1

Chapter 13

De mand Ma nagement

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 2

OBJECTIVES
 Demand Management
 Qualitative Forecasting

Methods
 Simple & Weighted Moving

Average Forecasts
 Exponential Smoothing
 Simple Linear Regression
 Web-Based Forecasting

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 3

Demand Management

Independent Demand:
Finished Goods

A Dependent Demand:
Raw Materials,
Component parts,
B(4) C(2) Sub-assemblies, etc.

D(2) E(1) D(3) F(2)

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 4

Ind epe nde nt Demand:

What a f irm can d o to manage it?

 Can take an active role to influence

demand

 Can take a passive role and simply

respond to demand

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 5

Types of Forecast s

 Qualitative (Judgmental)

 Quantitative
– Time Series Analysis
– Causal Relationships
– Simulation

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 6

Components of Demand
 Average demand for a period of
time
 Trend

 Seasonal element

 Cyclical elements

 Random variation

 Autocorrelation

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 Finding Components of 7

Demand

Seasonal variation

x
x x Linear
x x
x x Trend
x x
Sales

x x x
x
x
xx
x xx x x
x
x
x x x x x x
x x x x x x
x x x
x xxxxx
x
x x

1 2 3 4
Year
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 8

Qualitat ive Me thods

Executive Judgment Grass Roots

Qualitative Market Research

Historical analogy
Methods

Delphi Method Panel Consensus

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 9

Delp hi Method
l. Choose the experts to participate
representing a variety of knowledgeable
people in different areas
2. Through a questionnaire (or E-mail), obtain
forecasts (and any premises or qualifications
for the forecasts) from all participants
3. Summarize the results and redistribute them
to the participants along with appropriate
new questions
4. Summarize again, refining forecasts and
conditions, and again develop new questions
5. Repeat Step 4 as necessary and distribute
the final results to all participants

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 10

Time S eries A nalysis

 Time series forecasting models try to
predict the future based on past data
 You can pick models based on:
1. Time horizon to forecast
2. Data availability
3. Accuracy required
4. Size of forecasting budget
5. Availability of qualified personnel

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 Simple Movin g Aver age 11

Formula
 The simple moving average model assumes
an average is a good estimator of future
behavior
 The formula for the simple moving average is:
A t-1 + A t-2 + A t-3 +...+A t- n
Ft =
n

Ft = Forecast for the coming period

N = Number of periods to be averaged
A t-1 = Actual occurrence in the past period for up to “n”
periods

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 Si mpl e Movi ng A ver age Probl em 12
(1)
A t-1 + A t-2 + A t-3 +...+A t- n
Ft =
Week Demand n
1 650 Question: What are the 3-
2 678 week and 6-week moving
3 720 average forecasts for
4 785
demand?
5 859
6 920 Assume you only have 3
7 850 weeks and 6 weeks of
8 758 actual demand data for the
9 892 respective forecasts
10 920
11 789
12 844

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 13
Calculating the moving averages gives us:
Week Demand 3-Week 6-Week
1 650 F4=(650+678+720)/3
2 678
=682.67
3 720 F7=(650+678+720
4 785 682.67 +785+859+920)/6
5 859 727.67
=768.67
6 920 788.00
7 850 854.67 768.67
8 758 876.33 802.00
9 892 842.67 815.33
10 920 833.33 844.00
11 789 856.67 866.50
12 844 867.00 854.83
©The McGraw-Hill Companies, Inc., 2004
 14

Plotting the moving averages and comparing

them shows how the lines smooth out to reveal
the overall upward trend in this example

1000
900
Demand
800
Demand

3-Week
700
6-Week
600
500 Note how the
1 2 3 4 5 6 7 8 9 10 11 12 3-Week is
Week smoother than
the Demand,
and 6-Week is
even smoother
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 15
Simp le Mo vin g A vera ge Proble m (2 )
Data

Question: What is the 3

week moving average
forecast for this data?
Week Demand Assume you only have 3
1 820 weeks and 5 weeks of
2 775 actual demand data
3 680 for the respective
4 655 forecasts
5 620
6 600
7 575

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 16

Si mpl e Movi ng Av erage Probl em

(2) Soluti on
Week Demand 3-Week 5-Week
1 820 F4=(820+775+680)/3
2 775 =758.33
3 680 F6=(820+775+680
+655+620)/5
4 655 758.33 =710.00
5 620 703.33
6 600 651.67 710.00
7 575 625.00 666.00

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 17

Wei ghted Movi ng Average

Formul a
While the moving average formula implies an equal
weight being placed on each value that is being averaged,
the weighted moving average permits an unequal
weighting on prior time periods

The formula for the moving average is:

Ft = w1A t-1 + w 2 A t-2 + w 3A t-3 +...+w n A t-n

n
wt = weight given to time period “t”
occurrence (weights must add to one)
∑w
i=1
i =1

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 18

Wei ghted Movi ng Average

Probl em (1 ) Data
Question: Given the weekly demand and weights, what is
the forecast for the 4th period or Week 4?

Week Demand Weights:

1 650
2 678 t-1 .5
3 720 t-2 .3
4 t-3 .2

Note that the weights place more emphasis on the

most recent data, that is time period “t-1”

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 19

Weighted Movi ng Aver age

Pr ob lem ( 1) So luti on

Week Demand Forecast

1 650
2 678
3 720
4 693.4

F4 = 0.5(720)+0.3(678)+0.2(650)=693.4

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 20

Wei ghted Movi ng Average

Probl em (2 ) Data
Question: Given the weekly demand information and
weights, what is the weighted moving average forecast
of the 5th period or week?

