Forecasting

For Operations Management, 9e by

PowerPoint Slides
Krajewski/Ritzman/Malhotra
by Jeff Heyl © 2010 Pearson Education
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Forecasting

 Forecasting is the prediction of future events or

future demands used for planning purposes.
 Forecasts are critical inputs to business plans,
annual plans, and budgets
 Forecasts are made on many different variables
 Forecasts are important to managing both
processes and managing supply chains

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Demand Patterns

 Time series patterns: A time series pattern is the

repeated observations of demand for a service or
product in their order of occurrence
 There are five basic time series patterns of
demand
 Horizontal

 Trend

 Seasonal

 Cyclical

 Random

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Demand Patterns
Figure 13.1 – Patterns of Demand
Quantity

Time

(a) Horizontal: Data cluster about a horizontal line

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Demand Patterns
Figure 13.1 – Patterns of Demand
Quantity

Time

(b) Trend: Data consistently increase or decrease

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Demand Patterns
Figure 13.1 – Patterns of Demand

Year 1
Quantity

Year 2

| | | | | | | | | | | |
J F M A M J J A S O N D
Months

(c) Seasonal: Data consistently show peaks and valleys

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Demand Patterns
Figure 13.1 – Patterns of Demand
Quantity

| | | | | |
1 2 3 4 5 6
Years
(d) Cyclical: Data reveal gradual increases and
decreases over extended periods

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Forecasting Technique

 Choosing the type of forecasting technique

 Judgment and qualitative methods
 Causal methods
 Time-series analysis

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Judgmental Forecasts
 Useful when no historical data are available
 Can be used to develop long-range forecasts and
technological forecasting
 Executive opinions: Executive opinion is a method in
which opinions, experience, and technical knowledge of one
or more managers are summarized to arrive at a single
forecast
 Market research: is a systematic approach used to
determine external customer interest through data-gathering
surveys
 Sales force opinions
 Consumer surveys
 Delphi method: is a process of gaining consensus from a
group of experts while maintaining their anonymity

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Time Series Methods

 In a naive forecast the forecast for the next

period equals the demand for the current
period (Forecast = Dt)

 Estimating the average: simple moving

averages
 Used to estimate the average of a demand time
series and thereby remove the effects of
random fluctuation
 Most useful when demand has no pronounced
trend or seasonal influences
 The stability of the demand series generally
determines how many periods to include

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Time Series Methods

450 –

430 –
Patient arrivals

410 –

390 –

370 –

350 –

| | | | | |
0 5 10 15 20 25 30
Week
Figure 13.4 – Weekly Patient Arrivals at a Medical Clinic

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Simple Moving Averages

 Specifically, the forecast for period t + 1 can be

calculated at the end of period t (after the actual
demand for period t is known) as

Sum of last n demands Dt + Dt-1 + Dt-2 + … + Dt-n+1

Ft+1 = =
n n

where
Dt = actual demand in period t
n = total number of periods in the average
Ft+1 = forecast for period t + 1

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Simple Moving Averages

 For any forecasting method, it is important to

measure the accuracy of its forecasts. Forecast
error is simply the difference found by subtracting
the forecast from actual demand for a given
period, or

E t = Dt – F t

where
Et = forecast error for period t
Dt = actual demand in period t
Ft = forecast for period t

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Using the Moving Average Method
EXAMPLE 13.2
a. Compute a three-week moving average forecast for the
arrival of medical clinic patients in week 4. The numbers of
arrivals for the past three weeks were as follows:

Week Patient Arrivals

1 400
2 380
3 411

b. If the actual number of patient arrivals in week 4 is 415,

what is the forecast error for week 4?
c. What is the forecast for week 5?

