Lecture 3 - 09-02-09 Rough 2 on 1 page

Lecture Rough Version Basic Basic principles principles and and demand demand forecasting forecasting Chapter February, 8th 2009 Hessel Visser Logistics: Principles and Practice hesselvisser@chello.nl Program for Today Logistics Tools for Management DuPont chart ABC-analysis Relative Contribution Forecasting Qualitative forecasting Quantitative Methods Conclusions Logistics: Principles and Practice hesselvisser@chello.nl 1 DuPont Chart Definition • DuPont Chart calculates the key components of any business for easy evaluation of performance www.businessplans.org/DuPontChart.html Page 167 WML4 174 / WML5 132 Page 170 WML4 177 / WML5 135 Page 171 WML4 178 / WML5 136 Logistics: Principles and Practice hesselvisser@chello.nl ABC-analysis Definition • Analysis of a range of items, from inventory levels to customers and sales territories, into three groups: A = very important; B = important; C = marginal significance The goal is to categorize items which would be prioritized, managed, or controlled in different ways ABC analysis is also called 'usage-value analysis' Page 173 WML4 179 / WML5 138 Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl 3 Relative Contribution Definition • Average contribution margin that is weighted to reflect the relative contribution of each operating department of a multidepartment firm to its ability to pay fixed costs and to generate income Page 175 WML4 182 / WML5 141 Page 176 WML4 183 / WML5 142 Logistics: Principles and Practice hesselvisser@chello.nl Forecasting Definition • Forecasting is the process of estimation in unknown situations Prediction is a similar, but more general term, and usually refers to estimation of time series, crosssectional or longitudinal data Logistics: Principles and Practice hesselvisser@chello.nl Types of Forecasts • Economic forecasts – Address business cycle, e.g., inflation rate, money supply etc • Technological forecasts – Predict rate of technological progress – Predict acceptance of new product • Demand forecasts – Predict sales of existing product Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl Demand Patterns Dependent versus independent – Only independent demand needs to be forecasted – Dependent demand should never be forecasted Seat Handlebars Wheels Logistics: Principles and Practice hesselvisser@chello.nl What Should Be Forecasted? Level Business plan Sales and operations planning Master production schedule Logistics: Principles and Practice Forecast Market direction Product lines and families End items and options Time Frame to 10 years to years to 18 Months hesselvisser@chello.nl Seven Steps in Forecasting • Determine the use of the forecast • Select the items to be forecasted • Determine the time horizon of the forecast • Select the forecasting model(s) • Gather the data • Make the forecast • Validate and implement results Logistics: Principles and Practice hesselvisser@chello.nl Product Demand Charted over Years with Trend and Seasonality Demand for product or service Seasonal peaks Trend component Actual demand line Random variation Year Logistics: Principles and Practice Year Average demand over four years Year Year hesselvisser@chello.nl Actual Demand, Moving Average, Weighted Moving Average 35 Sales Demand 30 Actual sales Weighted moving average 25 20 15 Moving average 10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Month Logistics: Principles and Practice hesselvisser@chello.nl Realities of Forecasting • Forecasts are seldom perfect • Most forecasting methods assume that there is some underlying stability in the system • Both product family and aggregated product forecasts are more accurate than individual product forecasts Logistics: Principles and Practice hesselvisser@chello.nl Forecasting Approaches Qualitative Methods Quantitative Methods • Used when situation is vague & little data exist • Used when situation is ‘stable’ & historical data exist – New products – New technology – Existing products – Current technology • Involves intuition, experience – e.g., forecasting sales on Internet Logistics: Principles and Practice • Involves mathematical techniques – e.g., forecasting sales of color televisions hesselvisser@chello.nl Qualitative forecasting Definition • Qualitative forecasting methods are based on educated opinions of appropriate persons Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl Overview of Qualitative Methods • Jury of executive opinion – Pool opinions of high-level executives, sometimes augment by statistical models • Delphi method – Panel of experts, queried iteratively • Sales force composite – Estimates from individual salespersons are reviewed for reasonableness, then aggregated • Consumer Market Survey – Ask the customer Logistics: Principles and Practice hesselvisser@chello.nl 10 Jury of Executive Opinion • Involves small group of high-level