Construction Project Initiation and Feasibility Study Part...

Project and Construction Management

Lecture #2

Construction Project Initiation and Feasibility Study

Part 1: Introduction and Market Assessment

Department of Civil Engineering, Sharif University of Technology

By: Dr. Amin Alvanchi and Dr. Hamed Kashani

Construction Engineering and Management

Outline

Introduction to Initiation Phase

An Overview of Feasibility Study

Feasibility Study: Market assessment

Identify the actual need and product specification

Identify target market

Collecting supply and demand information

Forecasting the market

2

3

Introduction to Initiation Phase

4

Construction project lifecycle

Initiation

Organization and planning

Design

Construction

Operation

Maintenance

Demolition

Construction

Project

Lifecycle

Project initiation phase or فاز آغازین

The Project Initiation Phase is the 1st phase of the Construction

Projects lifecycle, as it involves starting up a new project.

Construction project initiation phase is the most crucial phase in

the project lifecycle, as it's the phase in which project scope (=

main characteristics) and project boundaries are defined.

In project initiation phase we are framing the project.

Many failures in projects happen because project is not properly

initiated and defined!

5

Project initiation phase

Project initiation phase is also called pre-planning phase!

Most projects stop at this phase!!!!! Why?

In this phase the project’s high level objectives, scope, purpose and

deliverables (or outputs) are defined. Main steps to be followed are:

6

Why this project? شناسایی نیاز به اجرای پروژه

Project Feasibility Studies انجام مطالعات امکان سنجی پروژه

Project Charter منشور پروژه

7

Before formally continuing different steps of the project we

need to informally justify the original need for the project!

Questions to be answered at this step:

What are the main incentives/ purpose of the project

idea?

Who or what groups are the project’s main clients?

How this project is going to benefit project clients?

What are the main requirements/ characteristics?

What are the main assumptions and limitations?

Initiation: Why this project?

8

A simple examples: Chitgar lake project.

What are the main incentives/ purpose of the project idea?

To bring a new type of attraction to the Capital.

Who or what groups are at the main focus (main project customers)?

Tehran citizens.

How this project is going to benefit project clients?

Spend their leisure time in the park and close the lake, do water activities and

enjoy the new view for the city.

What are the main requirements/ characteristics?

Be easily accessible, have a certain capacity to accommodate visitors, has a

sustainable source of water, water quality should follow a certain standard.

What are the main assumptions and limitations?

Is limited between Tehran-Karaj and Hemat high ways, it is funded by Iranian

financial institutes, it is going to be constructed by Iranian construction

companies.


9

Why “Imam Khomeini airport metro” project is built?

Your are encouraged to discuss your ideas with your

classmates!

In-class practice

10

Sample answers:

Main incentives: bringing prosperity to Imam Khomeini airport, reducing

traveling cost and time for passengers and airport staff

Main customers: passengers and airport staff living in Tehran and

neighboring areas

How does it work: Passengers and airport staff can get to any metro

station in Tehran’s metro network and can go to the airport by change

one or two lines

Main requirement: To have luggage friendly cabins and stations, to

have reasonable travelling time and sequence, to easily get connected

with other metro routes, easily linkable to city center and main hotels

Main assumptions and limitations: Ticket price should be cheap

compared to cabs and shuttle buses, should have 24 hours services.

In-class practice

11

When we could (informally) convince ourselves that this

project is needed we then need to formally justify the

project’s feasibility by conducting a project feasibility study

Significance of project necessities and needs identified at

this step is the key factor to persuade project owners to go

to the next step.

Needs identified at this step are going to get more detailed

at the feasibility study step.


12

Before start undertaking a project we need to make sure that the

project is feasible and justified!

A feasibility study (FS) is a structured assessment of the usefulness

and practicality of a proposed project. It aims to objectively and

rationally uncover the strengths and weaknesses of a proposed

project.

An FS evaluates the project's potential for success over its lifecycle!

FS report is an important document, it draws a big picture of the

project from the beginning to the end.

FS is the most elaborated step in the initiation phase, our main focus

on the rest of this lecture is on different aspects of feasibility study.

Initiation: Feasibility study

13

When FS confirms a project’s feasibility, the project is formally initiated

by preparing a project charter document.

A project charter outlines high level scope and requirements of a

project as identified and investigated at prior steps, i.e., feasibility

studies. Project charter usually includes:

High level project description, purpose and justification,

High level project outputs and deliverables,

Measurable project objectives and related success criteria,

High-level requirements,

High-level risks,

Main milestone schedule,

Summary budget,

Initiation: Project charter

14

Initiation: Project charter

High level scope and requirements outlined in a project

charter is an important base for the planning the project at

the next phase!

Sample project charter 1, 2 & 3.

Project manager is usually introduced in the project charter.

To formally initiate a project owners usually sign the project

charter and announce it to the project manger.

PCM-L02-P1_Support/3_PCharter_Example1_BridgeReplacement.pdf

PCM-L02-P1_Support/3_PCharter_Example2_DesalinationPlant.pdf

PCM-L02-P1_Support/3_PCharter_Example3_CRMSoft.pdf

15

Initiation: In brief

Project initiation is the first phase of a project

We cannot expect a successful project if its initiation phase is not

properly done.

