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MITSloan
Costs of Forecasting
Store Mark-Downs
% of Dollar Sales
26%
22%
18%
14%
10%
6%
1970
1975
1980
1985
1990
Source: Fisher, Marshall L. et al. Making Supply Meet Demand in an Uncertain World. Boston, MA:
Harvard Business Review, 1994. Reprint No. 94302. and National Retail Federation
MITSloan
Forecasting Basics
Basic Taxonomy
Qualitative
(subjective)
Expertise Based
Delphi Method
The Sage
Sales Force
Customer Surveys
Long Term
Complex Scenarios
Quantitative
(objective)
Causal Models
MITSloan
Causal Models
MITSloan
MITSloan
Random
Trend
Seasonality
No Pattern
Cyclic
Ft = a n Dt n
n =1
Stationary Series
Moving Averages
&
Exponential Smoothing
MITSloan
Moving Averages
Dt 1 + Dt 1 + ... + Dt N
1 N
Ft = Dt n =
N
N n =1
a i = N1 for i < N , a i = 0 elsewhere
Exponential Smoothing
Ft = a Dt 1 + (1 a ) Ft 1
= Ft 1 a (Ft 1 Dt 1 )
= Ft 1 a et 1
Small a Stability up
Large a Responsiveness up
MITSloan
Commonalities
Stationary Process
1 Parameter (a or N)
Lag behind Trend
Differences
Last Forecast *
Demand
MITSloan
Trends
Exponential Smoothing with
Linear Trend
Regression Analysis
MITSloan
St = a Dt + (1 a ) [St 1 + Gt 1 ]
= Ft
Gt = b (St St 1 ) + (1 b ) Gt 1
Ft + = St + Gt
Regression Analysis
Sum of Least Squares
Min Sum of
Y
a0
Y = a0 + a1*X
X
MITSloan
Regression in Excel
MITSloan
Trend Tool
=Trend(y-range,x-range,x-value)
Output: Trend Estimate for x-value
Y-range: Observed Data (Demand)
X-range: Independent Variable (Time)
X-value: Value (Date) for which to
estimate Y (Demand)
MITSloan
Regression
MITSloan
Seasonal Patterns
Basic Idea:
Caution:
Error Measures
1
n
F D
t
i =1
Bias
1
n
F D
t
i =1
1
n
(F D )
i =1
MITSloan
MITSloan
Demand
Product
Development
Steady
State
Introduction
Growth
Decline
Time
Product Development
Development Effort
Market Entry
Product Specs
Product Introduction
facility size
supply chain design
Analysis
delphi / expert
Comparisons
QFD
Analysis
market tests
consumer survey
life cycle analysis
MITSloan
Growth
capacity expansion
statistical tech
production planning
promotions
Steady State
production planning
inventory models
Analysis
Causal Models
Simulation
Analysis
time series
causal models
MITSloan
Next Week
Monday
Voluntary Lead-Offs
Download Inventory Problems from
SloanSpace in Handouts folder
MITSloan
Sales
OBSERVED
ACTUAL
Feb
Apr
Jun
Aug
Oct
Dec
MITSloan
Demand
Random Patterns
Time
MITSloan
Demand
Time
MITSloan
Demand
Time
MITSloan
Demand
Time
MITSloan