managers – Group estimates demand by working together • Combines managerial experience with statistical models • Relatively quick • ‘Group-think’ disadvantage Logistics: Principles and Practice hesselvisser@chello.nl Sales Force Composite • Each salesperson projects his or her sales • Combined at district & national levels • Sales reps know customers’ wants • Tends to be overly optimistic Logistics: Principles and Practice hesselvisser@chello.nl 11 Delphi Method • Iterative group process • types of people – Decision makers – Staff – Respondents • Reduces ‘groupthink’ Decision Makers Staff (What will (Sales?) (Sales will be 50!) sales be? survey) Respondents (Sales will be 45, 50, 55) Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl 12 Consumer Market Survey • Ask customers about purchasing plans • What consumers say, and what they actually are often different • Sometimes difficult to answer http://blogs.zdnet.com/emergingtech/?m=200701&paged=1 Logistics: Principles and Practice hesselvisser@chello.nl Quantitative Methods Definition • Time series forecasting methods are based on analysis of historical data (time series: a set of observations measured at successive times or over successive periods) They make the assumption that past patterns in data can be used to forecast future data points Logistics: Principles and Practice hesselvisser@chello.nl 13 Quantitative Forecasting Methods (Non-Naive) Quantitative Forecasting Associative Models Time Series Models Moving Average Exponential Smoothing Trend Projection Linear Regression Logistics: Principles and Practice hesselvisser@chello.nl What is a Time Series? • Set of evenly spaced numerical data – Obtained by observing response variable at regular time periods • Forecast based only on past values – Assumes that factors influencing past and present will continue influence in future • Example Year: Sales: Logistics: Principles and Practice 2004 78.7 2005 63.5 2006 89.7 2007 93.2 2008 92.1 hesselvisser@chello.nl 14 Time Series Components Trend Cyclical Seasonal Random Logistics: Principles and Practice hesselvisser@chello.nl Trend Component • Persistent, overall upward or downward pattern • Due to population, technology etc • Several years duration Logistics: Principles and Practice Trend Cyclical Seasonal Random hesselvisser@chello.nl 15 Seasonal Component • Regular pattern of up & down fluctuations • Due to weather, customs etc • Occurs within year Trend Cyclical Seasonal Random Logistics: Principles and Practice hesselvisser@chello.nl Cyclical Component • Repeating up & down movements • Due to interactions of factors influencing economy • Usually 2-10 years duration Logistics: Principles and Practice Trend Cyclical Seasonal Random hesselvisser@chello.nl 16 Random Component • Erratic, unsystematic, ‘residual’ fluctuations • Due to random variation or unforeseen events – Union strike – Tornado • Short duration & nonrepeating Trend Cyclical Seasonal Random Logistics: Principles and Practice hesselvisser@chello.nl Naive Approach • Assumes demand in next period is the same as demand in most recent period – e.g., If May sales were 48, then June sales will be 48 • Sometimes cost effective & efficient Logistics: Principles and Practice hesselvisser@chello.nl 17 Page 180 WML4 187 / WML5 95 Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl 18 Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl 19 Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl 20 Forecast errors Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl 21 Logistics: Principles and Practice Logistics: Principles and Practice hesselvisser@chello.nl Page 181 WML4 188 / WML5 97 hesselvisser@chello.nl 22 Logistics: Principles and Practice hesselvisser@chello.nl Logistics: Principles and Practice hesselvisser@chello.nl 23 Tracking the Forecast Forecasts are rarely 100% correct over time Why track the forecast? – To plan around the error in the future – To measure actual demand versus forecasts – To improve our forecasting methods Logistics: Principles and Practice hesselvisser@chello.nl Conclusions about Logistic Tools for management • Start with Simple Tools • Collect Data in an Early Stage • Integrate Tools as much as possible Logistics: Principles and Practice hesselvisser@chello.nl 24 .. .1 DuPont Chart Definition • DuPont Chart calculates the key components of any business for easy evaluation of performance www.businessplans.org/DuPontChart.html Page 16 7 WML4 17 4 / WML5 1 32 Page. .. income Page 17 5 WML4 1 82 / WML5 14 1 Page 17 6 WML4 1 83 / WML5 1 42 Logistics: Principles and Practice hesselvisser@chello.nl Forecasting Definition • Forecasting is the process of estimation in... Sales: Logistics: Principles and Practice 20 04 78.7 20 05 63. 5 20 06 89.7 20 07 93. 2 2008 92. 1 hesselvisser@chello.nl 14 Time Series Components Trend Cyclical Seasonal Random Logistics: Principles and