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Operations & Production Management
(OPM)Dr. Muhammad Wasif
Visiting Faculty, IBA.
6 Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management7
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Introduction to ForecastingSection 6.1
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Management33
Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Process of predicting a future event
Underlying basis of all business
decisions
Production
Inventory
Personnel
Facilities
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Applications of Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Accounting Cost/profit estimates
Finance Cash flow and funding
Human Resources Hiring/recruiting/training
Marketing Pricing, promotion, strategy
MIS IT/IS systems, services
Operations Schedules, MRP, workloads
Product/service design New products and services
Forecasting Time Horizon
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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
Long-range forecasting
Medium-range forecasting
Short-range forecasting
Production/operation control
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Influence of Product Life Cycle
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Introduction and growth require longer forecasts than
maturity
and decline
As product passes through life cycle, forecasts are useful
in
projecting
Staffing levels (Human Resource Requirements)
Inventory levels (Supply chain management)
Factory capacity
Introduction Growth Maturity Decline
Types of Forecasts
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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
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Seven Steps in Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
1 Determine the use of the forecast Determine the use of the
forecast
2 Select the items to be forecasted Select the items to be
forecasted
3 Determine the time horizon of the forecast Determine the time
horizon of the forecast
4 Select the forecasting model(s) Select the forecasting
model(s)
5 Gather the data Gather the data
6 Make the forecast Make the forecast
7 Validate and implement results Validate and implement
results
Forecasts Idealism & Reality
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Seldom PerfectSeldom Perfect
Based on AssumptionsBased on Assumptions
Aggregate are more accurate than individualAggregate are more
accurate than individual
Accuracy decreases as time horizon increasesAccuracy decreases
as time horizon increases
Real
ity
TimelyTimely
ReliableReliable
AccurateAccurate
MeaningfulMeaningful
WrittenWritten
Easy to useEasy to use
Idea
l
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Approaches to Forecast
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Qualitative Methods
Used when situation is vague and little data exist; for example
New
products, New technology
Involves intuition, experience. e.g., forecasting sales on
Internet
Quantitative Methods
Used when situation is stable and historical data exist; for
example Existing
products, Current technology
Involves mathematical techniques, e.g., forecasting sales of
color televisions
Overview of Qualitative Methods
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Jury of executive opinion
Involves small group of high-level experts and managers
Combines managerial experience with statistical models
Quick decisions but group think is disadvantage
Delphi method
Iterative group process, continues until consensus is
reached
3 types of participants; Decision makers, Staff,
Respondents
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Overview of Qualitative Methods
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Sales force composite
Each salesperson projects his or her sales
Combined at district and national levels
Tends to be overly optimistic
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
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
1. Naive approach
2. Moving averages
3. Exponential smoothing
4. Trend projection
5. Linear regression
time-series models
associative model
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Time Series ForecastingSection 6.2
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Management33
Time Series Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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
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Time Series Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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 ofPeriod Length SeasonsWeek Day 7Month Week 4-4.5Month
Day 28-31Year Quarter 4Year Month 12Year Week 52
Time Series Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Cyclical Component
Repeating up and down movements
Affected by business cycle, political, and economic factors
Multiple years duration
Random Component
Erratic, unsystematic, residual fluctuations
Due to random variation or unforeseen events
Short duration and nonrepeating
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1- Naive Approach
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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
Simple to use, Virtually no cost
Cannot provide high accuracy
2- Moving Average Method
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
MA is a series of arithmetic means
Used if little or no trend
Used often for smoothing
Provides overall impression of data over time
Moving average = demand in previous n periodsn
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2- Moving Average Method
