Quantitative Business Analysis

Demand Planning and Forecasting Models

Dr. Emad Elwy Habib, FIATA, PGCHE, FHEA, PhD.

Associate Professor of Business Administration.
Member of the British Academy of Management (BAM ) U.K.
Faculty of Business Administration and International Trade
Misr International University (MIU).
Supply Chain and Operations Management program leader
Production Operations Management Expert and Trainer.
Supply Chain Management Expert and Trainer.
Fellow of Higher Education - Greenwich university - UK.
Middle Sex University Program U.K
Greenwich university Program UK.
Bedfordshire University Program UK
British University In Egypt
London South Bank University Program U.K.
Cardiff Metropolitan University Program U.K.
Hull University Program USA.
Operations Management
What is operations?
– The part of a business organization that is responsible for
producing goods and/or services
How can we define operations management?
– The management of systems or processes that create goods
and/or provide services.
Physical items produced
Involve the planning,
by business organizations.
coordination, and execution of
all activities that create goods
and services. Activities that provide some combination of
time, location, form, and psychological
value.
Supply & Demand

Operations & Supply

Chains Sales & Marketing

>
Wasteful
Supply Demand Costly

<
Opportunity Loss
Supply Demand Customer
Dissatisfaction

Supply
= Demand Ideal
What is Forecasting?
A statement about the future
Basis of Forecast I see that you will
accomplish the targeted
objectives
- History: projection techniques
- Causal relationships: Trend and
regression analysis.
- Opinions: e.g. executives, sales
force composite, consumer
survey, focus group, experts’
opinion (Delphi method)
Uses of Forecasts

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

Elements of a Good Forecast Technique
Components of Time Series
Irregular 2023
variation

Random
variations
Trend

2023

2022

2021
Seasonality
Revised from Figure 3-1
 Quantitative Approaches

1. Naive approach

time-series associative
2. Simple Average

models
3. Moving average
4. Weighted moving average
5. Exponential smoothing
6. Trend projection

models
7. Causal Relationship Regression.
8. Exponential Smoothing with trend
9. Seasonality and trend analysis
 Forecasting

2023 A(n)
2024 A(n)

F(n) F(n)

Jan. Dec. Jan. Dec.

Error = A(n)-F(n) Error = (A(n)-F(n)

 F(1) F(2)
Forecasting

2023 A(n-1)
2024 A(n)

F(n-1) F(n)

Jan. Dec. Jan. Dec.

Error = A(n-1)-F(n-1) Error = A(n)-F(n)

1. Naive Forecasts

Uh, give me a minute....

We sold 250 wheels last
week.... Now, next week we
should sell 250 + 10%
Uses for Naïve Forecasts
• Forecast = the latest actual
• Stable time series data Naïve Method with stable data:
Question: Can Naïve model handle
trend and seasonality?
Fn +1 =A n
F(5+1)=F(6) =A(5)=49

◼ Data with trend Naïve Method with Trend:

