Production and Operations Management Assignment On Demand Forecasting

Craig Patrick Williams BBA 6th Semester Amity Global Business School, Kolkata

Question 1. Write short notes on Delphi method and Market Survey. Answer 1. Market Survey: is a technique, where the market / consumer are surveyed to estimate the potential market through various techniques like direct survey, questionnaire, interview methods etc. Delphi Technique - the short coming of the expert opinion method is eliminated in the Delphi technique method. In this method, the experts are not invited for the discussion, instead the questions is prepared for which is indented and circulated to all experts. The responses of experts are collected and then the reasoning for their response will also be collected and then same such process is continued until the consensus is arrived at. The whole task is carried out by a person called Facilitator.

Question 2. Describe the Quantitative forecasting methods using suitable examples. Answer 2. Quantitative methods: These types of forecasting methods are based on mathematical (quantitative) models, and are objective in nature. They rely heavily on mathematical computations.

Quantitative Methods

Time-Series Models Time series models look at past patterns of data and attempt to predict the future based upon the underlying patterns contained within those data.

Associative Models Associative models (often called causal models) assume that the variable being forecasted is related to other variables in the environment. They try to project based upon those associations.

Time Series Models

Model Nave

Description Uses last periods actual value as a forecast

Simple Mean (Average)

Uses an average of all past data as a forecast Uses an average of a specified number of the most recent observations, with each observation receiving the same emphasis (weight) Uses an average of a specified number of the most recent observations, with each observation receiving a different emphasis (weight) A weighted average procedure with weights declining exponentially as data become older Technique that uses the least squares method to fit a straight line to the data A mechanism for adjusting the forecast to accommodate any seasonal patterns inherent in the data

Simple Moving Average

Weighted Moving Average

Exponential Smoothing

Trend Projection

Seasonal Indexes

Decomposition of a Time Series Patterns that may be present in a time series: Trend: Data exhibit a steady growth or decline over time. Seasonality: Data exhibit upward and downward swings in a short to intermediate time frame (most notably during a year). Cycles: Data exhibit upward and downward swings in over a very long time frame. Random variations: Erratic and unpredictable variation in the data over time with no discernable pattern.

Illustration of Time Series Decomposition

Hypothetical Pattern of Historical Demand Demand

Year 1

Year 2

Year 3

Time

Trend Component in Historical Demand

Demand

Time

Seasonal Component in Historical Demand

Demand

Year 1

Year 2

Year 3

Time

Cycle Component in Historical Demand

Demand

Many years or decades

Time

Random Component in Historical Demand

Demand

Time

Data set to Demonstrate Forecasting Methods The following data set represents a set of hypothetical demands that have occurred over several consecutive years. The data have been collected on a quarterly basis, and these quarterly values have been amalgamated into yearly totals. For various illustrations that follow, we may make slightly different assumptions about starting points to get the process started for different models. In most cases we will assume that each year a forecast has been made for the subsequent year. Then, after a year has transpired we will have observed what the actual demand turned out to be (and we will surely see differences between what we had forecasted and what actually occurred, for, after all, the forecasts are merely educated guesses). Finally, to keep the numbers at a manageable size, several zeros have been dropped off the numbers (i.e., these numbers represent demands in thousands of units).

Year 1 2 3 4 5 6

Quarter 1 62 73 79 83 89 94

Quarter 2 94 110 118 124 135 139

Quarter 3 113 130 140 146 161 162

Quarter 4 41 52 58 62 65 70

Total Annual Demand 310 365 395 415 450 465

Illustration of the Nave Method

Nave method: The forecast for next period (period t+1) will be equal to this period's actual demand (At). In this illustration we assume that each year (beginning with year 2) we made a forecast, then waited to see what demand unfolded during the year. We then made a forecast for the subsequent year, and so on right through to the forecast for year 7.

Year 1 2 3 4 5 6 7

Actual Demand (At) 310 365 395 415 450 465

Forecast (Ft) -310 365 395 415 450 465

Notes There was no prior demand data on which to base a forecast for period 1 From this point forward, these forecasts were made on a year-by-year basis.

Mean (Simple Average) Method

Mean (simple average) method: The forecast for next period (period t+1) will be equal to the average of all past historical demands. In this illustration we assume that a simple average method is being used. We will also assume that, in the absence of data at startup, we made a guess for the year 1 forecast (300). At the end of year 1 we could start using this forecasting method. In this illustration we assume that each year (beginning with year 2) we made a forecast, then waited to see what demand unfolded during the year. We then made a forecast for the subsequent year, and so on right through to the forecast for year 7.

Year 1

Actual Demand (At) 310

Forecast (Ft) 300

Notes This forecast was a guess at the beginning. From this point forward, these forecasts were made on a year-by-year basis using a simple average approach.

