PRODUCTION

PLANNING AND
CONTROL
(MEFB 433)
Dr. Weria Khaksar
Email: weria@uniten.edu.my
Room No. BN-03-08

2- DEMAND
FORECASTING

2- Demand Forecasting
Introduction:
Accounting:
product/process
ForecastsNew
are
a basic cost
input
estimates, cash management,
in
the
decision
making
Finance: Equipment needs, Amount of
processes
because
they
funding,
Human
Resource:
Hiring and Layoff
provide
information
on
activities,
FUTURE DEMAND.
Marketing: Pricing and Promotion, eWhy?
business strategies,
global competition
strategies,
Because
the
primary
goal
of
Operations: Scheduling, capacity planning,
the
production
planners
is
work assignments,
inventory
planning,
project management,

2- Demand Forecasting
Common Features in All
Forecasts:
1. They assume that the same
system that existed in the past,
will continue in the future.
2. Forecasts are not perfect and
actual results usually differ from
predicted values (ERROR).
3. Forecast of groups of items tend
to
be
more
accurate
than
individuals.
4. Forecast accuracy decreases as

2- Demand Forecasting
Elements of a Good Forecast:
The forecast should be:

1.Timely
2.Accurate
3.Reliable
4.Meaningful
5.Based on a simple and
understandable method
6.Cost-effective

2- Demand Forecasting
Steps in the Forecasting Process:
1. Determine
forecast.

the

purpose

of

the

2. Establish a time horizon.

3. Select a forecasting technique.
4. Obtain,
clean,
appropriate data.
5. Make the forecast.
6. Monitor the forecast.

and

analyze

2- Demand Forecasting
Forecast Accuracy:
Accuracy

of a forecast is minimizing the

forecast error.
Accuracy if one of the factors for
choosing a forecasting technique.
Forecast ERROR is the difference
between the actual and predicted
values:
Positive errors happen when forecast is
too low.
Negative errors happen when forecast
is too high.

2- Demand Forecasting
Forecast Accuracy:
Three

commonly
used
measures
for
summarizing historical errors are:
1. Mean Absolute Deviation (MAD): Average
absolute error
2. Mean Squared Error (MSE): Average of
squared errors
3. Mean absolute Percent Error (MAPE):
Average absolute percent error

2- Demand Forecasting
Forecast Accuracy:
Example: Compute MAD, MSE and MAPE for the
following data, showing actual and predicted
numbers of accounts serviced.
1

217

215

213

216

216

215

210

214

213

211

219

214

216

217

212

216

2- Demand Forecasting
Forecast Accuracy:
Example: Compute MAD, MSE and MAPE for the
following data, showing actual and predicted
numbers of accounts serviced.
1

217

215

0.92%

216

-3

1.41%

213

216

215

0.46%

210

214

-4

16

1.90%

213

211

0.94%

219

214

25

2.28%

216

217

-1

0.46%

212

216

-4

16

1.89%

-2

22

76

10.26%

2- Demand Forecasting
Forecast Accuracy:
Three

commonly
used
measures
summarizing historical errors are:

1. MAD: Weights all errors evenly.

2. MSE: Weights errors according to
their squared values.
3. MAPE: Weights errors according to
relative error.

for

2- Demand Forecasting
Approaches to Forecasting:
There are two general approaches:
QUALITATIVE APPROACHES: For subjective inputs,
which often oppose precise numerical description.
Permit inclusion of SOFT INFORMATION like human
factors, personal opinions and hunches. These
information are difficult or impossible to quantify.
QUANTITATIVE APPROACHES: Involve either the
projection of historical data or the development of
associative models. They use HARD DATA. Usually
avoid personal opinions.

IN PRACTISE, EITHER OR BOTH

APPROACHES MIGHT BE USED TO

2- Demand Forecasting
Common Forecast Techniques:
There are three classes of forecasting
techniques:

JUDGMENTAL FORECASTS
TIME-SERIES FORECAST
ASSOCIATIVE MODLS

2- Demand Forecasting
Common Forecast Techniques:
JUDGMENTAL FORECASTS
Available
approaches:
In these
approaches, forecasts rely solely on
judgment
Executive
andOpinion
opinion. For instance:
If the forecast is needed quickly.
Salesforce Opinion
If there are some unclear political or
Consumer
economical Surveys
conditions and new data is not
available yet.
Other Approaches: Delphi Method
Introduction of new products or redesign of
existing products or packaging where there
are no historical data.

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES FORECAST

A time series is a time-ordered

sequence of observations taken at
regular intervals (e.g., hourly, daily,
weekly, monthly, quarterly, annually).
Forecasting techniques based on timeseries data are made on the
assumption that future values of the
series can be estimated from past
values.

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES FORECAST
Irregul
Common
behaviors of time-series:
ar
variati
1. Trend
on
Trend
2. Seasonality
3. Cycles
Cycles
4. Irregular variations
5. Random variations
Seasonal
variations

90
89
88

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES

FORECAST: Naive Methods

A naive forecast uses a single

previous value of a time series as the
base of the forecast.
Examples:
- Stable series:
- Seasonal variations:
- Trend: +()

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES
FORECAST:
Averaging
Methods
These techniques smooth variations in the
data where there are a great amount of
random variations or White Noise.

