Demand (Dt) Forecast (Ft) Trend (Tt) Trend (FITt)
1 12 11 2 13.00
2 17 12.80 1.92
3 20
4 19
5 24 Step 3: Calculate FIT for Month 2
6 21
FIT2 = F2 + T2
7 31
FIT2 = 12.8 + 1.92
8 28
9 36 = 14.72 units
10
Example 3: Exponential smoothing with
trend adjustment

Forecast
Actual Smoothed Smoothed Including
Month (t) Demand (Dt) Forecast (Ft) Trend (Tt) Trend (FITt)
1 12 11 2 13.00
2 17 12.80 1.92 14.72
3 20 15.18 2.10 17.28
4 19 17.82 2.32 20.14
5 24 19.91 2.23 22.14
6 21 22.51 2.38 24.89
7 31 24.11 2.07 26.18
8 28 27.14 2.45 29.59
9 36 29.28 2.32 31.60
10 32.48 2.68 35.16
Example 3: Exponential smoothing with
trend adjustment

35 –

30 – Actual demand (Dt)

25 –
Product demand

20 –

15 –

10 – Forecast including trend (FITt)

with  = 0.2 and  = 0.4
5 –

0 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Time (month)