Operations Management: - Forecasting

Operations
Management
Chapter 4
Forecasting
PowerPoint presentation to accompany

Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
2008 Prentice Hall, Inc. 41
Learning Objectives
When you complete this chapter you
should be able to :
Understand the three time horizons and

which models apply for each use
Explain when to use each of the four
qualitative models
Apply the naive, moving average,
exponential smoothing, and trend
methods

Learning Objectives
When you complete this chapter you
should be able to :
Compute three measures of forecast

accuracy
Develop seasonal indexes
Conduct a regression and correlation
analysis
Use a tracking signal

What is Forecasting?
Process of
predicting a future
event
Underlying basis of
??
all business
decisions
Production
Inventory
Personnel
Facilities
Forecasting Time Horizons
Short-range forecast
Up to 1 year, generally less than 3 months
Purchasing, job scheduling, workforce
levels, job assignments, production levels
Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting
Long-range forecast
3+ years
New product planning, facility location,
research and development
Distinguishing Differences
Medium/long range forecasts deal with
more comprehensive issues and support
management decisions regarding
planning and products, plants and
processes
Short-term forecasting usually employs
different methodologies than longer-term
forecasting
Short-term forecasts tend to be more
accurate than longer-term forecasts

Influence of Product Life
Cycle
Introduction Growth Maturity Decline
Introduction and growth require longer
forecasts than maturity and decline
As product passes through life cycle,
forecasts are useful in projecting
Staffing levels
Inventory levels
Factory capacity

Product Life Cycle
Best period to Practical to change Poor time to Cost control
Company Strategy/Issues
increase market price or quality change image, critical

share image price, or quality
R&D engineering is Strengthen niche Competitive costs

critical become critical
Defend market
position
CD-ROMs
Internet search engines
Analog TVs
Drive-through
LCD & plasma TVs restaurants
Sales iPods
3 1/2
Xbox 360 Floppy
disks
Figure 2.5
Product Life Cycle
Product design Forecasting Standardization Little product
and critical Less rapid differentiation
development Product and product changes Cost
OM Strategy/Issues
critical process more minor minimization

Frequent reliability changes Overcapacity
product and Competitive Optimum in the
process design product capacity industry
changes improvements Increasing Prune line to
Short production and options stability of eliminate
runs Increase capacity process items not
High production Shift toward Long production returning
costs product focus runs good margin
Limited models Enhance Product Reduce
Attention to distribution improvement capacity
quality and cost cutting
Figure 2.5
Types of Forecasts
Economic forecasts
Address business cycle inflation rate,
money supply, housing starts, etc.
Technological forecasts
Predict rate of technological progress
Impacts development of new products
Demand forecasts
Predict sales of existing products and
services
2008 Prentice Hall, Inc. 4 10

Strategic Importance of
Forecasting
Human Resources Hiring, training,

laying off workers
Capacity Capacity shortages can
result in undependable delivery, loss
of customers, loss of market share
Supply Chain Management Good
supplier relations and price
advantages

Seven Steps in Forecasting
Determine the use of the forecast
Select the items to be forecasted
Determine the time horizon of the
forecast
Select the forecasting model(s)
Gather the data
Make the forecast
Validate and implement results
The Realities!
Forecasts are seldom perfect

Most techniques assume an
underlying stability in the system
Product family and aggregated
forecasts are more accurate than
individual product forecasts

Forecasting Approaches
Qualitative Methods
Used when situation is vague
and little data exist
New products
New technology
Involves intuition, experience
e.g., forecasting sales on Internet

Forecasting Approaches
Quantitative Methods
Used when situation is stable and
historical data exist
Existing products
Current technology
Involves mathematical techniques
e.g., forecasting sales of color
televisions

Overview of Qualitative
Methods
Jury of executive opinion
Pool opinions of high-level experts,
sometimes augment by statistical
models
Delphi method
Panel of experts, queried iteratively

Overview of Qualitative
Methods
Sales force composite
Estimates from individual
salespersons are reviewed for
reasonableness, then aggregated
Consumer Market Survey
Ask the customer

Jury of Executive Opinion
Involves small group of high-level experts
and managers
Group estimates demand by working
together
Combines managerial experience with
statistical models
Relatively quick
Group-think
disadvantage

Sales Force Composite
Each salesperson projects his or
her sales
Combined at district and national
levels
Sales reps know customers wants
Tends to be overly optimistic