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES

FORECAST:

Averaging

Methods
1. Moving Average Technique:
Example: Compute three and five moving averages
for the following data:
Period

Demand

42

40

43

40

41

Answer:

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES

FORECAST:

Averaging

Methods
2. Weighted Moving Average Technique:
Example: Compute a weighted average forecast
using a weight of 0.40 for the most recent period,
0.30 for the next most recent, 0.20 for the next,
and 0.10 for the next:
Period

Demand

42

40

43

40

41

Answer:

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES

FORECAST:

Averaging

Methods
3. Exponential Smoothing Technique:

2- Demand Forecasting
Common Forecast Techniques:
Example:

Compute the forecast for the following data using

exponential smoothing technique with and .
Actual
Period,
(t)

Demand

42

40

43

40

41

39

46

44

Forecast

Forecast

2- Demand Forecasting
Common Forecast Techniques:
Example:

Compute the forecast for the following data using

exponential smoothing technique with and .
Actual
Period,
(t)

Demand

Forecast

Forecast

42

40

42

42

43

41.8

41.2

40

41.92

41.92

41

41.73

41.15

39

41.66

41.09

46

41.39

40.25

44

41.85

42.55

45

42.07

43.13

10

38

42.35

43.88

11

40

41.92

41.53

41.73

40.92

12

2- Demand Forecasting
Common Forecast Techniques:
Example:

Compute the error performance

forecasting techniques using the following data:
Naive

Period
,t

Dema
nd

42

40

43

40

41

39

46

44

45

Forec
ast

Error

of

Two-Period
MA

Forec
ast

Error

these

three
ES

Forec
ast

Error

2- Demand Forecasting
Common Forecast Techniques:
Example:

Compute the error performance

forecasting techniques using the following data:
Naive

Forec
ast

of

these

Two-Period
MA

Error

Forec
ast

three
ES

Period
,t

Dema
nd

Error

42

40

42

-2

43

40

41

40

43

-3

41.5

-1.5

41.92

-1.92

41

40

41.5

-0.5

41.73

-0.73

39

41

-2

40.5

-1.5

41.66

-2.66

46

39

40

41.39

4.61

44

46

-2

42.5

1.5

41.85

2.15

45

44

45

42.07

2.93

Forec
ast

Error

42

-2

41.8

1.2

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES

FORECAST: Trend Methods

1. Linear Trend Technique:

Where

n=Number of periods and y=Value of the time series

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES FORECAST: Trend Methods
1. Linear Trend Technique: Example
Using the following data, determine the equation of the trend line and
predict for weeks 11 and 12.
800

Week
(t)

Unit Sales
(y)

700

724

720

728

740

742

758

750

770

10

775

780
760
740
Sales
720
700
680
660
0

6
Week

10

12

2- Demand Forecasting
Common Forecast Techniques:
TIME-SERIES FORECAST: Trend Methods
1. Linear Trend Technique: Example
Using the following data, determine the equation of the trend line and
predict for weeks 11 and 12.
Week
(t)

Unit Sales
(y)

ty

700

700

724

1448

720

2160

728

2912

740

3700

742

4452

758

5306

750

6000

770

6930

10

775

7750

7407

41358

800

780
760
740
Sales
720
700

789.52

680
660
0

6
Week

10

12

2- Demand Forecasting
Common Forecast Techniques:
Associative Forecasting Techniques:

Identification of related variables that

can be used to predict values of the
variable of interest.
The essence of associative techniques
is the development of an equation that
summarizes the effect of predictor
variables.
The primary method of analysis is
known as Regression.

2- Demand Forecasting
Common Forecast Techniques:
Associative Forecasting Techniques:

Linear Regression:
Obtain a equation of
a straight line that
Minimizes the sum of
squared vertical
Deviations of data
points from the line
(Least Squares Error)

2- Demand Forecasting
Common Forecast Techniques:
Associative

Forecasting Techniques:

Linear Regression:

2- Demand Forecasting
Common Forecast Techniques:
Associative

Forecasting Techniques:

Linear Regression:

Example: Based on the

following data about a company unit sales and
profits, obtain a regression line and predict profit
when sale is $10 million.

2- Demand Forecasting
Common Forecast Techniques:
Associative

Forecasting Techniques:

Linear Regression:
How accurate a prediction might be for
a linear regression line:
Standard Error of Estimates:

2- Demand Forecasting
Common Forecast Techniques:
Associative Forecasting Techniques:
Linear Regression:
Indicator: Uncontrollable variables that tend to lead
or precede changes in a variable of interest.
Condition for a valid indicator:
1. There should be a logical explanation for
the relations.
2. Movement of the indicator must precede
movement of the dependent variable.
3. A fairly high correlation should exist
between the two variables.

2- Demand Forecasting
Common Forecast Techniques:
Associative

Forecasting Techniques:

Linear Regression:
Correlation: Measures the strength and direction of
relationship between two variables.

Percentage of the changes in the dependent variable that can

be explained by the independent variable.

2- Demand Forecasting
Common Forecast Techniques:
Associative
Forecasting
Linear Regression

Techniques:

Example:60 Sales of new houses and three-month

lagged unemployment
are shown

in the following
50
table. Determine
if unemployment levels can be
40
used to predict demand for new houses and if so,
Unit Sold, Ya 30 predictive
derive
equation and explain the
20
relationship.
10
0
3

Level of Unemployment (%), x

10