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Chapter 15. Demand Management and Forecasting. Learning Objectives. Understand the role of forecasting as a basis for supply chain planning. Compare the differences between independent and dependent demand.

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## Chapter 15

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**Chapter 15**Demand Management and Forecasting**Learning Objectives**• Understand the role of forecasting as a basis for supply chain planning. • Compare the differences between independent and dependent demand. • Identify the basic components of independent demand: average, trend, seasonal, and random variation. • Show how to make a time series forecast using moving averages and exponential smoothing.**Demand Management**• The purpose of demand management is to coordinate and control all sources of demand • Two basic sources of demand • Dependent demand: the demand for a product or service caused by the demand for other products or services • Independent demand: the demand for a product or service that cannot be derived directly from that of other products LO 2**Demand Management Continued**• Not much a firm can do about dependent demand • It is demand that must be met • There is a lot a firm can do about independent demand • Take an active role to influence demand • Take a passive role and respond to demand LO 1**Types of Forecasts**• Time series analysis is based on the idea that data relating to past demand can be used to predict future demand • Components of demand • Average demand for a period of time • Trend • Seasonal element • Cyclical elements • Random variation LO 3**Simple Moving Average Formula**• The simple moving average model assumes an average is a good estimator of future behavior • The formula for the simple moving average is: Ft = Forecast for the coming period N = Number of periods to be averaged A t-1 = Actual occurrence in the past period for up to “n” periods If N=1 we have the “naïve forecast” – the forecast equals the current period’s actual LO 4**Simple Moving Average Problem (1)**Question: What are the 3-week and 6-week moving average forecasts for demand? Assume you only have 3 weeks and 6 weeks of actual demand data for the respective forecasts LO 4**8**F4=(650+678+720)/3 =682.67 F7=(650+678+720 +785+859+920)/6 =768.67 Calculating the moving averages gives us: LO 4 • The McGraw-Hill Companies, Inc., 2004**Plotting the moving averages and comparing them shows how**the lines smooth out to reveal the overall upward trend in this example Note how the 3-Week is smoother than the Demand, and 6-Week is even smoother LO 4**Simple Moving Average Problem (2) Data**Question: What is the 3 week moving average forecast for this data? Assume you only have 3 weeks and 5 weeks of actual demand data for the respective forecasts LO 4**F4=(820+775+680)/3**=758.33 F6=(820+775+680 +655+620)/5 =710.00 Simple Moving Average Problem (2) Solution LO 4**Exponential Smoothing Model**Ft = Ft-1 + a(At-1 - Ft-1) • Premise: The most recent observations might have the highest predictive value • Therefore, we should give more weight to the more recent time periods when forecasting LO 4**Exponential Smoothing Problem (1) Data**Question: Given the weekly demand data, what are the exponential smoothing forecasts for periods 2-10 using a=0.10 and a=0.60? Assume F1=D1 LO 4**Answer: The respective alphas columns denote the forecast**values. Note that you can only forecast one time period into the future. LO 4**Exponential Smoothing Problem (1) Plotting**Note how that the smaller alpha results in a smoother line in this example LO 4**Exponential Smoothing Problem (2) Data**Question: What are the exponential smoothing forecasts for periods 2-5 using a =0.5? Assume F1=D1 LO 4**F1=820+(0.5)(820-820)=820**F3=820+(0.5)(775-820)=797.75 Exponential Smoothing Problem (2) Solution LO 4**The MAD Statistic to Determine Forecasting Error**• The ideal MAD is zero which would mean there is no forecasting error • The larger the MAD, the less the accurate the resulting model LO 4**MAD Problem Data**Question: What is the MAD value given the forecast values in the table below? Month Sales Forecast 1 220 n/a 2 250 255 3 210 205 4 300 320 5 325 315 LO 4**Month**Sales Forecast Abs Error 1 220 n/a 2 250 255 5 3 210 205 5 4 300 320 20 5 325 315 10 40 MAD Problem Solution Note that by itself, the MAD only lets us know the mean error in a set of forecasts LO 4**MAPE**• Mean Absolute Percentage Error (MAPE) is another measure often used to evaluate forecasting accuracy A MAPE of under 8% is acceptable for most applications LO 4

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