Delphi Method
Iterative group Decision Makers
(Evaluate
process, responses and
continues until make decisions)
consensus is
reached Staff
(Administering
3 types of survey)
participants
Decision makers
Staff Respondents
(People who can
Respondents make valuable
judgments)
Consumer Market Survey
Ask customers about purchasing

plans
What consumers say, and what
they actually do are often different
Sometimes difficult to answer

Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
Time-Series
3. Exponential Models
smoothing
4. Trend projection
Associative
5. Linear regression Model

Time Series Forecasting
Set of evenly spaced numerical data
Obtained by observing response
variable at regular time periods
Forecast based only on past values,
no other variables important
Assumes that factors influencing
past and present will continue
influence in future

Time Series Components
Trend Cyclical
Seasonal Random

Components of Demand
Trend
component
Demand for product or service
Seasonal peaks
Actual
demand
Average
demand over
Random four years
variation
| | | |
1 2 3 4
Year Figure 4.1
Trend Component
Persistent, overall upward or
downward pattern
Changes due to population,
technology, age, culture, etc.
Typically several years
duration

Seasonal Component
Regular pattern of up and
down fluctuations
Due to weather, customs, etc.
Occurs within a single year
Number of
Period Length Seasons
Week Day 7
Month Week 4-4.5
Month Day 28-31
Year Quarter 4
Year Month 12
Year Week 52
Cyclical Component
Repeating up and down movements
Affected by business cycle, political,
and economic factors
Multiple years duration
Often causal or
associative
relationships
0 5 10 15 20
Random Component
Erratic, unsystematic, residual
fluctuations
Due to random variation or
unforeseen events
Short duration and
nonrepeating
M T W T F
Naive Approach
Assumes demand in next

period is the same as
demand in most recent period
e.g., If January sales were 68, then
February sales will be 68
Sometimes cost effective and
efficient
Can be good starting point

Moving Average Method
MA is a series of arithmetic means
Used if little or no trend
Used often for smoothing
Provides overall impression of data
over time
demand in previous n periods

Moving average = n

Moving Average Example
Actual 3-Month
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3

Graph of Moving Average
Moving
30
Average
28
Forecast
26 Actual
24 Sales
Shed Sales
22
20
18
16
14
12
10
| | | | | | | | | | | |
J F M A M J J A S O N D

Weighted Moving Average
Used when trend is present

Older data usually less important
Weights based on experience and
intuition
(weight for period n)

Weighted x (demand in period n)
moving average = weights

Weights Applied Period
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights
Actual 3-Month Weighted

Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2

Potential Problems With
Moving Average
Increasing n smooths the forecast
but makes it less sensitive to
changes
Do not forecast trends well
Require extensive historical data

Moving Average And
Weighted
30 moving
average
25
Sales demand
20 Actual
sales
15
Moving
10 average
5
| | | | | | | | | | | |
J F M A M J J A S O N D
Figure 4.2

Exponential Smoothing
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
Requires smoothing constant ()
Ranges from 0 to 1
Subjectively chosen
Involves little record keeping of past
data
New forecast = Last periods forecast

+ (Last periods actual demand
Last periods forecast)
Ft = Ft 1 + (At 1 - Ft 1)
where Ft = new forecast

Ft 1 = previous forecast
= smoothing (or weighting)
constant (0 1)
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20

Example
Actual demand = 153
New forecast = 142 + .2(153 142)

Example
Actual demand = 153
New forecast = 142 + .2(153 142)

= 142 + 2.2
= 144.2 144 cars

Effect of
Smoothing Constants
Weight Assigned to
Most 2nd Most 3rd Most 4th Most 5th Most
Recent Recent Recent Recent Recent
Smoothing Period Period Period Period Period
Constant () (1 - ) (1 - ) 2 (1 - ) 3 (1 - )4
= .1 .1 .09 .081 .073 .066
= .5 .5 .25 .125 .063 .031

Impact of Different
225
Actual = .5
200 demand
Demand
175
= .1
150 | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter

Impact of Different
225
Actual = .5
Chose
200 high values
demandof
Demand
when underlying average

is likely to change
Choose low values of
175

when underlying average = .1
is stable|
150 | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter

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

= At - Ft

Common Measures of Error
Mean Absolute Deviation (MAD)

|Actual - Forecast|
MAD =
n
Mean Squared Error (MSE)

(Forecast Errors)2
MSE =
n
Common Measures of Error
Mean Absolute Percent Error (MAPE)
n
100|Actuali - Forecasti|/Actuali
MAPE = i=1
n

Comparison of Forecast
Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded = .10 = .10 = .50 = .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

Error
|deviations|
MADActual
= Forecast Deviation Forecast Deviation
Tonnage n
with for with for
1
For 180
= .10 175 5.00 175 5.00
2 168 = 82.45/8
175.5 = 10.31
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For 175
= .50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 = 98.62/8
175.02 = 12.33
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

Error2
(forecast errors)
MSE = Actual Forecast Deviation Forecast Deviation
Tonnage
n
with for with for
1
For 180
= .10 175 5.00 175 5.00
2 = 1,526.54/8
168 175.5 = 190.82
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For 175
= .50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 = 1,561.91/8
205 175.02 = 195.24
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

n Error
100|deviationi|/actuali
MAPE = i=1
Tonnage with n for with for
1
= .10 175
For 180 5.00 175 5.00
2 168 = 44.75/8
175.5 = 7.50
5.59% 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 =
For 175 .50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 = 54.05/8
175.02 =29.98
6.76% 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 190.82 195.24

Error
Tonnage with for with for
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 190.82 195.24
MAPE 5.59% 6.76%
Exponential Smoothing with
Trend Adjustment
When a trend is present, exponential
smoothing must be modified
Forecast Exponentially Exponentially

including (FITt) = smoothed (Ft) + (Tt) smoothed
trend forecast trend

Trend Adjustment
Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1)
Tt = b(Ft - Ft - 1) + (1 - b)Tt - 1
Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt

Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) 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
Table 4.1
Forecast
1 12 11 2 13.00
2 17
3 20
4 19
5 24 Step 1: Forecast for Month 2
6 21
7 31 F2 = A1 + (1 - )(F1 + T1)
8 28 F2 = (.2)(12) + (1 - .2)(11 + 2)
9 36
10 = 2.4 + 10.4 = 12.8 units
Table 4.1
Forecast
1 12 11 2 13.00
2 17 12.80
3 20
4 19
5 24 Step 2: Trend for Month 2
6 21
7 31 T2 = b(F2 - F1) + (1 - b)T1
8 28 T2 = (.4)(12.8 - 11) + (1 - .4)(2)
9 36
10 = .72 + 1.2 = 1.92 units
Table 4.1
Forecast
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
7 31 FIT2 = F2 + T1
8 28 FIT2 = 12.8 + 1.92
9 36
10 = 14.72 units
Table 4.1
Forecast
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
Table 4.1
35
30 Actual demand (At)

Product demand
25
20
15
10 Forecast including trend (FITt)

with = .2 and b = .4
5
0 | | | | | | | | |
1 2 3 4 5 6 7 8 9
Figure 4.3
Time (month)
Trend Projections
Fitting a trend line to historical data points
to project into the medium to long-range
Linear trends can be found using the least
squares technique
y^ = a + bx
^ = computed value of the variable to
where y
be predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
Values of Dependent Variable
Least Squares Method
Actual observation Deviation7

(y value)
Deviation5 Deviation6
Deviation3
Deviation4
Deviation1
(error) Deviation2
Trend line, y^ = a + bx
Time period Figure 4.4

Values of Dependent Variable
Actual observation Deviation7

(y value)
Deviation5 Deviation6
Deviation3 Least squares method

minimizes the sum of the
Deviation
squared errors (deviations)
4
Deviation1
Deviation2
Trend line, y^ = a + bx
Time period Figure 4.4

Equations to calculate the regression variables
y^ = a + bx
Sxy - nxy
b=
Sx2 - nx2
a = y - bx

Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2001 1 74 1 74
2002 2 79 4 158
2003 3 80 9 240
2004 4 90 16 360
2005 5 105 25 525
2005 6 142 36 852
2007 7 122 49 854
x = 28 y = 692 x2 = 140 xy = 3,063
x=4 y = 98.86
xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
x - nx
2 2 140 - (7)(4 2)
a = y - bx = 98.86 - 10.54(4) = 56.70