= A + (A − A )
◼ Seasonal variations
p = no. of periods (i.e. seasons) F n +1 n n n −1
in each cycle
n-p+1: the period of the same F(2021) = A(2020) + (A(2020) – A(2019))
season in the last cycle F(6) = 49 + (49) – (48)= 50
Naïve Method with Seasonality:
Period Demand
1 50 Fn +1 = An − p +1 F(S1) = A(S1)
2 51
3 49 Period Demand 1 Period Demand 2
4 48 S1 (2022) 50 F1 (2023) 50
5 49 S2 (2022) 51 F2 (2023) 51
6 49 S3 (2022) 49 F3 (2023) 49
6 (Fn+1) 49 + (49-48) = 50 S4 (2022) 48 F4 (2023) 48
 2. Simple Average
n
 Ai
Fn +1 = SAn = i =1 • Uses all data
n
• Potential Problems:
n = the latest period
– Misled by older data
no. of periods = n, if the
no longer relevant
first period =1
Period Demand 1 Demand 2 150 + 110 + 80 + 40 + 5
1 150 50 F6 = 5
= 77
2 110 51
3 80 49 50 + 51 + 49 + 48 + 49
4 40 48 F6 = 5
= 49.4
5 5 49
 n
3. Simple Moving Average  Ai
Fn +1 = MAn (m ) = i = n − m +1
Example 1 : m
Where:
Compute a three – period moving averaging i = An index that corresponds to
forecast given demand for shopping carts for the periods
last past periods. n = Number of periods (data
Period Age Demand points) in the moving average
1 5 42 (m) Ai = Actual value in period I
2 4 40 MA = Moving average
The base
3 3 43 Ft = Forecast for time period t
period is the
4 2 40
5 1 41 3 most recent 43 + 40 + 41
demands F = = 41.33
6 39 6
3
7 40
Solution : If actual demand in period (6) turns F7 = (40 + 41 + 41.33 ) / 3 = 40.77
out to be (39), the moving average forecast for
period (7) would be F7 = (40 + 41 + 39 ) / 3 = 40
 Time Demand
4. Weighted Moving Average
2014 50
For Months and seasons
2015 60
Steps :
2016 55
1. Find the moving average of the 2017 47
years time series.
2018 52
2. Find weights of months or seasons
2019 49
from the overall last year.
2020 45
3. Step1 * Step2 (m)
2021 57
2022 62 3 Years
Base
2023 65 Period
Sum 542
MA (2024) 65+62+57/3=
61.33333333

Seasons S1 S2 S3 S4
Months 1 2 3 4 5 6 7 8 9 10 11 12
Demand 2023 4.5 5.3 3.5 3.5 6.7 5.5 3.7 6.5 4.4 6.4 6.5 8.5
 Solution Steps :
1. Yearly Moving Average (MA) = 61.33333
2. Find weights of months or seasons from the overall year.
3. Step1 × Step2
Seasons S1 S2 S3 S4

Months 1 2 3 4 5 6 7 8 9 10 11 12
Demand 5.3/ 3.5/ 3.5/ 6.7/ 5.5/ 3.7/ 6.5/ 4.4/ 6.4/ 6.5/ 8.5/
4.5/ 65
2023 65 65 65 65 65 65 65 65 65 65 65
[Link] 0.08 0.05 0.05 0.10 0.08 0.05 0.10 0.06 0.09 0.10 0.13
0.069
Weights 2 4 4 3 5 7 0 8 8 0 0
3. F.
Months
4.23 5.1 3.3 3.3 6.32 5.21 3.5 6.13 4.2 6.01 6.13 8
Demand
2024
[Link] S1=4.5+5.3+3.5/65=0. S2=3.5+6.7+5.5/65= S3=3.7+6.5+4.4/65= S4=6.4+6.5+8.5/65=
Weights 205 0.242 0.225 0.329
3. F.
Seasons S1=0.205×61.333= S2=0.242×61.333= S3=0.225×61.333= S4=0.329×61.333=
Demand 12.573 14.843 13.799 20.1
2024
 5. Simple Exponential Smoothing :

Exponential smoothing is a sophisticated weighted averaging method that is still

relatively easy to use and understand. Each new forecast is based on the previous
forecast plus a percentage of the difference between that forecast and the actual
value of the series at that point. That is :
Next forecast = Previous forecast + ( Previous Actual – Previous forecast )
Where (Actual – Previous) represents the forecast error and (  ) is a percentage of the error.
More concisely,
Ft = Ft-1 + (At-1 – Ft-1 )
Where
Ft = Forecast for period t.
Ft-1 = Forecast for the previous period.
 = Smoothing constant.
At-1 = Actual demand or sales for the previous period.
The smoothing constant a represents a percentage of the forecast error.
Exponential Average
Growth/Declination Rate = (New Demand – Old Demand / Old Demand ) * 100 =
Current demand – previous demand / previous demand ×100 =