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Using the Moving Average Method
Week Patient Arrivals
SOLUTION
1 400
a. The moving average forecast at 2 380
the end of week 3 is 3 411

411 + 380 + 400

F4 = = 397.0
3

b. The forecast error for week 4 is

E4 = D4 – F4 = 415 – 397 = 18

c. The forecast for week 5 requires the actual arrivals from

weeks 2 through 4, the three most recent weeks of data

380 + 411 + 415

F5 = = 402.0
3

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Application 13.1a
Estimate Simple Moving Average using the following customer-
arrival data

Month Customer arrival

1 800
2 740
3 810
4 790

Use a three-month moving average to forecast customer

arrivals for month 5

D4 + D3 + D2 790 + 810 + 740

F5 = = = 780
3 3

Forecast for month 5 is 780 customer arrivals

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Application 13.1a
If the actual number of arrivals in month 5 is 805, what is the
forecast for month 6?

Month Customer arrival

1 800
2 740
3 810
4 790

D5 + D4 + D3 805 + 790 + 810

F6 = = = 801.667
3 3

Forecast for month 6 is 802 customer arrivals

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Application 13.1a
Forecast error is simply the difference found by subtracting the
forecast from actual demand for a given period, or

Et = Dt – Ft

Given the three-month moving average forecast for month 5,

and the number of patients that actually arrived (805), what is
the forecast error?

E5 = 805 – 780 = 25

Forecast error for month 5 is 25

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Weighted Moving Averages

In the weighted moving average method, each

historical demand in the average can have its own
weight, provided that the sum of the weights equals
1.0. The average is obtained by multiplying the
weight of each period by the actual demand for that
period, and then adding the products together:
Ft+1 = W1D1 + W2D2 + … + WnDt-n+1

A three-period weighted moving average model with

the most recent period weight of 0.50, the second
most recent weight of 0.30, and the third most
recent might be weight of 0.20

Ft+1 = 0.50Dt + 0.30Dt–1 + 0.20Dt–2

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Application 13.1b
Revisiting the customer arrival data in Application 13.1a. Let
W1 = 0.50, W2 = 0.30, and W3 = 0.20. Use the weighted moving
average method to forecast arrivals for month 5.

F5 = W1D4 + W2D3 + W3D2

= 0.50(790) + 0.30(810) + 0.20(740) = 786

Forecast for month 5 is 786 customer arrivals

Given the number of patients that actually arrived (805), what

is the forecast error?

E5 = 805 – 786 = 19

Forecast error for month 5 is 19

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Application 13.1b
If the actual number of arrivals in month 5 is 805, compute
the forecast for month 6

F6 = W1D5 + W2D4 + W3D3

= 0.50(805) + 0.30(790) + 0.20(810) = 801.5

Forecast for month 6 is 802 customer arrivals

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Exponential Smoothing

 A sophisticated weighted moving average that

calculates the average of a time series by giving
recent demands more weight than earlier demands
 Requires only three items of data
 The last period’s forecast
 The demand for this period
 A smoothing parameter, alpha (α), where 0 ≤ α ≤ 1.0
 The equation for the forecast is
Ft+1 = α(Demand this period) + (1 – α)(Forecast calculated last period)
= αDt + (1 – α)Ft
or the equivalent
Ft+1 = Ft + α(Dt – Ft)

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Exponential Smoothing

 The emphasis given to the most recent demand

levels can be adjusted by changing the smoothing
parameter
 Larger α values emphasize recent levels of
demand and result in forecasts more responsive
to changes in the underlying average
 Smaller α values treat past demand more
uniformly and result in more stable forecasts
 Exponential smoothing is simple and requires
minimal data
 When the underlying average is changing, results
will lag actual changes

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Using Exponential Smoothing
EXAMPLE 13.3
a. Reconsider the patient arrival data in Example 13.2. It is
now the end of week 3. Using α = 0.10, calculate the
exponential smoothing forecast for week 4.
b. What was the forecast error for week 4 if the actual demand
turned out to be 415?
c. What is the forecast for week 5?

