Samuel H. Huang, Winter 2012 Basic Concepts and Constant Process Overview of demand forecasting Constant process –Average and moving average method –Exponential.

Samuel H. Huang, Winter 2012

Basic Concepts and Constant Process

• Overview of demand forecasting

• Constant process– Average and moving average method

– Exponential Smoothing method


Demand Influencing Factors

• Product characteristics• Past demand• Economic condition• Competition• Planned marketing efforts• Planned price discount


Forecasting Methods

• Qualitative: rely on human judgment– Market survey (customer response)

– Delphi technique (expert opinion)

• Causal: demand is highly correlated with certain factors

• Time Series: past demand is a good indicator of future demand

• Simulation: mimic consumer behavior to conduct what-if analysis


Time-series Forecasting

• Constant process– Average– Moving average– Exponential smoothing

• Trend process– Regression– Double exponential smoothing

• Seasonal process


Characteristics of Forecast

• Forecasts are always wrong and thus should include an error analysis

• Long-term forecasts are usually less accurate than short-term forecasts

• Aggregate forecasts are usually more accurate than disaggregate forecasts


Constant Model: Average

• Constant model

• Forecast

• Derived based on minimizing the sum of squared errors

tt ad

N

da

Nt t 1ˆ

ade tt ˆ

0ˆ2ˆ

ˆ

ˆ 11

21

2

N

t t

Nt t

Nt t ad

ad

add

ad

ed

Nt t aNd1 ˆ


Example: Average

Microsoft Office Excel 97-2003 Worksheet


Moving Average

• Average only the most recent data points

• Smooth out noise

• Can respond to change in process

n

dM

tnt t

t

1

n

ddMM ntt

tt11

1


Example: Moving Average



Noise Smoothing


Response to Process Change


Exponential Smoothing

• Adjust forecast based on the most recent data point

• It is a weighted average of all historical data points, with the weight decreasing exponentially with the age of the data point

• Different initial estimates can be used – average of several past data points

11 ttt SdS


Example: Exponential Smoothing



Insensitive to Initial Estimate


Effect of Weighting Factor


Response to Process Change

Samuel H. Huang, Winter 2012 Basic Concepts and Constant Process Overview of demand forecasting Constant process –Average and moving average method –Exponential.

Documents

average slide

average average

exponential smoothing

process change slide

analysis slide

constant process average

noise smoothing slide

initial estimate slide