Fn +1 = Fn +  ( An − Fn ) • Considers all data

• Weights the most recent data the
Intuitively: most
New Forecast = • Recursive, needs a starting
forecast and α.
Old Forecast + A Portion of Error
• Adaptive, i.e. constantly making
< ± 10% adjustment based on past errors

= ± 10%- < ± 20%

= ± 20%- < ± 25%
α
= ± 25%- < ± 40%

≥ ± 40%
Exponential Smoothing

◆ Form of weighted moving average

◆ Weights decline exponentially
◆ Most recent data weighted most
◆ Requires smoothing constant ()
◆ Ranges from 0 to 1
◆ Subjectively chosen
◆ Involves little record keeping of past data
 Exponential Smoothing

New forecast = Last period’s forecast

+  (Last period’s actual demand
– Last period’s forecast)

Ft = Ft – 1 + (At – 1 - Ft – 1)
where Ft = new forecast
Ft – 1 = previous forecast
 = smoothing (or weighting)
constant (0 ≤  ≤ 1)

Growth/Declination Rate = (New Demand – Old Demand / Old

Demand ) * 100 =
Current demand – previous demand / previous demand ×100 =
 Logistics Management System 21

Exponential Smoothing Example

Predicted demand Ft – 1 = 142

Actual demand At – 1 = 153
Smoothing constant  = + 0.20

[Link]
 Logistics Management System 22

Exponential Smoothing Example

Predicted demand Ft – 1 = 142

Actual demand At – 1 = 153
Smoothing constant  = + 0.20
Ft = Ft – 1 + (At – 1 - Ft – 1)
New forecast = 142 + 0.2(153 – 142)

[Link]
 Logistics Management System 23

Exponential Smoothing Example

Predicted demand Ft – 1 = 142

Actual demand At – 1 = 153
Smoothing constant  = + 0.20
New forecast = 142 + 0.2(153 – 142)
= 142 + 2.2
= 144.2 ≈ 144 cars
New forecast = 153 + 0.2(153 – 142)
= 153 + 2.2
= 155.2 ≈ 156 [Link]
• Each new forecast is equal to the previous forecast plus a
percentage of the previous error.
• For example, suppose the previous forecast ( Month 10) was (42) units,
Previous actual demand was (40) units, and ( ) = + 0.10. the new forecast
would be computed as follows :
• Growth/Declination Rate = (new – old / old ) × 100 =
• Current demand – previous demand / previous demand ×100 =
Ft=11 = 42 + 0.10 (40 – 42 ) = 41.8
• Then, if the actual demand for (Month 11) turns out to be (43), the next
forecast would be : Ft=12 = 41.8 + 0.10 (43 – 41.8 ) = 41.92
• Example 3 :
The following table illustrates two series of forecasts for a data set, and
the resulting (Actual – Forecast ) = Error, for each period.
One forecast uses =0.10 and one uses =0.40 . the following figure plots
the actual data and both sets of forecasts.


Period (t)
Actual  =0.10  = 0.40
Demand Forecast Error Forecast Error
1 42 - - - -
2 40 42 -2 42 -2
3 43 41.8 1.2 41.2 1.8
4 40 41.92 -1.92 41.92 -1.92
5 41 41.73 -0.73 41.15 -0.15
6 39 41.66 -2.66 41.09 -2.09
7 46 41.39 4.61 40.25 5.75
8 44 40.85 2.15 48.55 1.45
9 45 42.07 2.93 43.13 1.87
10 38 42.35 -4.35 43.88 -5.88
11 40 41.92 -1.92 41.53 -1.53
12 41.73 40.92


Period (t)
Actual  =0.10  = 0.40
Demand Forecast Error Forecast Error
1 42 - - - -
2 40 42 -2 42 -2
3 43 41.8 1.2 41.2 1.8
4 40 41.92 -1.92 41.92 -1.92
5 41 41.73 -0.73 41.15 -0.15
6 39 41.66 -2.66 41.09 -2.09
7 46 41.39 4.61 40.25 5.75
8 44 41.85 2.15 42.55 1.45
9 45 42.07 2.93 43.13 1.87
10 38 42.35 -4.35 43.88 -5.88
11 40 41.92 -1.92 41.53 -1.53
12 41.73 -0.27 40.92 -0.27
Max +2.474 +2.471
6. Linear Trend