Week Patient Arrivals

1 400
2 380
3 411
4 415

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Using Exponential Smoothing
SOLUTION
a. The exponential smoothing method requires an initial
forecast. Suppose that we take the demand data for the first
two weeks and average them, obtaining (400 + 380)/2 = 390
as an initial forecast. (POM for Windows and OM Explorer
simply use the actual demand for the first week as a default
setting for the initial forecast for period 1, and do not begin
tracking forecast errors until the second period). To obtain
the forecast for week 4, using exponential smoothing with
and the initial forecast of 390, we calculate the average at
the end of week 3 as

F4 = 0.10(411) + 0.90(390) = 392.1

Thus, the forecast for week 4 would be 392 patients.

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Using Exponential Smoothing
b. The forecast error for week 4 is

E4 = 415 – 392 = 23

c. The new forecast for week 5 would be

F5 = 0.10(415) + 0.90(392.1) = 394.4

or 394 patients. Note that we used F4, not the integer-value

forecast for week 4, in the computation for F5. In general, we
round off (when it is appropriate) only the final result to
maintain as much accuracy as possible in the calculations.

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Application 13.1c
Suppose the value of the customer arrival series average in
month 3 was 783 customers (let it be F4). Use exponential
smoothing with α = 0.20 to compute the forecast for month 5.

Ft+1 = Ft + α(Dt – Ft) = 783 + 0.20(790 – 783) = 784.4

Forecast for month 5 is 784 customer arrivals

Given the number of patients that actually arrived (805),

what is the forecast error?

E5 = 805 – 784 = 21

Forecast error for month 5 is 21

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Application 13.1c

Given the actual number of arrivals in month 5, what is the

forecast for month 6?

Ft+1 = Ft + α(Dt – Ft) = 784.4 + 0.20(805 – 784.4) = 788.52

Forecast for month 6 is 789 customer arrivals

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Forecast Error: Choosing a Time-
Series Method
 Forecast performance is determined by
forecast errors
 Forecast errors detect when something is
going wrong with the forecasting system
 Forecast errors can be classified as either bias
errors or random errors
 Bias errors are the result of consistent
mistakes
 Random error results from unpredictable
factors that cause the forecast to deviate from
the actual demand

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Measures of Forecast Error

(Et – E )2
CFE = Et =
n–1

CFE |Et |
E= n MAD =
n

Et2 (|Et |/ Dt)(100)

MSE = n MAPE = n

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Calculating Forecast Errors
EXAMPLE 13.6
The following table shows the actual sales of upholstered
chairs for a furniture manufacturer and the forecasts made for
each of the last eight months. Calculate CFE, MSE, σ, MAD, and
MAPE for this product.

Month Demand Forecast Error Error2 Absolute Absolute % Error (|

t Dt Ft Et Et2 Error |Et| Et|/Dt)(100)
1 200 225 – 625 25
25 12.5%
2 240 220 20 400 20 8.3
3 300 285 15 225 15 5.0
4 270 290 – 400 20 7.4
20
5 230 250 – 400 20 8.7
20
6 260 240 20 400 20 7.7
7 210 250 40 1,600 40 19.0
8 275 240 35 1,225 35 12.7
Total
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Calculating Forecast Errors
SOLUTION
Using the formulas for the measures, we get
Cumulative forecast error (bias):

CFE = –15

Average forecast error (mean bias):

CFE
E = n = –1.875

Mean squared error:

Et2 5,275
MSE = =
n 8

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Calculating Forecast Errors
Standard deviation:

= [Et – (–1.875)]2 = 27.4

n–1

Mean absolute deviation:

|Et | 195
MAD = n = = 24.4
8

Mean absolute percent error:

(|Et |/ Dt)(100) 81.3%

MAPE = = = 10.2%
n 8

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Solved Problem 2
The Polish General’s Pizza Parlor is a small restaurant catering
to patrons with a taste for European pizza. One of its
specialties is Polish Prize pizza. The manager must forecast
weekly demand for these special pizzas so that he can order
pizza shells weekly. Recently, demand has been as follows:

Week Pizzas Week Pizzas

June 2 50 June 23 56
June 9 65 June 30 55
June 16 52 July 7 60

a. Forecast the demand for pizza for June 23 to July 14 by

using the simple moving average method with n = 3 then
using the weighted moving average method with and
weights of 0.50, 0.30, and 0.20, with 0.50.
b. Calculate the MAD for each method.

