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Forecasting

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**Independent Demand: What a firm can do to manage it?**

Demand Management A B(4) C(2) D(2) E(1) D(3) F(2) Independent Demand Dependent Demand Independent Demand: What a firm can do to manage it? Can take an active role to influence demand Can take a passive role -simply respond to demand 3

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**Components of Demand Average demand for the period Trend**

Seasonal element Cyclical elements Irregular variation Random variation 5

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Components of Demand Quantity Time Average demand for the period

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**Components of Demand Quantity Time**

Trend: Data consistently increase or decrease, not necessarily in a linear fashion

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**Components of Demand Year 1 Quantity | | | | | | | | | | | | Months**

| | | | | | | | | | | | J F M A M J J A S O N D Months Seasonal: Data consistently show peaks and valleys with a one-year cycle Year 1 Seasonal variations 90 89 88

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**Components of Demand Quantity | | | | | | Years**

| | | | | | Years Cyclical: Data reveal gradual increases and decreases over extended periods of more than one-year in length

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**Components of Demand Quantity Time**

Irregular variation Quantity Time Irregular Variation: any event interrupting the regular phenomena Random Variation: are caused by chance events

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**Types of Forecasts Qualitative Time Series Analysis Casual Relations**

Simulations 5

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**Qualitative Methods Grass Roots Qualitative Methods Market Research**

Executive Judgment Grass Roots Qualitative Methods Market Research Historical analogy Delphi Method Panel Consensus

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**The analysis can be done through various methods:**

Time Series Analysis Time series forecasting models try to predict the future based on past data The analysis can be done through various methods: 1. Simple moving average 2. Weighted moving average 3. Exponential smoothing 4. Regression analysis 5. Others 14

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**Simple Moving Average Formula**

The simple moving average model assumes an average is a good estimator of future behavior The formula for the simple moving average is: 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 15

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**Simple Moving Average Problem**

Question: What are the 3-week and 6-week moving average forecasts for demand? Assume you only have 3 weeks and 6 weeks of actual demand data for the respective forecasts 15

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**Calculating the moving averages gives us:**

F4=( )/3 =682.67 F7=( )/6 =768.67 16

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**Weighted Moving Average Formula**

While the simple 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: wt = weight given to time period “t” occurrence (weights must add to one) 20

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**Weighted Moving Average Problem Data**

Question: Given the weekly demand and weights, what is the forecast for the 4th period or Week 4? Weights: t-1 .5 t-2 .3 t-3 .2 Note that the weights place more emphasis on the most recent data, that is time period “t-1” 20

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**Weighted Moving Average Problem Solution**

F4 = 0.5(720)+0.3(678)+0.2(650)=693.4 21

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**Exponential Smoothing Model**

Ft = Ft-1 + a(At-1 - Ft-1) Exponential Smoothing assigns exponentially decreasing weights as the observation get older. 24

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**Exponential Smoothing Problem Data**

Question: Given the weekly demand data, what are the exponential smoothing forecasts for periods 2-10 using a=0.10 and a=0.60? Assume F1=D1 25

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**Answer: The respective alphas columns denote the forecast values**

Answer: The respective alphas columns denote the forecast values. Note that you can only forecast one time period into the future. 26

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**Simple Linear Regression Model**

The simple linear regression model seeks to fit a line through various data over time Y a 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. 35

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**Simple Linear Regression Formulas for Calculating “a” and “b”**

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**Simple Linear Regression Problem Data**

Question: Given the data below, what is the simple linear regression model that can be used to predict sales in future weeks? 37

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**Answer: First, using the linear regression formulas, we can compute “a” and “b”**

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McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Demand Management and Forecasting CHAPTER 10.

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Demand Management and Forecasting CHAPTER 10.

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