• Trend Adjusted Forecasting Model

– Exponential average based
– Two exponential average models
• one to estimate the current underlying demand level
for the current level
• one to estimate the increment of the demand level
Linear Trend Equation

Yt = a + bt where, 180
160
140
Y = Dependent variable (Demand 120

forecasting) 100 Actual

80 Trend
60
t=Independent Variable 40
20
a= Constant of the equation ( min. 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
number of demanded Items)
b= slope change in the dependent
Question: How to forecast using
variable (Δy) to the change in the
Linear Trend Equation?
independent variable (Δ t)
b= Δy/ Δt. Fn + i = Yn + i = a + b(n + i )
n (tYt ) −  t  Yt
b=
n t 2 − ( t )
2
a=
 Yt − b t
n
Linear Trend Equation

180
160
140
120
100 Actual
80 Trend
60
Underlying
Demand
a 40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

b (slope)
b= Δy/ Δt.
Linear Trend Equation

• Easy to use: a built-in

function in spreadsheet Yt Deviation
software
• Based on Least Squares
method used in linear
regression, which
– Minimizes the sum of the
squares of the deviations
– Uses equal weight for all At
time periods
• Both a and b must be
recalculated on regular basis
to include new data.
Linear Trend Equation Example

Period (t) Demand (Yt) t*Yt t^2 Exercise: Calculate b and a by

1 67 67 1 using the sums on the left.
2
3
74
102
148
306
4
9
Yt = a + bt
4 87 346 16
n (tYt ) −  t  Yt
5 106 530 25 b=
n t 2 − ( t )
6 86 516 36 2
7 117 817 49
10(5958) − 55(996 )
8 113 904 64
= = 5.79
9 130 1168 81 10(385) − (55)2
10 116 1156 100
55 996 5958 385
a=
 Yt − b t
n
t  Yt  tYt t
2
996 − 5.79(55)
= = 67.78
10
Y11= a + b (11) = 67.78 + 5.79 (11)= 131.47
Linear Trend Equation Example

Period (t) Demand (Yt) t*Yt t^2

Exercise: Calculate b and a
1 67 67 1
2 74 148 4
again by adding the new figures
3 102 306 9 using the new sums on the left.
4
5
87
106
346
530
16
25
Yt = a + bt
6 86 516 36 n (tYt ) −  t  Yt
b=
n t 2 − ( t )
7 117 817 49
2
8 113 904 64

10(5958) − 55(996 )
9 130 1168 81
10 116 1156 100 = = 5.79
11 131 1446 121 10(385) − (55) 2
55
66
996
1128
5958
7404
385
506 a=
 Yt − b t
t  Yt t n
2
 tYt 996 − 5.79(55)
= = 67.78
Y12 = a+ b (12) = 69.5 +5.5 (12)= 135.5 10
Trend Adjusted Forecasting

180
160
140
120
100 Actual
80 Trend
60
40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Causal Models

• Often, leading indicators can help to predict

changes in future demand e.g. housing starts
• Causal models establish a cause-and-effect
relationship between independent and dependent
variables
• A common tool of causal modeling is linear
regression: Y = a + bx
• Additional related variables may require multiple
regression modeling
 n (tYLogistics
t ) −  t  Yt  Yt − b t
Management System 35
b= a=
n t − ( t )
2 2 n
7. Linear Regression 996 − 5.79(55)
10(5958) − 55(996) = =
= = 5.79 10
10(385) − (55)2

• Identify dependent (y) and

independent (x) variables
b=
 XY − ((X ) Y ) • Solve for the slope of the
 X 2 − ((X ) X )
line