365

310.000

395

337.500

415

356.667

450

371.250

465

387.000

400.000

Simple Moving Average Method

Simple moving average method: The forecast for next period (period t+1) will be equal to the average of a specified number of the most recent observations, with each observation receiving the same emphasis (weight). In this illustration we assume that a 2-year simple moving average is being used. We will also assume that, in the absence of data at startup, we made a guess for the year 1 forecast (300). Then, after year 1 elapsed, we made a forecast for year 2 using a nave method (310). Beyond that point we had sufficient data to let our 2-year simple moving average forecasts unfold throughout the years.

Year 1

Actual Demand (At) 310

Forecast (Ft) 300

Notes This forecast was a guess at the beginning. This forecast was made using a nave approach. From this point forward, these forecasts were made on a year-by-year basis using a 2-yr moving average approach.

365

310

395

337.500

415

380.000

450

405.000

465

432.500

457.500

Another Simple Moving Average Illustration

In this illustration we assume that a 3-year simple moving average is being used. We will also assume that, in the absence of data at startup, we made a guess for the year 1 forecast (300). Then, after year 1 elapsed, we used a nave method to make a forecast for year 2 (310) and year 3 (365). Beyond that point we had sufficient data to let our 3-year simple moving average forecasts unfold throughout the years.

Year 1

Actual Demand (At) 310

Forecast (Ft) 300

Notes This forecast was a guess at the beginning. This forecast was made using a nave approach. This forecast was made using a nave approach. From this point forward, these forecasts were made on a year-by-year basis using a 3-yr moving average approach.

365

310

395

365

415

356.667

450

391.667

465

420.000

433.333

Weighted Moving Average Method

Weighted moving average method: The forecast for next period (period t+1) will be equal to a weighted average of a specified number of the most recent observations. In this illustration we assume that a 3-year weighted moving average is being used. We will also assume that, in the absence of data at startup, we made a guess for the year 1 forecast (300). Then, after year 1 elapsed, we used a nave method to make a forecast for year 2 (310) and year 3 (365). Beyond that point we had sufficient data to let our 3-year weighted moving average forecasts unfold throughout the years. The weights that were to be used are as follows: Most recent year, .5; year prior to that, .3; year prior to that, .2

Year 1 2 3 4 5 6 7

Actual Demand (At) 310 365 395 415 450 465

Forecast (Ft) 300 310 365 369.000 399.000 428.500 450.500

Notes This forecast was a guess at the beginning. This forecast was made using a nave approach. This forecast was made using a nave approach. From this point forward, these forecasts were made on a year-by-year basis using a 3-yr wtd. moving avg. approach.

Exponential Smoothing Method

Exponential smoothing method: The new forecast for next period (period t) will be calculated as follows: New forecast = Last periods forecast + (Last periods actual demand Last periods forecast) Ft = Ft-1 + (At-1 Ft-1) (equation 1) Ft = At-1 + (1-)Ft-1 (alternate equation 1 a bit more user friendly)

Where is a smoothing coefficient whose value is between 0 and 1.

The exponential smoothing method only requires that you dig up two pieces of data to apply it (the most recent actual demand and the most recent forecast). An attractive feature of this method is that forecasts made with this model will include a portion of every piece of historical demand. Furthermore, there will be different weights placed on these historical demand values, with older data receiving lower weights. At first glance this may not be obvious; however, this property is illustrated on the following page.

Exponential Smoothing Illustration In this illustration we assume that, in the absence of data at startup, we made a guess for the year 1 forecast (300). Then, for each subsequent year (beginning with year 2) we made a forecast using the exponential smoothing model. After the forecast was made, we waited to see what demand unfolded during the year. We then made a forecast for the subsequent year, and so on right through to the forecast for year 7.

This set of forecasts was made using an value of .1 Actual Demand Forecast Year (A) (F) 1 310 300

Notes

This was a guess, since there was no prior demand data. From this point forward, these forecasts were made on a year-by-year basis using exponential smoothing with =.1

365

301

395

307.4

415

316.16

450

326.044

465

338.4396

351.09564

A Second Exponential Smoothing Illustration

In this illustration we assume that, in the absence of data at startup, we made a guess for the year 1 forecast (300). Then, for each subsequent year (beginning with year 2) we made a forecast using the exponential smoothing model. After the forecast was made, we waited to see what demand unfolded during the year. We then made a forecast for the subsequent year, and so on right through to the forecast for year 7.