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Solved Problem 2
SOLUTION
a. The simple moving average method and the weighted
moving average method give the following results:

Current Simple Moving Average Weighted Moving Average Forecast

Week Forecast for Next Week for Next Week
52 + 65 + 50 [(0.5  52) + (0.3  65) + (0.2  50)] = 55.5 or 56
June 16 = 55.7 or 56
3
56 + 52 + 65
June 23 = 57.7 or 58 [(0.5  56) + (0.3  52) + (0.2  65)] = 56.6 or 57
3
55 + 56 + 52
June 30 = 54.3 or 54 [(0.5  55) + (0.3  56) + (0.2  52)] = 54.7 or 55
3
60 + 55 + 56
July 7 = 57.0 or 57 [(0.5  60) + (0.3  55) + (0.2  56)] = 57.7 or 58
3

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Solved Problem 2
b. The mean absolute deviation is calculated as follows:

Simple Moving Average Weighted Moving Average

Actual Forecast for Forecast for

Week Demand This Week Absolute Errors |Et| This Week Absolute Errors |Et|
June 23 56 56 |56 – 56| = 0 56 |56 – 56| = 0
June 30 55 58 |55 – 58| = 3 57 |55 – 57| = 2
July 7 60 54 |60 – 54| = 6 55 |60 – 55| = 5

0+3+6 0+2+2
MAD = =3 MAD = = 2.3
3 3

For this limited set of data, the weighted moving average

method resulted in a slightly lower mean absolute deviation.
However, final conclusions can be made only after analyzing
much more data.

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Solved Problem 3
The monthly demand for units manufactured by the Acme
Rocket Company has been as follows:
Month Units Month Units
May 100 September 105
June 80 October 110
July 110 November 125
August 115 December 120

a. Use the exponential smoothing method to forecast June to

January. The initial forecast for May was 105 units; α = 0.2.
b. Calculate the absolute percentage error for each month
from June through December and the MAD and MAPE of
forecast error as of the end of December.

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Solved Problem 3
SOLUTION
a.

Calculating Forecast for Next

Current Month, t Month Ft+1 = αDt + (1 – α)Ft Forecast for Month t + 1
May 0.2(100) + 0.8(105) = 104.0 or 104 June
June 0.2(80) + 0.8(104.0) = 99.2 or 99 July
July 0.2(110) + 0.8(99.2) = 101.4 or 101 August
August 0.2(115) + 0.8(101.4) = 104.1 or 104 September
September 0.2(105) + 0.8(104.1) = 104.3 or 104 October
October 0.2(110) + 0.8(104.3) = 105.4 or 105 November
November 0.2(125) + 0.8(105.4) = 109.3 or 109 December
December 0.2(120) + 0.8(109.3) = 111.4 or 111 January

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Solved Problem 3
b.
Absolute
Actual Percent
Demand, Forecast, Error, Absolute Error, (|
Month, t Dt Ft Et = Dt – Ft Error, |Et| Et|/Dt)(100)
June 80 104 –24 24 30.0%
July 110 99 11 11 10.0
August 115 101 14 14 12.0
September 105 104 1 1 1.0
October 110 104 6 6 5.5
November 125 105 20 20 16.0
December 120 109 11 11 9.2
Total 765 39 87 83.7%

|Et | 87 (|Et |/Dt)(100) 83.7%

MAD = n = = 12.4 MAPE = n = = 11.96%
7 7

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