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
January 10February 12March 13April 16May 19June 23July 26
Actual 3-MonthMonth Shed Sales Moving Average
(12 + 13 + 16)/3 = 13 2/3(13 + 16 + 19)/3 = 16(16 + 19 + 23)/3 =
19 1/3
101213
(10 + 12 + 13)/3 = 11 2/3
2- Weighted Moving Average Method
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Used when some trend might be present
Older data usually less important
Weights based on experience and intuition
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2- Weighted Moving Average Method
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
January 10February 12March 13April 16May 19June 23July 26
Actual 3-Month WeightedMonth Shed Sales Moving Average
[(3 x 16) + (2 x 13) + (12)]/6 = 141/3[(3 x 19) + (2 x 16) +
(13)]/6 = 17[(3 x 23) + (2 x 19) + (16)]/6 = 201/2
101213
[(3 x 13) + (2 x 12) + (10)]/6 = 121/6
Weights Applied Period3 Last month2 Two months ago1 Three months
ago6 Sum of weights
Potential Problems With Moving Average
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Increasing n smooths the forecast but makes it less
sensitive to changes
Do not forecast trends well
Require extensive historical data
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3 - Exponential Smoothing
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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
3 - Exponential Smoothing
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant a = .20
Ft = Ft1 + (At1 - Ft1)
New forecast = 142 + .2(153 142) = 144.2 144 units
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Effect of Smoothing Constants
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Weight Assigned toMost 2nd Most 3rd Most 4th Most 5th Most
Recent Recent Recent Recent RecentSmoothing Period Period Period
Period PeriodConstant () (1 - ) (1 - )2 (1 - )3 (1 - )4
= .1 .1 .09 .081 .073 .066
= .5 .5 .25 .125 .063 .031
Effect of Smoothing Constants
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
225
200
175
150 | | | | | | | | |1 2 3 4 5 6 7 8 9
Quarter
Dem
and
= .1
Actual demand
= .5
Chose high values of when underlying average is likely to
change
Choose low values of when underlying average is stable
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Choosing
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Mean Absolute Deviation (MAD)
MAD = |Actual - Forecast|
n
Mean Squared Error (MSE)
MSE = (Forecast Errors)2
n
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Common Measures of Error
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Mean Absolute Percent Error (MAPE)
MAPE =100|Actuali - Forecasti|/Actuali
n
n
i = 1
Comparison of Forecast Error
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Rounded Absolute Rounded AbsoluteActual Forecast Deviation
Forecast Deviation
Tonnage with for with forQuarter Unloaded = .10 = .10 = .50 =
.50
1 180 175 5.00 175 5.002 168 175.5 7.50 177.50 9.503 159 174.75
15.75 172.75 13.754 175 173.18 1.82 165.88 9.125 190 173.36 16.64
170.44 19.566 205 175.02 29.98 180.22 24.787 180 178.02 1.98 192.61
12.618 182 178.22 3.78 186.30 4.30
82.45 98.62
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Comparison of Forecast Error
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Rounded Absolute Rounded AbsoluteActual Forecast Deviation
Forecast Deviation
Tonnage with for with forQuarter Unloaded = .10 = .10 = .50 =
.50
1 180 175 5.00 175 5.002 168 175.5 7.50 177.50 9.503 159 174.75
15.75 172.75 13.754 175 173.18 1.82 165.88 9.125 190 173.36 16.64
170.44 19.566 205 175.02 29.98 180.22 24.787 180 178.02 1.98 192.61
12.618 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD = |deviations|
n
= 82.45/8 = 10.31For = .10
= 98.62/8 = 12.33For = .50
Comparison of Forecast Error
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Rounded Absolute Rounded AbsoluteActual Forecast Deviation
Forecast Deviation
Tonnage with for with forQuarter Unloaded = .10 = .10 = .50 =
.50
1 180 175 5.00 175 5.002 168 175.5 7.50 177.50 9.503 159 174.75
15.75 172.75 13.754 175 173.18 1.82 165.88 9.125 190 173.36 16.64
170.44 19.566 205 175.02 29.98 180.22 24.787 180 178.02 1.98 192.61
12.618 182 178.22 3.78 186.30 4.30
82.45 98.62
= 1,526.54/8 = 190.82For = .10
= 1,561.91/8 = 195.24For = .50
MSE = (forecast errors)2
n
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Comparison of Forecast Error
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Rounded Absolute Rounded AbsoluteActual Forecast Deviation
Forecast Deviation
Tonnage with for with forQuarter Unloaded = .10 = .10 = .50 =
.50
1 180 175 5.00 175 5.002 168 175.5 7.50 177.50 9.503 159 174.75
15.75 172.75 13.754 175 173.18 1.82 165.88 9.125 190 173.36 16.64
170.44 19.566 205 175.02 29.98 180.22 24.787 180 178.02 1.98 192.61
12.618 182 178.22 3.78 186.30 4.30
82.45 98.62
= 44.75/8 = 5.59%For = .10
= 54.05/8 = 6.76%For = .50
MAPE =100|deviationi|/actuali
n
n
i = 1
Comparison of Forecast Error
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Rounded Absolute Rounded AbsoluteActual Forecast Deviation
Forecast Deviation
Tonnage with for with forQuarter Unloaded = .10 = .10 = .50 =
.50
1 180 175 5.00 175 5.002 168 175.5 7.50 177.50 9.503 159 174.75
15.75 172.75 13.754 175 173.18 1.82 165.88 9.125 190 173.36 16.64
170.44 19.566 205 175.02 29.98 180.22 24.787 180 178.02 1.98 192.61
12.618 182 178.22 3.78 186.30 4.30
82.45 98.62MAD 10.31 12.33MSE 190.82 195.24MAPE 5.59% 6.76%
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Comparison of Forecast Error
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
0.2Actial F Dev. F Dev. F Dev. F Dev. F Dev.
