Supply Chain Management

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Supply Chain Management

• Lecture 12

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Outline

• Today
• Finish Chapter 7 and start with Chapter 8
• Homework 3
• Due Thursday October 8 before class
• Next week Thursday
• Chapter 8 and 9
• No class on Tuesday October 13
• Network design simulation assignment

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Network Design Simulation Assignment

• Design the supply chain network for Jacobs
  Industries on the fictional continent of Pangea
• Jacobs only product is an industrial chemical
  that can be mixed with air to form a foam (used
  in air conditioner retrofit kits)

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ABCCorp
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Static Forecasting Method

• Deseasonalize demand
• Average seasonal cycle demand depending on p
  being odd or even
• Estimate level and trend using linear regression
• INTERCEPT(ys, xs)
• LINEST(ys, xs)
• Estimate seasonal factors
• St Dt / Dt
• Si ?j0r-1 Sjpi (average seasonality over all
  seasonal cycles)
• Forecast
• Ftn (L nT)Stn

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Winters Model

• Estimate levels
• The initial estimates of L0, T0, S1, S2, S3, and
  S4 is obtained from static forecasting procedure
• Revise the estimate of level for all periods
  using smoothing constants ?, ? and ?
• Lt1 ?(Dt1/St1) (1 ?)(Lt Tt)
• Tt1 ?(Lt1 Lt) (1 ?)Tt
• Stp1 ?(Dt1/Lt1) (1 ?)St1
• Forecast
• Forecast for future periods is expressed as
• Ftn (Lt nTt)Stn

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Characteristics of Forecasts

• Forecasts should include both the expected value
  of the forecast and measure of forecast error
• Forecast error estimates the random component of
  demand and reveals how inaccurate a forecast is
• Observed demand Systematic component random
  component

Why is forecast error important?
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Examples
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Measures of Forecast Error

• Forecast error
• Bias
• Absolute deviation
• Mean absolute deviation
• Tracking signal
• Mean absolute percentage error
• Mean squared error

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Forecast Error

• Error (E)
• Measures the difference between the forecast and
  the actual demand in period t
• Want error to be relatively small

Et Ft Dt
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Forecast Error
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Forecast Error

• Bias
• Measures the bias in the forecast error
• Want bias to be as close to zero as possible
• A large positive (negative) bias means that the
  forecast is overshooting (undershooting) the
  actual observations
• Zero bias does not imply that the forecast is
  perfect (no error) -- only that the mean of the
  forecast is on target

biast
?n
?t1
Et
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Forecast Error
Forecast mean on target but not perfect
Undershooting
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Forecast Error

• Absolute deviation (A)
• Measures the absolute value of error in period t
• Want absolute deviation to be relatively small

At Et
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Forecast Error

• Mean absolute deviation (MAD)
• Measures absolute error
• Positive and negative errors do not cancel out
  (as with bias)
• Want MAD to be as small as possible
• No way to know if MAD error is large or small in
  relation to the actual data

?n
MADn ?t1 At
? 1.25MAD
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Forecast Error
Not all that large relative to data
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Forecast Error

• Tracking signal (TS)
• Want tracking signal to stay within (6, 6)
• If at any period the tracking signal is outside
  the range (6, 6) then the forecast is biased

TSt biast / MADt
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Forecast Error
Biased (underforecasting)
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Forecast Error

• Mean absolute percentage error (MAPE)
• Same as MAD, except ...
• Measures absolute deviation as a percentage of
  actual demand
• Want MAPE to be less than 10 (though values under
  30 are common)

MAPEn
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Forecast Error
Smallest absolute deviation relative to demand
MAPE lt 10 is considered very good
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Forecast Error

• Mean squared error (MSE)
• Measures squared forecast error
• Recognizes that large errors are
  disproportionately more expensive than small
  errors
• Not as easily interpreted as MAD, MAPE -- not as
  intuitive

Et2
MSEn ?t1
?n
VAR MSE
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Measures of Forecast Error
?n
?n
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Measures of Forecast Error
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Summary

• What information does the bias and TS provide to
  a manager?
• The bias and TS are used to estimate if the
  forecast consistently over- or underforecasts
• What information does the MSE and MAD provide to
  a manager?
• MSE estimates the variance of the forecast error
• VAR(Forecast Error) MSEn
• MAD estimates the standard deviation of the
  forecast error
• STDEV(Forecast Error) 1.25 MADn

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Forecast Error in Excel

• Calculate absolute error At ABS(Et)
• Calculate mean absolute deviation
  MADn SUM(A1An)/n AVERAGE(A1An)
• Calculate mean absolute percentage error
  MAPEn AVERAGE()
• Calculate tracking signal TSt biast / MADt
• Calculate mean squared error MSEn SUMSQ(E1En)/n

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Forecast Error in Excel
Et Ft Dt
Forecast Error
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Forecast Error in Excel
biast
?n
?t1
Et
Bias
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Forecast Error in Excel
At Et
Absolute Error
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Forecast Error in Excel
MADn ?t1 At
?n
Mean Absolute Deviation
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Forecast Error in Excel
TSt biast / MADt
Tracking Signal
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Forecast Error in Excel
Errort
Error
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Forecast Error in Excel
Errort
MAPEn
n
Mean Absolute Percentage Error
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Forecast Error in Excel
?n
Et2
MSEn ?t1
Mean Squared Error
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Forecasting
What role does forecasting play in the supply
chain?
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From Forecasting to Planning
Capacity
How should a company best utilize the resources
that it currently has?