Production and Operations Management - Session 10-11
Production and Operations Management - Session 10-11
&
OPERATIONS MANAGEMENT
SESSION 10-11
FORECASTING
Manufacturing
• A manufacturer of household appliances wants to add another product line for
manufacturing microwave ovens. The decision requires a good understanding
of the nature of demand for the range of microwave ovens proposed to be
manufactured
Services
• A hospital chooses to add one more specialty health care wing, it needs to
make some assumptions about the demand for the facility
Public Policy
• Government of India needs to have a reasonable estimate of the population
growth over the next 10 – 20 years while it formulates long term plans for
creating infrastructure for transport
FORECASTING
• Forecasts are estimates of
• magnitude and
• timing
of uncertain events that happen in every business setting
• Forecast – a statement about the future value of a variable of interest
• We make forecasts about such things as weather, demand, and resource availability
• An estimation tool
• A way of addressing complex and uncertain environment surrounding
business decision-making
• A tool for predicting events related to operations planning & control
• A vital pre-requisite for the planning process in organizations
• Forecasts are important to making informed decisions
FORECASTING
• Two Important Aspects
• Expected level of demand
• The level of demand may be a function of some structural variation such as trend or
seasonal variation
• Accuracy
• Related to the potential size of forecast error
NEED FOR FORECASTING
• The key applications of forecasting are:
• Understanding Dynamic & Complex environment
• Managing Short-term fluctuations in production
• Better Materials Management
• Rationalized man-power decisions
• Providing a basis for
• Strategic decisions
• Planning & scheduling
FORECAST USES
• Plan the system
• Generally involves long-range plans related to:
• Types of products and services to offer
• Facility and equipment levels
• Facility location
• Plan the use of the system
• Generally involves short- and medium-range plans related to:
• Inventory management
• Workforce levels
• Purchasing
• Production
• Budgeting
• Scheduling
FORECASTING: TIME HORIZON
Criterion Short-term Medium-term Long-term
Typical Duration 1 – 3 months 12 – 18 months 5 – 10 Years
No
1 n
• Mean Absolute Deviation (MAD): MAD = * i
n i =1
• Mean Absolute Percentage Error (MAPE): 1 n i
MAPE = * * 100
n i =1 Di
𝑛
1
• Mean Squared Error (MSE): 𝑀𝑆𝐸 = ∗ 𝜀𝑖2
𝑛−1
𝑖=1
(Actual t − Forecast t )
2 Mean Square Error weights errors according to
MSE = their squared values
n −1
Actual t − Forecast t
Actual t
100 Mean Absolute Percent Error weights errors
MAPE = according to relative error
n
FORECASTS: METRICS
•Tracking signal
–Ratio of cumulative error to MAD
Tracking signal =
(Actual-forecast)
MAD
Bias – Persistent tendency for forecasts to be
Greater or less than actual values.
Value of zero would be ideal for Tracking signal.
Limits of +/-4 or +/- 5are often used for a range of
acceptable values of the tracking signal.
FORECASTS: METRICS
Actual Forecast
Period (A-F) Error
(A) (F) |Error| Error2 [|Error|/Actual]x100
Sum 13 39 11.23%
Ft = wt ( At ) + wt −1 ( At −1 ) + ... + wt − n ( At − n )
where
wt = weight for period t , wt −1 = weight for period t − 1, etc.
At = the actual value for period t , At −1 = the actual value for period t − 1, etc.
WEIGHTED MOVING AVERAGE
Model parameter
Number of periods for moving average 3 months
Weights for three periods
Immediate past 0.45
Two periods before 0.30
Three periods before 0.25
150
140
Demand/Forecast (units)
130
120
110
100
90
80
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Forecast period
EXPONENTIAL SMOOTHING WITH TREND & SEASONALITY
• The trend adjusted forecast consists of
• Smoothed error
• Trend factor
• Alpha and beta are smoothing constants
• Trend-adjusted exponential smoothing has the ability to respond to changes in
trend
TAFt +1 = St + Tt
St = TAFt + (At − TAFt )
Tt = Tt−1 + (TAFt − TAFt−1 − Tt−1 )
TECHNIQUES FOR SEASONALITY
• Seasonality – regularly repeating movements in series values that can be tied
to recurring events
• Expressed in terms of the amount that actual values deviate from the average value of a
series
• Models of seasonality
• Additive
• Seasonality is expressed as a quantity that gets added to or subtracted from the time-series
average in order to incorporate seasonality
• Multiplicative
• Seasonality is expressed as a percentage of the average (or trend) amount which is then used to
multiply the value of a series in order to incorporate seasonality
TECHNIQUES FOR SEASONALITY
MONITORING THE FORECAST
• Tracking forecast errors and analyzing them can provide useful insight into
whether forecasts are performing satisfactorily
• Sources of forecast errors:
• The model may be inadequate due to
a. omission of an important variable
b. a change or shift in the variable the model cannot handle
c. the appearance of a new variable
• Irregular variations may have occurred
• Random variation
• Control charts are useful for identifying the presence of non-random error in
forecasts
CONTROL CHART
• Control chart
• A visual tool for monitoring forecast errors
• Used to detect non-randomness in errors
• Control limits:
UCL = 0 + z √MSE
LCL = 0 – z √MSE
z typically=2 or 3
• Forecasting errors are in control if
• All errors are within the control limits
• No patterns, such as trends are present
CONTROL CHART
1. Compute the MSE.
2. Estimate of standard deviation of the distribution of errors
s= MSE
3. UCL : 0 + z MSE
4. LCL : 0 − z MSE
where z = Number of standard deviations from the mean
USING THE FORECASTING SYSTEM
Data Time
Cost
Availability Frame
Key inferences
from
research/practice
How to get started?
• Choice of model
• Estimation of parameters
New
Competitor
Issues in using the system
• How to incorporate external information
• Stability Vs Responsiveness Sales
Promotions