1 180 175 5 175 5 175 5 175 5 175 52 168 175.5 7.5 176 8 176.5
8.5 177 9 177.5 9.53 159 174.75 15.75 174.4 15.4 173.95 14.95 173.4
14.4 172.75 13.754 175 173.18 1.82 171.32 3.68 169.465 5.535 167.64
7.36 165.88 9.125 190 173.36 16.64 172.056 17.944 171.1255 18.8745
170.584 19.416 170.44 19.566 205 175.05 29.95 175.6448 29.3552
176.7879 28.21215 178.3504 26.6496 180.22 24.787 180 178.02 1.98
181.5158 1.51584 185.2515 5.251495 189.0102 9.01024 192.61 12.618
182 178.22 3.78 181.2127 0.787328 183.676 1.676047 185.4061
3.406144 186.3 4.3
82.42 81.68237 87.99919 94.24198 98.62MAD 10.3025 10.2103
10.9999 11.78025 12.3275MAPE 5.591537 5.545828 5.992131 6.436648
6.755313
0.3 0.4 0.50.1
Exponential Smoothing with Trend Adjustment
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
When a trend is present, exponential smoothing must be
modified
Forecast including (FITt) = trend
Exponentially Exponentiallysmoothed (Ft) + smoothed (Tt)forecast
trend
Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1)
Tt = (Ft - Ft - 1) + (1 - )Tt - 1Step 1: Compute FtStep 2:
Compute TtStep 3: Calculate the forecast FITt = Ft + Tt
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Exponential Smoothing with Trend Adjustment Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
ForecastActual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt1 12 11 2
13.002 173 204 195 246 217 318 289 3610
Exponential Smoothing with Trend Adjustment Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
ForecastActual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt1 12 11 2
13.002 173 204 195 246 217 318 289 3610
F2 = A1 + (1 - )(F1 + T1)F2 = (.2)(12) + (1 - .2)(11 + 2)
= 2.4 + 10.4 = 12.8 units
Step 1: Forecast for Month 2
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Exponential Smoothing with Trend Adjustment Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
ForecastActual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt1 12 11 2
13.002 17 12.803 204 195 246 217 318 289 3610
T2 = (F2 - F1) + (1 - )T1T2 = (.4)(12.8 - 11) + (1 - .4)(2)
= .72 + 1.2 = 1.92 units
Step 2: Trend for Month 2
Exponential Smoothing with Trend Adjustment Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
ForecastActual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt1 12 11 2
13.002 17 12.80 1.923 204 195 246 217 318 289 3610
FIT2 = F2 + T2FIT2 = 12.8 + 1.92
= 14.72 units
Step 3: Calculate FIT for Month 2
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Exponential Smoothing with Trend Adjustment Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
ForecastActual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt1 12 11 2
13.002 17 12.80 1.92 14.723 204 195 246 217 318 289 3610
15.18 2.10 17.2817.82 2.32 20.1419.91 2.23 22.1422.51 2.38
24.8924.11 2.07 26.1827.14 2.45 29.5929.28 2.32 31.6032.48 2.68
35.16
Exponential Smoothing with Trend Adjustment Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
| | | | | | | | |1 2 3 4 5 6 7 8 9
Time (month)
Prod
uct d
eman
d
35
30
25
20
15
10
5
0
Actual demand (At)
Forecast including trend (FITt)with = .2 and = .4
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4 - Trend Projections
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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^
where y = computed value of the variable to be predicted
(dependent variable)
a = y-axis interceptb = slope of the regression linex = the
independent variable
^
Linear Regression Method
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Time period
Valu
es o
f Dep
ende
nt V
aria
ble
Deviation1(error)
Deviation5
Deviation7
Deviation2
Deviation6
Deviation4
Deviation3
Actual observation (y-value)
Trend line, y = a + bx^
Least squares method minimizes the sum of the squared errors
(deviations)
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Linear Regression Method
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Equations to calculate the regression variables
b =xy - nxyx2 - nx2
y = a + bx^
a = y - bx
Linear Regression Method - Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
b = = = 10.54xy - nxyx2 - nx2
3,063 - (7)(4)(98.86)140 - (7)(42)
a = y - bx = 98.86 - 10.54(4) = 56.70
Time Electrical Power Year Period (x) Demand x2 xy