Time Electrical Power
Year Period (x) Demand x2 xy
1999 1 74 1 74
2000 2 79 4 158
2001The trend
3 line is 80 9 240
2002 4 90 16 360
2003 y^ 5= 56.70 + 10.54x
105 25 525
2004 6 142 36 852
2005 7 122 49 854
Sx = 28 Sy = 692 Sx2 = 140 Sxy = 3,063
x=4 y = 98.86
Sxy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
Sx - nx
2 2 140 - (7)(4 2)
a = y - bx = 98.86 - 10.54(4) = 56.70

160
Trend line,
150 y^ = 56.70 + 10.54x
140
Power demand
130
120
110
100
90
80
70
60
50
| | | | | | | | |
2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
Seasonal Variations In Data
The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand

Seasonal Variations In Data
Steps in the process:
1. Find average historical demand for each
season
2. Compute the average demand over all
seasons
3. Compute a seasonal index for each season
4. Estimate next years total demand
5. Divide this estimate of total demand by the
number of seasons, then multiply it by the
seasonal index for that season

Seasonal Index Example
Demand Average Average Seasonal
Month 2005 2006 2007 2005-2007 Monthly Index
Jan 80 85 105 90 94
Feb 70 85 85 80 94
Mar 80 93 82 85 94
Apr 90 95 115 100 94
May 113 125 131 123 94
Jun 110 115 120 115 94
Jul 100 102 113 105 94
Aug 88 102 110 100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 75 72 83 80 94
Dec 82 78 80 80 94

Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94
Mar 80 93 average
82 85 monthly demand
2005-2007 94
Seasonal90index95= 115
Apr 100 94
average monthly demand
May 113 125 131 123 94
= 90/94 = .957
Jun 110 115 120 115 94
Jul 100 102 113 105 94
Aug 88 102 110 100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 75 72 83 80 94
Dec 82 78 80 80 94

Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90 95 115 100 94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 115 94 1.223
Jul 100 102 113 105 94 1.117
Aug 88 102 110 100 94 1.064
Sept 85 90 95 90 94 0.957
Oct 77 78 85 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851

Jan 80 85 105 90 94 0.957
Feb 70 85 Forecast
85 for802008 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90Expected
95 115annual demand
100 = 1,200
94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 1,200 115 94 1.223
Jul Jan 113
100 102 x .957 = 96 94
105 1.117
12
Aug 88 102 110 100 94 1.064
1,200
Sept 85 90
Feb 95 x90.851 = 85 94 0.957
Oct 77 78 85 12 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851

Associative Forecasting
Used when changes in one or more
independent variables can be used to predict
the changes in the dependent variable
Most common technique is linear

regression analysis
We apply this technique just as we did

in the time series example

Forecasting an outcome based on
predictor variables using the least squares
technique
y^ = a + bx
^ = computed value of the variable to
where y
be predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable though to
predict the value of the dependent
variable
Example
Sales Local Payroll
($ millions), y ($ billions), x
2.0 1
3.0 3
2.5 4 4.0
2.0 2
2.0 1 3.0
3.5 7 Sales
2.0
1.0
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll

Example
Sales, y Payroll, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
y = 15.0 x = 18 x2 = 80 xy = 51.5
xy - nxy 51.5 - (6)(3)(2.5)

x = x/6 = 18/6 = 3 b=
x2 - nx2
= 80 - (6)(32) = .25
y = y/6 = 15/6 = 2.5 a = y - bx = 2.5 - (.25)(3) = 1.75

Example
y^ = 1.75 + .25x Sales = 1.75 + .25(payroll)
If payroll next year

4.0
is estimated to be
$6 billion, then: 3.25
3.0
Sales
2.0
Sales = 1.75 + .25(6)
Sales = $3,250,000 1.0
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Standard Error of the
Estimate
A forecast is just a point estimate of a
future value
This point is 4.0
actually the 3.25
mean of a 3.0
Sales
probability 2.0
distribution
1.0
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Figure 4.9
Estimate
(y - yc)2
Sy,x =
n-2
where y = y-value of each data point

yc = computed value of the dependent
variable, from the regression
equation
n = number of data points

Estimate
Computationally, this equation is
considerably easier to use
y2 - ay - bxy
Sy,x =
n-2
We use the standard error to set up

prediction intervals around the
point estimate

Estimate
y2 - ay - bxy 39.5 - 1.75(15) - .25(51.5)
Sy,x = =
n-2 6-2
Sy,x = .306 4.0

