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Session 2 Objectives
Explain why forecasting is important Identify and describe general methods of forecasting Identify demand characteristics Describe considerations in using data for forecasts Outline the process of data decomposition
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What Is a Forecast?
An estimate of future demand. A forecast can be determined by mathematical means using historical data, it can be created subjectively by using estimates from informal sources, or it can represent a combination of both techniques.
APICS Dictionary, 9th ed.
Master Planning of Resources, ver. 2.0 December 2001
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What Is a Forecast?
Lead Time is reason for planning and forecasting. Forecasting is an important aid in
effective and efficient planning
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Why Forecast?
To plan for the future by reducing uncertainty To anticipate and manage change To increase communication and integration of planning teams To anticipate inventory and capacity demands and manage lead times To project costs of operations into budgeting processes To improve competitiveness and productivity through decreased costs and improved delivery and responsiveness to customer needs
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Investment decisions Capital equipment decisions Inventory planning Capacity planning Operations budgets Lead-time management Scheduling Acquiring resources
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Determine information that needs to be forecasted Assign responsibility for the forecast Set up forecast system parameters Select forecasting models and techniques Collect data Test models Record actual demand Report accuracy Determine root cause of variance Review forecasting system for improved performance
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Qualitativebased on intuitive or judgmental evaluation Quantitativebased on computational projection of a numeric relationship Quantitative: time series predicting the continuation of historical pattern Explanatory understanding relation between dependent and independent variables
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Intrinsicbased on historical patterns of the data itself from company data Extrinsicbased on external patterns from information outside the company
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Demand
A need for a particular product or component
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Sources of Demand
Demand can come from many sources:
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Demand Characteristics
Internal Factors
External Factors
Random fluctuation Seasonality Trend Economic cycle Changing customer preferences and demands
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Problem definition Gathering information Preliminary ( Exploratory ) analysis Choosing and fitting model Using and evaluating model
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Four types of time series data pattern can be distinguished 1. Horizontal(random). 2.Seasonal. 3. Cyclic . 4. Trend Difference between seasonal and cyclic
Measure of error MAD mean absolute deviation, MSD mean square deviation Both MAD and S provide measure of spread
Master Planning of Resources, ver. 2.0 December 2001
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Approximately 2/3 of observations must lie within one S from mean Approximately 95 % of observations within 2 S from mean. Plot of ACF it provides useful check for seasonality and other pattern. Measure of accuracy and precision
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Accuracy ME,MAE,MSE Relative accuracy MPE,MAPE For Forecasting data to be divided into two sets one for forecasting model and other for assessing error ( first set is called initializing and other set is called as test or holdout)
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Seasonality
Sales in cases by month
800 700 600 500 400 300 200 100 0 J F M A M J J A S O N D
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Year 1 Year 2
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Seasonality Calculation
Measures seasonal variation of demand Relates the average demand in a particular period to the average demand for all periods
period average demand The Seasonal Index average demand for all periods
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Economic Cycle
Sales by Quarter
35 30 25 20 15 10 5 0 1 3 5 7 9 11 13 15 17 19 Quarter
Master Planning of Resources, ver. 2.0 December 2001
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Pyramid Forecasting
Total business volume (dollars)
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X1
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Management has determined that next years demand will be $10,000 total. CALCULATE the projected demand in units for products A and B in each region.
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A: Region 1 = 1.19 150 = 178.5 Region 2 = 1.19 300 = 357.0 B: Region 1 = 1.19 300 = 357.0 Region 2 = 1.19 450 = 535.5
178.5 + 357.0 = 536.5 $4.50 = $2,414.25 357.0 + 535.5 = 892.5 $8.50 = $7,586.25 $10,000.50
Master Planning of Resources, ver. 2.0 December 2001
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Quantitative Techniques
Moving average Exponential smoothing Regression analysis Adaptive smoothing Graphical methods Econometric modeling Life-cycle modeling
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A simple technique that is easy to calculate It can be used to filter out random variation Longer periods provide more smoothing
If a trend exists, it is hard to detect Moving averages lag trends
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Limitations
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Exponential Smoothing
NEW FORECAST = a ACTUAL DEMAND + (1-a) OLD FORECAST NEW FORECAST = OLD FORECAST + a (ACTUAL DEMAND - OLD FORECAST)
Provides a routine method of updating item forecasts Alpha is a weighting factor applied to the demand element Works well for items with fairly constant demand Is satisfactory for short-range forecasts Lags trends
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Smoothing Factor
Referred to as Alpha (a) Determines the weight of historical data on projection Sets responsiveness to changes in demand Range 0 a 1 2 a= n+1
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Determines how many periods of actual demand will influence forecast 1.00 = 1 period 0.50 = 3 periods 0.29 = 6 periods 0.15 = 12 periods 0.10 = 19 periods
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0.1 Low weighting -most smoothing 0.9 High weighting - close to actual
Actual sales
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Qualitative Techniques
Expert opinion Market research Focus groups Historical analogy Delphi method Panel consensus
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Product life-cycle management Planned price changes Changes in the sales force Resource constraints Marketing and sales promotion Advertising
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Competition New customers Plans of major customers Government policies Regulatory concerns Economic conditions Environmental issues Weather conditions Global trends
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Leading Indicators
Indicator (Causal Factor) Housing starts Birth rate Hits on a Web site Health trends Healthier lifestyle
Master Planning of Resources, ver. 2.0 December 2001
Influences volume of
Building materials Home furnishings Baby products e-commerce sales Medical supplies Nutritional products Fitness products
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Time
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Focus ForecastingAssumptions/Methods
Assumptions
The most recent past is the best indicator of the future One forecasting model is better than the others All forecasting models for all items forecasted will be compared against recent sales history The model that achieves the closest fit will be used to forecast this item this time Next time, a different model may be selected
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Methods
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Availability of data Consistency of data Amount of history required Forecast frequency Frequency of model reevaluation Cost and time issues Recording true demand Order date vs. ship date Product units vs. financial units Level of aggregation Customer partnering
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Short
Mid
Long
Planning Horizon
Weeks
Months
Quarters
1 2 3 4 5 6 7 8 9 1011 12 13 17 21 26 30 34 39 43 47
52 65
78
91 104
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Record sales data in same periods as forecast data (daily, weekly, or monthly) Monitor demand, not sales and/or shipments Record the circumstances of exceptional demand Record demand separately for unique customer groupings and market sectors
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25 20 15 10 5 0 J F M A M J J A S O N D J F M A M J J A S O N D
Master Planning of Resources, ver. 2.0 December 2001
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Decomposition of Data
Purify the data Adjust the data Take out the baseline Identify demand components
Trend Seasonality Nonannual cycle Random error
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Session 2 Review
You should now be able to:
Explain why forecasting is important Identify and describe general methods of forecasting Identify demand characteristics Describe considerations in using data for forecasts Outline the process of data decomposition
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