2003 1 74 1 742004 2 79 4 1582005 3 80 9 2402006 4 90 16 3602007
5 105 25 5252008 6 142 36 8522009 7 122 49 854
x = 28 y = 692 x2 = 140 xy = 3,063x = 4 y = 98.86
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Linear Regression Method - Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
b = = = 10.54xy - nxyx2 - nx2
3,063 - (7)(4)(98.86)140 - (7)(42)
a = y - bx = 98.86 - 10.54(4) = 56.70
Time Electrical Power Year Period (x) Demand x2 xy
2003 1 74 1 742004 2 79 4 1582005 3 80 9 2402006 4 90 16 3602007
5 105 25 5252008 6 142 36 8522009 7 122 49 854
x = 28 y = 692 x2 = 140 xy = 3,063x = 4 y = 98.86
The trend line is
y = 56.70 + 10.54x^
Linear Regression Method - Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
| | | | | | | | |2003 2004 2005 2006 2007 2008 2009 2010
2011
160 150 140 130 120 110 100 90 80 70 60 50
Year
Pow
er d
eman
d
Trend line,y = 56.70 + 10.54x^
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5 - Seasonal Variations In Data
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
The multiplicative seasonal model can adjust trend
data for seasonal variations in demand
5 - Seasonal Variations In Data
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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
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5 - Seasonal Variations In Data
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Jan 80 85 105 90 94Feb 70 85 85 80 94Mar 80 93 82 85 94Apr 90 95
115 100 94May 113 125 131 123 94Jun 110 115 120 115 94Jul 100 102
113 105 94Aug 88 102 110 100 94Sept 85 90 95 90 94Oct 77 78 85 80
94Nov 75 72 83 80 94Dec 82 78 80 80 94
Demand Average Average Seasonal Month 2007 2008 2009 2007-2009
Monthly Index
San Diego Hospital
5 - Seasonal Variations In Data
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Jan 80 85 105 90 94Feb 70 85 85 80 94Mar 80 93 82 85 94Apr 90 95
115 100 94May 113 125 131 123 94Jun 110 115 120 115 94Jul 100 102
113 105 94Aug 88 102 110 100 94Sept 85 90 95 90 94Oct 77 78 85 80
94Nov 75 72 83 80 94Dec 82 78 80 80 94
Demand Average Average Seasonal Month 2007 2008 2009 2007-2009
Monthly Index
0.957
Seasonal index = Average 2007-2009 monthly demand
Average monthly demand
= 90/94 = .957
San Diego Hospital
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5 - Seasonal Variations In Data
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Jan 80 85 105 90 94 0.957Feb 70 85 85 80 94 0.851Mar 80 93 82 85
94 0.904Apr 90 95 115 100 94 1.064May 113 125 131 123 94 1.309Jun
110 115 120 115 94 1.223Jul 100 102 113 105 94 1.117Aug 88 102 110
100 94 1.064Sept 85 90 95 90 94 0.957Oct 77 78 85 80 94 0.851Nov 75
72 83 80 94 0.851Dec 82 78 80 80 94 0.851
Demand Average Average Seasonal Month 2007 2008 2009 2007-2009
Monthly Index
San Diego Hospital
5 - Seasonal Variations In Data
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Jan 80 85 105 90 94 0.957Feb 70 85 85 80 94 0.851Mar 80 93 82 85
94 0.904Apr 90 95 115 100 94 1.064May 113 125 131 123 94 1.309Jun
110 115 120 115 94 1.223Jul 100 102 113 105 94 1.117Aug 88 102 110
100 94 1.064Sept 85 90 95 90 94 0.957Oct 77 78 85 80 94 0.851Nov 75
72 83 80 94 0.851Dec 82 78 80 80 94 0.851
Demand Average Average Seasonal Month 2007 2008 2009 2007-2009
Monthly Index
Expected annual demand = 1,200
Jan x .957 = 961,200
12
Feb x .851 = 851,200
12
Forecast for 2010
San Diego Hospital
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5 - Seasonal Variations In Data
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
140
130
120
110
100
90
80
70 | | | | | | | | | | | |J F M A M J J A S O N D
Time
Dem
and
2010 Forecast2009 Demand 2008 Demand2007 Demand
San Diego Hospital
San Diego Hospital
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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Associative ForecastingSection 6.3
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Management33
Associative Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Forecasting an outcome based on predictor variables
using the least squares technique
where computed value of the variable to 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
a b x
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Associative Forecasting - Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Sales Local Payroll($ millions), y ($ billions), x