3.25
3.0
Sales
The standard error
2.0
of the estimate is
$306,000 in sales 1.0
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Correlation
How strong is the linear
relationship between the
variables?
Correlation does not necessarily
imply causality!
Coefficient of correlation, r,
measures degree of association
Values range from -1 to +1

Correlation Coefficient
nSxy - SxSy
r=
[nSx2 - (Sx)2][nSy2 - (Sy)2]

y
Correlation Coefficient y
nSxy - SxSy
r=
[nSx 2 - (Sx)2][nSy2 - (Sy)2]
(a) Perfect positive x (b) Positive x
correlation: correlation:
r = +1 0<r<1
y y
(c) No correlation: x (d) Perfect negative x

r=0 correlation:
r = -1
Correlation
Coefficient of Determination, r2,
measures the percent of change in
y predicted by the change in x
Values range from 0 to 1
Easy to interpret
For the Nodel Construction example:

r = .901
r2 = .81
Multiple Regression
Analysis
If more than one independent variable is to be
used in the model, linear regression can be
extended to multiple regression to
accommodate several independent variables
y^ = a + b1x1 + b2x2
Computationally, this is quite

complex and generally done on the
computer
Multiple Regression
Analysis
In the Nodel example, including interest rates in
the model gives the new equation:
y^ = 1.80 + .30x1 - 5.0x2
An improved correlation coefficient of r = .96

means this model does a better job of predicting
the change in construction sales
Sales = 1.80 + .30(6) - 5.0(.12) = 3.00

Sales = $3,000,000
Monitoring and Controlling
Forecasts
Tracking Signal
Measures how well the forecast is
predicting actual values
Ratio of running sum of forecast errors
(RSFE) to mean absolute deviation (MAD)
Good tracking signal has low values
If forecasts are continually high or low, the
forecast has a bias error

Monitoring and Controlling
Forecasts
Tracking RSFE
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

Tracking Signal Example
Cumulative
Absolute Absolute
Actual Forecast Forecast Forecast
Qtr Demand Demand Error RSFE 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

Tracking Signal Example
Tracking Cumulative
Absolute Absolute
Actual Signal
Forecast Forecast Forecast
Qtr (RSFE/MAD)
Demand Demand Error RSFE Error Error MAD
1 90-10/10
100= -1 -10 -10 10 10 10.0
2 95
-15/7.5
100= -2 -5 -15 5 15 7.5
3 115 0/10
100
= 0 +15 0 15 30 10.0
4 100-10/10
110= -1 -10 -10 10 40 10.0
5 125
+5/11110
= +0.5+15 +5 15 55 11.0
6 140
+35/14.2
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
Adaptive Forecasting
Its possible to use the computer to

continually monitor forecast error and
adjust the values of the and b
coefficients used in exponential
smoothing to continually minimize
forecast error
This technique is called adaptive
smoothing

Focus Forecasting
Developed at American Hardware Supply,
focus forecasting is based on two principles:
1. Sophisticated forecasting models are not
always better than simple ones
2. There is no single technique that should
be used for all products or services
This approach uses historical data to test
multiple forecasting models for individual items
The forecasting model with the lowest error is
then used to forecast the next demand

Forecasting in the Service
Sector
Presents unusual challenges
Special need for short term records
Needs differ greatly as function of
industry and product
Holidays and other calendar events
Unusual events

Operations Management: - Forecasting

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Operations

PowerPoint presentation to accompany

Understand the three time horizons and

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Compute three measures of forecast

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increase market price or quality change image, critical

R&D engineering is Strengthen niche Competitive costs

critical process more minor minimization

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Human Resources Hiring, training,

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Forecasts are seldom perfect

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Ask customers about purchasing

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Assumes demand in next

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demand in previous n periods

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Used when trend is present

(weight for period n)

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Actual 3-Month Weighted

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New forecast = Last periods forecast

where Ft = new forecast

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New forecast = 142 + .2(153 142)

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New forecast = 142 + .2(153 142)

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= .1 .1 .09 .081 .073 .066

= .5 .5 .25 .125 .063 .031

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when underlying average

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Forecast error = Actual demand - Forecast value

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Mean Absolute Deviation (MAD)

Mean Squared Error (MSE)

Mean Absolute Percent Error (MAPE)

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