• Solve for the y intercept

• a=(Ʃy – bƩx)/n
• Develop your equation for
the trend line
Y=a + bx
[Link]
 Linear Regression Problem: A maker of golf shirts has been
tracking the relationship between sales and advertising dollars. Use
linear regression to find out what sales might be if the company
invested $53,000 in advertising next year. (65,000$)

Sales $ Adv.$ XY X^2 Y^2

(Y) (X) a=(Ʃy – bƩx)/n
1 130 32 4160 2304 16,900
4(28202) − (𝟏𝟖𝟗)(𝟓𝟖𝟗)
2 151 52 7852 2704 22,801 𝐛= = 1.15
4(9253) − 189 𝟐
3 150 50 7500 2500 22,500
a =(Ʃy – bƩx)/n
4 158 55 8690 3025 24964 a=(589) – 1.15(189)/4 = 92.9

5 153.85 53
𝐘(𝟓) = 𝐚 + bX = 92.9 + 1.15X
Tot 589 189 28202 9253 87165 𝐘 = 92.9 + 1.15 53 = 153.85
Y(6)=92.9+1.15(65)=167.66
6
Avg 147.25 47.25
Correlation Coefficient

◼ Correlation
◼ A measure of the strength and direction of relationship between two
variables
◼ Ranges between -1.00 and +1.00
◼ r2, square of the correlation coefficient
◼ A measure of the percentage of variability in the values of y that is
“explained” by the independent variable
◼ Ranges between 0 and 1.00

 
r 2

=
( xy)− ( x )( y )
n 

n ( x )− ( x ) n ( y )− ( y )
2 2
 2 2 
 
Correlation Coefficient
How Good is the Fit?

• Correlation coefficient (r) measures the direction and strength of the linear
relationship between two variables. The closer the r value is to 1.0 the
better the regression line fits the data points.

𝐧 σ XY − σ 𝐗 σ 𝐘
𝐫=
𝐧 σ 𝐗 𝟐 − σ 𝐗 𝟐 ∗ 𝐧 σ 𝐘 𝟐 − σ𝐘 𝟐

𝟒 28,202 − 189 589

𝐫=
𝟒(9253) − (189) 𝟐 ∗ 𝟒 87,165 − 589 𝟐

= 0.982×100= 98.2%
𝐫 𝟐 = 𝟎.982 𝟐 = 0.964×100= 96.4%

• Coefficient of determinationr 2( ) measures the amount of variation in the

dependent variable about its mean that is explained by the regression line.
Values of (r 2 ) close to 1.0 are desirable.
Forecast Accuracy

• The importance of appropriate evaluation

criteria
– Different criteria may lead to totally
different conclusions.
– Evaluation criteria must be designed to
reveal the problems in the model.
Forecast Accuracy

Major Forecasting Problems

• Are forecasts over/understated? Bias
• How far off are forecasts from ▪ Whether forecasts are
actual? generally overstated or
understated.
▪ Question: If measured by
avg. error, what is the sign
120
of bias when forecasts are
100 overstated?
80

60
Forecast Errort = At − Ft
40
Actual
 ( At − Ft )
20
Avg Error =
0 n
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Forecast Accuracy

Major Forecasting Problems Question: What

is the bias of this
• Are forecasts forecast model If
over/understated? measured by
avg. error?
• How far off are forecasts from
actual?
120 Question: What
would you
100
recommend for
80 this situation?
60
Forecast
40
Actual
20

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Forecast Accuracy

• Mean Absolute Deviation

MAD =
 At − Ft
(MAD) n
– Average “distance”
• Mean squared error (MSE) (
 t t
A − F )2
MSE =
– Similar to average of n −1
squared error
( At − Ft )
• Mean Absolute Percent Error  At
(MAPE) MAPE = 100%
- Relative to volume n
Forecast Accuracy

• Tracking Signal (TS) AvgError

Tracking Signal =
– Ratio of average error MAD
to-date and MAD to-
date
– -1 ≤ TS ≤ 1
 = Tracking Signal
– May be used to
determine the value of
smoothing constants Question: If TS is approaching –1,
what does that tell us about the model?
such as  & 
dynamically Question: Under what condition TS =
1? TS = -1?
•Applied Example:

•During the past 8 quarters, the Port of Baltimore has unloaded

large quantities of grain from ships. The Port’s Operations
Manager wants to test the forecasting method exponential
smoothing to see how well the this method works in predicting
tonnage unloaded.
•He guesses that the forecast of grain unloaded in the first
quarter was 175 tons.
Comparison of Forecast Error
Comparison of Forecast Error

∑ |deviations|
Rounded Absolute Rounded Absolute
MADActual
= Forecast Deviation Forecast Deviation
Tonnage n
with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1
For 180
= 0.10 175 5.00 175 5.00
2 168 = 82.45/8
175.5 = 10.31
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For 175
= 0.50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 = 98.62/8
175.02 = 12.33
29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
Comparison of Forecast Error

∑ (forecast errors)2
Rounded Absolute Rounded Absolute
MSE = Actual Forecast Deviation Forecast Deviation
Tonnage
n
with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1
For 180
= 0.10 175 5.00 175 5.00
2 = 1,526.54/8
168 175.5 = 190.82
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For 175
= 0.50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 = 1,561.91/8
205 175.02 = 195.24
29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
Comparison of Forecast Error

n
∑100|deviationi|/actuali
Rounded Absolute Rounded Absolute
MAPE = i=1
Actual Forecast Deviation Forecast Deviation
Tonnage with n for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1
 = 0.10175
For 180 5.00 175 5.00
2 168 = 44.75/8
175.5 = 7.50
5.59% 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 =
For 175 0.50173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 = 54.05/8
175.02 =29.98
6.76% 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.24
Comparison of Forecast Error

Rounded Absolute Rounded Absolute

Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.24
MAPE 5.59% 6.76%
 8. Exponential Smoothing with Trend
Adjustment

When a trend is present, exponential smoothing must be

modified to respond to trend

Forecast Exponentially Exponentially

including (FITt) = smoothed (Ft) + smoothed (Tt)
trend forecast trend
8. Exponential Smoothing with Trend
Adjustment

Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1)

Tt = (Ft - Ft - 1) + (1 - )Tt - 1

Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
EXAMPLE

• A Portland manufacturer wants to forecast the demand for a

pollution-control equipment.
• Past data shows that there is an increasing trend.
• The company assumes the initial forecast for month 1 was 11 units
and the trend over that period was 2 units.
• α = 0.2 β =0.4
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24
6 21
7 31
8 28
9 36
10
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24 Step 1: Forecast for Month 2
6 21
7 31 F2 = A1 + (1 - )(F1 + T1)
8 28 F2 = (0.2)(12) + (1 - 0.2)(11+ 2)
9 36
10 = 2.4 + 10.4 = 12.8 units
Table 4.1
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80
3 20
4 19
5 24 Step 2: Trend for Month 2
6 21
7 31 T2 = (F2 - F1) + (1 - )T1
8 28 T2 = (.4)(12.8 - 11) + (1 - .4)(2)
9 36
10 = .72 + 1.2 = 1.92 units
Table 4.1
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80 1.92
3 20
4 19
5 24 Step 3: Calculate FIT for Month 2
6 21
7 31 FIT2 = F2 + T2
8 28 FIT2 = 12.8 + 1.92
9 36
10 = 14.72 units
Table 4.1
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80 1.92 14.72
3 20 15.18 2.10 17.28
4 19 17.82 2.32 20.14
5 24 19.91 2.23 22.14
6 21 22.51 2.38 24.89
7 31 24.11 2.07 26.18
8 28 27.14 2.45 29.59
9 36 29.28 2.32 31.60
10 32.48 2.68 35.16

Table 4.1
 Exponential Smoothing with Trend
Adjustment Example
35 –

30 – Actual demand (At)

Product demand

25 –

20 –

15 –

10 – Forecast including trend (FITt)

with  = .2 and  = .4
5 –

0 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Figure 4.3
Time (month)
 Seasonal Variations In Data