2.0 13.0 32.5 42.0 22.0 13.5 7
4.0
3.0
2.0
1.0
| | | | | | |0 1 2 3 4 5 6 7
Sale
s
Area payroll
Associative Forecasting - Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Sales, y Payroll, x x2 xy2.0 1 1 2.03.0 3 9 9.02.5 4 16 10.02.0
2 4 4.02.0 1 1 2.03.5 7 49 24.5
y = 15.0 x = 18 x2 = 80 xy = 51.5
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Associative Forecasting - Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
y = 1.75 + .25x^ Sales = 1.75 + .25(payroll)
If payroll next year is estimated to be $6 billion, then:
Sales = 1.75 + .25(6)Sales = $3,250,000
4.0
3.0
2.0
1.0
| | | | | | |0 1 2 3 4 5 6 7
Sale
s
Area payroll
3.25
Standard Error of the Estimate
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
A forecast is just a point estimate of a future value
This point is actually the mean
of a probability distribution
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Standard Error of the Estimate
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Sy,x = .306
The standard error of the estimate is $306,000 in sales
Monitoring and Controlling Forecasts
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Tracking
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
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Monitoring and Controlling Forecasts
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Tracking signal
RSFEMAD=
Tracking signal =
(Actual demand in period i -
Forecast demand in period i)
|Actual - Forecast|/n)
Tracking Signal
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Tracking signal
+
0 MADs
Upper control limit
Lower control limit
Time
Signal exceeding limit
Acceptable range
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Tracking Signal - Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
CumulativeAbsolute Absolute
Actual Forecast Forecast ForecastQtr Demand Demand Error RSFE
Error Error MAD
(AD) (FD) (AD-FD) |RSFE| (CAF) CAF/Qtr
1 90 100 -10 -10 10 10 10.02 95 100 -5 -15 5 15 7.53 115 100 +15
0 15 30 10.04 100 110 -10 -10 10 40 10.05 125 110 +15 +5 15 55
11.06 140 110 +30 +35 30 85 14.2
Tracking Signal - Example
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
CumulativeAbsolute Absolute
Actual Forecast Forecast ForecastQtr Demand Demand Error RSFE
Error Error MAD
1 90 100 -10 -10 10 10 10.02 95 100 -5 -15 5 15 7.53 115 100 +15
0 15 30 10.04 100 110 -10 -10 10 40 10.05 125 110 +15 +5 15 55
11.06 140 110 +30 +35 30 85 14.2
TrackingSignal
(RSFE/MAD)-10/10 = -1-15/7.5 = -2
0/10 = 0-10/10 = -1
+5/11 = +0.5+35/14.2 = +2.5
The variation of the tracking signal between -2.0 and +2.5 is
within acceptable limits
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Miscellaneous ForecastingSection 6.4
Resource Person : Dr. Muhammad Wasif Operations & Production
Management33
Adaptive Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
Its possible to use the computer to continually
monitor forecast error and adjust the values of the a
and b coefficients used in exponential smoothing to
continually minimize forecast error
This technique is called adaptive smoothing
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Focus Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
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
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Operations&ProductionManagement 2/21/2015
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Fast Food Restaurant Forecast
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
20%
15%
10%
5%
11-12 1-2 3-4 5-6 7-8 9-1012-1 2-3 4-5 6-7 8-9 10-11
(Lunchtime) (Dinnertime)Hour of day
Perc
enta
ge o
f sa
les
FedEx Call Center Forecast
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
12%
10%
8%
6%
4%
2%
0%
Hour of dayA.M. P.M.
2 4 6 8 10 12 2 4 6 8 10 12
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ResourcePerson:Dr.MuhammadWasif 39
Resource Person : Dr. Muhammad Wasif Operations & Production
Management
References
Operations Management, 10th Ed., by J. Heizer & B.
Render
Operations Management, William J. Stevenson.
Operations Management, 7th Ed., N. Slack, A.B. Jones, R.
Johnston.
Cases in Operations Management, S. Chambers, C. Harland, A.
Harison, N. Slack.