This set of forecasts was made using an value of .2 Actual Demand Forecast Year (A) (F) 1 310 300

Notes

This was a guess, since there was no prior demand data. From this point forward, these forecasts were made on a year-by-year basis using exponential smoothing with =.2

365

302

395

314.6

415

330.68

450

347.544

465

368.0352

387.42816

A Third Exponential Smoothing Illustration

In this illustration we assume that, in the absence of data at startup, we made a guess for the year 1 forecast (300). Then, for each subsequent year (beginning with year 2) we made a forecast using the exponential smoothing model. After the forecast was made, we waited to see what demand unfolded during the year. We then made a forecast for the subsequent year, and so on right through to the forecast for year 7.

This set of forecasts was made using an value of .4 Actual Demand Forecast Year (A) (F) 1 310 300

Notes

This was a guess, since there was no prior demand data. From this point forward, these forecasts were made on a year-by-year basis using exponential smoothing with =.4

365

304

395

328.4

415

355.04

450

379.024

465

407.4144

430.44864

Trend Projection Trend projection method: This method is a version of the linear regression technique. It attempts to draw a straight line through the historical data points in a fashion that comes as close to the points as possible. (Technically, the approach attempts to reduce the vertical deviations of the points from the trend line, and does this by minimizing the squared values of the deviations of the points from the line). Ultimately, the statistical formulas compute a slope for the trend line (b) and the point where the line crosses the y-axis (a). This results in the straight line equation Y = a + bX Where X represents the values on the horizontal axis (time), and Y represents the values on the vertical axis (demand). For the demonstration data, computations for b and a reveal the following b = 30 a = 295 Y = 295 + 30X This equation can be used to forecast for any year into the future. For example: Year 7: Forecast = 295 + 30(7) = 505 Year 8: Forecast = 295 + 30(8) = 535 Year 9: Forecast = 295 + 30(9) = 565 Year 10: Forecast = 295 + 30(10) = 595

Question 3. Write a short note on Exponential Smoothing or Regression Analysis. Answer 3. Exponential Smoothing: is a technique that can be applied to time series data, either to produce smoothed data for presentation, or to make forecasts. This is a very popular scheme to produce a smoothed Time Series. Whereas in Single Moving Averages the past observations are weighted equally, Exponential Smoothing assigns exponentially decreasing weights as the observation get older. In other words, recent observations are given relatively more weight in forecasting than the older observations. In the case of moving averages, the weights assigned to the observations are the same and are equal to 1/N. In exponential smoothing, however, there are one or more smoothing parameters to be determined (or estimated) and these choices determine the weights assigned to the observations. (Illustration done in Question 2.)

Question 4. Define Capacity Planning. Answer 4. Capacity planning: is a process, which is to be carried out after deciding the product and the long range demand for the product. Suppose if you produce custom made product, the demand is not estimated through the product but in terms of hours. Once if you know the long range demand, the effort needed to determine the amount of resources needed to meet the demand requirement is all about capacity planning. Capacity Measure Analyze the system into input, processing and output. When you analyze, see to that, where there is a less variability, choose that side and identify the product, process-resources, the input resources and attach time frame to provide the capacity measure. Measure of Capacity through output Consider an automobile mass production industry. You cant find much variation in the output side compared to the input resources and processing parts. So the number of cars/time is considered as the measure. Mostly in the case of mass production industry, the output side is considered to measure the capacity. Measure of the capacity through Input Consider an educational institution; here the output side is not taken into consideration because the number of outgoing students per time may vary depending upon the pass result. But the intake is always constant because the intake depends upon the government approved. So, the

capacity of educational institution is measured through the input, namely, the number of students intake. Measure of the capacity through processing Consider a sugarcane industry; the capacity of that industry is not measured in terms of the output and input. There is variability in terms of yield rate that means some times y tons of sugarcane may give x tons of sugar or sometimes same y may give more than or less than the x tons of sugar. Since variability is existing in both the input side and output side. Inputs and outputs are not considered for measuring the capacity. But in the processing side there is a less variability namely the crushing capacity or the number of tons of sugarcane could be crushed by the crushing machine is considered to be a best measure to measure the capacity of the sugarcane industry from the processing point of view. In summary, if you want to fix the measure for the capacity, then see the system as input, processing and output. Find where there is a less variability choose that side and correspondingly choose the product or the resources to estimate the measure. The table below provides some of the systems and their corresponding measure to measure the capacity. Table - Capacity planning involves three stages of planning. System Components of System considered for capacity measure Output Output Input per year Processing day Processing Unit of Measure

Automobile Industry Bottling Plant University Auto repair shop Restaurant

Number of Automobiles Gallons / Day Number of students intake Number of machines hour per Seating Capacity

Stage 1 involves resource planning this is considered to be long range planning. In the long range planning, mostly the type and amount of man power requirement, the capital equipment requirements are to be decided. Stage 2 is by considering the resource planning; the rough cut capacity planning is carried out. Stage 3 is capacity requirement planning this is lower level planning. This is carried out with the input of rough cut capacity planning.