Week Demand Weights:

1 820 t-1 .7
2 775 t-2 .2
3 680
t-3 .1
4 655

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 21

Wei ghted Movi ng Average

Probl em (2) Sol ut ion

Week Demand Forecast

1 820
2 775
3 680
4 655
5 672

F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672

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 22

Exponential Smoothi ng Model

Ft = Ft-1 + α(At-1 - Ft-1)

Where :
Ft = Forcast value for the coming t time period
Ft - 1 = Forecast value in 1 past time period
At - 1 = Actual occurance in the past t time period
α = Alpha smoothing constant
 Premise: The most recent observations might
have the highest predictive value
 Therefore, we should give more weight to the
more recent time periods when forecasting
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 23
Exponentia l Sm oothin g Pr oble m ( 1)
Data
Question: Given the weekly
demand data, what are
Week Demand the exponential
1 820 smoothing forecasts for
2 775
periods 2-10 using α=0.10
3 680
and α=0.60?
4 655
Assume F1=D1
5 750
6 802
7 798
8 689
9 775
10

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 24

Answer: The respective alphas columns denote the forecast values. Note
that you can only forecast one time period into the future.

Week Demand 0.1 0.6

1 820 820.00 820.00
2 775 820.00 820.00
3 680 815.50 793.00
4 655 801.95 725.20
5 750 787.26 683.08
6 802 783.53 723.23
7 798 785.38 770.49
8 689 786.64 787.00
9 775 776.88 728.20
10 776.69 756.28
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 25

Exponential Smoothi ng
Probl em (1) Pl otting
Note how that the smaller alpha results in a smoother line
in this example

900
800 Demand
700 0.1
Demand

600 0.6
500
1 2 3 4 5 6 7 8 9 10
Week

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 26

Exponential Smoothing
Problem (2) D ata

Question: What are the

Week Demand
exponential smoothing
1 820
forecasts for periods 2-5
2 775 using a =0.5?
3 680
4 655
5 Assume F1=D1

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 27

Exponential Smoothing
Probl em ( 2) So lut ion
F1=820+(0.5)(820-820)=820 F3=820+(0.5)(775-820)=797.75

Week Demand 0.5

1 820 820.00
2 775 820.00
3 680 797.50
4 655 738.75
5 696.88
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 The MAD S tatis tic to 28

Det ermine For ecasting

Error
n
1 MAD ≈ 0.8 standard deviation
∑A
t=1
t - Ft
1 standard deviation ≈ 1.25 MAD
MAD =
n

 The ideal MAD is zero which would mean

there is no forecasting error

 The larger the MAD, the less the

accurate the resulting model

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 29

MAD Probl em Da ta

Question: What is the MAD value given

the forecast values in the table below?

Month Sales Forecast

1 220 n/a
2 250 255
3 210 205
4 300 320
5 325 315
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 30

MAD P roblem S olut ion

Month Sales Forecast Abs Error

1 220 n/a
2 250 255 5
3 210 205 5
4 300 320 20
5 325 315 10

40

n
Note that by itself, the MAD
∑A
t=1
t - Ft
40 only lets us know the mean
MAD = = = 10 error in a set of forecasts
n 4

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 31

Tracking Signal Formula

 The Tracking Signal or TS is a measure that
indicates whether the forecast average is
keeping pace with any genuine upward or
downward changes in demand.
 Depending on the number of MAD’s selected,
the TS can be used like a quality control chart
indicating when the model is generating too
much error in its forecasts.
 The TS formula is:

RSFE Running sum of forecast errors

TS = =
MAD Mean absolute deviation
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 32

Simp le Li near Regr essi on Model

The simple linear regression Y
model seeks to fit a line
through various data over
time
a
0 1 2 3 4 5 x (Time)

Yt = a + bx Is the linear regression model

Yt is the regressed forecast value or dependent

variable in the model, a is the intercept value of the
the regression line, and b is similar to the slope of the
regression line. However, since it is calculated with
the variability of the data in mind, its formulation is
not as straight forward as our usual notion of slope.

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 Sim ple Lin ear R egressio n 33

Form ulas fo r Calculatin g “a”

and “b”

a = y - bx

∑ xy - n(y)(x)
b= 2 2
∑ x - n(x )

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 34
Simple Linear Regressio n Pr oble m
Data

Question: Given the data below, what is the simple linear

regression model that can be used to predict sales in future
weeks?

Week Sales
1 150
2 157
3 162
4 166
5 177
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 35

Answer: First, using the linear regression formulas, we

can compute “a” and “b”
Week Week*Week Sales Week*Sales
1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885
3 55 162.4 2499
Average Sum Average Sum

b=
∑ xy - n(y)(x) 2499 - 5(162.4)(3) 63
= = = 6.3
∑ x - n(x )
2 2
55 − 5(9) 10

a = y - bx = 162.4 - (6.3)(3) = 143.5

 36

The resulting regression model

is: Yt = 143.5 + 6.3x
Now if we plot the regression generated forecasts against the
actual sales we obtain the following chart:
180
175
170
165
160 Sales
Sales

155 Forecast
150
145
140
135
1 2 3 4 5
Period
 37

Web-Bas ed Forecas ting:

CPFR
 Collaborative Planning, Forecasting, and
Replenishment (CPFR) a Web-based tool used
to coordinate demand forecasting, production
and purchase planning, and inventory
replenishment between supply chain trading
partners.
 Used to integrate the multi-tier or n-Tier supply
chain, including manufacturers, distributors
and retailers.
 CPFR’s objective is to exchange selected
internal information to provide for a reliable,
longer term future views of demand in the
supply chain.
 CPFR uses a cyclic and iterative approach to
derive consensus forecasts.

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 38

We b-B ased For ecasti ng:

Steps in C PFR

 1. Creation of a front-end partnership

agreement
 2. Joint business planning
 3. Development of demand forecasts
 4. Sharing forecasts
 5. Inventory replenishment

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