The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand (jet skis,
snow mobiles)
 Seasonal Variations In Data

Steps in the process:

1. Find average historical demand for each season
2. Compute the average demand over all seasons
3. Compute a seasonal index for each season
4. Estimate next year’s total demand
5. Divide this estimate of total demand by the
number of seasons, then multiply it by the
seasonal index for that season
 Seasonal Index Example

Demand Average Average Seasonal

Month 2022 2023 2024 2022-2024 of Average Index
Jan 80 85 105 90 94
Feb 70 85 85 80 94
Mar 80 93 82 85 94
Apr 90 95 115 100 94
May 113 125 131 123 94
Jun 110 115 120 115 94
Jul 100 102 113 105 94
Aug 88 102 110 100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 75 72 83 80 94
Dec 82 78 80 80 94
 n (tYt ) −  t  Yt
b=
n t 2 − ( t )
Seasonal Index Example 2

Demand Average Average Seasonal

Month 2022 2023 2024 2022-2024 of Average Index
Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94
Mar 80 93 Average
82 85 monthly 94
2022-2024 demand
Seasonal90index95= 115
Apr 100 94
Average monthly demand
May 113 125 131 123 94
= 90/94 = 0.957
Jun 110 115 120 115 94
Jul 100 102 113 105 94
Aug 88 102 110 100 94
Sept
Oct
85
77
90
78
95
85
90
80
94
94
a=
 Yt − b t
Nov 75 72 83 80 94 n
Dec 82 78 80 80 94
 n (tYt ) −  t  Yt
Seasonal Index
a=
 Yt − b t b=
n t 2 − ( t )
Example 2
n
Demand Average Average Seasonal
Month 2022 2023 2024 2022-2024 of Average Index
Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90 95 115 100 94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 115 94 1.223
Jul 100 102 113 105 94 1.117
Aug 88 102 110 100 94 1.064
Sept 85 90 95 90 94 0.957
Oct 77 78 85 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851
Total 1050 1120 1204 y=a+bt y=a+b(4)
 n (tYt ) −  t  Yt
a=
 Yt − b t b=
n t 2 − ( t )
2
n

Periods Demand
ty t2
(t) (y)
1 1050 1050 1
2 1120 2240 4
3 1204 3612 9
∑t = 6 ∑y= 3374 ∑ty= 6902 ∑t2=14
 Seasonal Index Example

Demand Average Average Seasonal

Month 2022 2023 2024 2022-2024 of Average Index
Jan 80 85 105 90 94 0.957
Feb 70 85 Forecast
85 for802025 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90Expected
95 115annual demand
100 = 1,278
94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 1,278 115 94 1.223
Jul Jan 113
100 102 = x 0.957 = 101.920
105 94 1.117
12
Aug 88 102 110 100 94 1.064
1,278
Sept 85 90
Feb =95 x90 94
0.851 = 90.631 0.957
Oct 77 78 85 12 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851
Seasonal Index Example
Demand Average Average of Seasonal Monthly
Month Index
2022 2023 2024 2022-2024 Average Demand
Jan. 80 85 105 90 94 0.957 101.920
Feb. 70 85 85 80 94 0.857 90.631
Mar. 80 93 82 85 94 0.904 96.276
Apr. 90 95 115 100 94 1.064 113.316
May 113 125 131 123 94 1.309 139.408
Jun. 110 115 120 115 94 1.223 122.3
Jul 100 102 113 105 94 1.117 111.7
Aug. 88 102 110 100 94 1.064 106.4
Sep 85 90 95 90 94 0.957 95.7
Oct 77 78 85 80 94 0.851 85.1
Nov. 75 72 83 80 94 0.851 85.1
Dec 82 78 80 80 94 0.851 85.1
Seasonal Index Example

2025 Forecast
140 – 2024 Demand
130 – 2023 Demand
2022 Demand
120 –
Demand

110 –
100 –
90 –
80 –
70 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Time
Thank you