Among different steps in initiation phase FS stays at the core. It has

more details and requires more attention to be followed!

Results from FS determines the decision for continuing or discontinuing

our efforts for doing the project.

We are going to discuss more about different aspects of FS in next few

sessions!!

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An Overview of Feasibility Study

17

Depending on the type, requirements and limitations of a project,

feasibility studies might analyze different aspects of projects such

as market, technical aspect, financial aspect, environmental

aspect, social aspect, cultural aspect and security aspect.

Most feasibility studies at least assess market, technical, and

financial standing of projects.

Depending on the complexity and size of a project, level of details

in feasibility studies varies.

Conceptual design and master plan are usually two main outputs

expected from a complete feasibility study.

Sample feasibility study reports 1, 2, 3 & 4.

Feasibility study

PCM-L02-P1_Support/1_FeasibilityStudy_Sample1_MarbleStone.pdf

PCM-L02-P1_Support/1_FeasibilityStudy_Sample2_NechesBridge.pdf

PCM-L02-P1_Support/1_FeasibilityStudy_Sample3_UgandaNationalRoad.pdf

PCM-L02-P1_Support/1_FeasibilityStudy_Sample4_BikePedBridgeFeasibilityStudy.pdf

18

Feasibility study Versus Prefeasibility study

In some cases and to avoid spending much money on running a full-

fledged feasibility study and to determine whether it is worthwhile to

proceed with a complete feasibility study we might decide to conduct a

prefeasibility study first.

A prefeasibility study follows similar steps as feasibility study but

compared to a feasibility study it is done in less details.

In prefeasibility study we depend more on general information available

in the literature for the project rather than digging into specific and

realistic project information which is required for a feasibility study.


19

Feasibility study Versus Prefeasibility study, Examples:

Prefeasibility: Use technical information of project facilities from

technical handbooks

Feasibility: Get technical information of project facilities form facility

suppliers

Prefeasibility: Consider an average cost of the land in the area

Feasibility: Get an expert to evaluate the project’s land price!

Prefeasibility: Use an average cost of materials

Feasibility: Get invoices for the cost of materials to be delivered to the

project’s location!

Sample prefeasibility study reports 1, 2, & 3.


PCM-L02-P1_Support/2_PrefeasibilityStudy_Sample1_WhiteOil.pdf

PCM-L02-P1_Support/2_PrefeasibilityStudy_Sample2_ChamplainBridge.pdf

PCM-L02-P1_Support/2_PrefeasibilityStudy_Sample3_MyanmarHighway.pdf


Stages:

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Feasibility

Study

1. How is supply and demand for the project’s

product?

(Market Assessment)

2. What is the project’s specification and how

should it be built?

(Technical Assessment)

3. Is the project cost effective?

(Financial Assessment)

4. Should we build or not to build the project?

(Conclusion)

Don’t proceed to the next step if project fails in feasibility study!

21

Feasibility Study:

Stage 1. Market assessment

Initiation


Design

Construction

Operation

Maintenance

Demolition

Construction

Project

Lifecycle

Market assessment: steps22

Where are we standing?

Why this project?

Project Feasibility

Studies

Project Charter

1. Market assessment

2. Technical assessment

3. Financial assessment

4. Conclusion

2.Identify the target market

3.Collect supply and

demand information

4.Use the information

collected for forecasting the

market

1.Identify the original need

and product spec

Init

iati

on

Initiation


Design

Construction

Operation

Maintenance

Demolition

Construction

Project

Lifecycle

Market assessment: steps23

2.Identify the target market

3.Collect supply and demand

information

4.Use the information collected

for forecasting the market

1.Identify the original need and

product specification

24


Step 1. Identify the original need and product

specification

Identify the original need

The original need or purpose urging us to define and implement

a project should be first well recognized.

We are often biased on conventional or usual methods for

fulfilling our needs; however, it might not be the case.

Example:

Wrong expression: We need to build an overpass for this

intersection.

Right expression: We need to reduce this intersection’s traffic load!

There are many other methods to be used for reducing the traffic,

e.g., under-pass, better managed traffic light, smart traffic light and

blocking a straight flow for one direction.

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Identify the original need

What might be original need and main incentives for following projects?

To build a new school,

Sample answers:

We are short in school capacity in the area, quality of training is

decreased!

Student in the neighbourhood need to travel a long distance to go

to school in another neighbourhood’s school, …

To build a new hospital,

Sample answers:

We are short in hospital capacity in the area, quality of medical

care is very low in the current hospital because of the high load!

The closest hospital takes more than an hour from this

neighbourhood, …

26

Determine objective specification

Do your best to set objective (or measurable) specification for the

expected project’s product! We can then do our best to fulfill the product

specification when implementing the project!

Example 1:

We need to reduce the intersection’s traffic load?

We built an overpass.

As a result the traffic is reduced.

SO: Have we met our purpose of the project! Am I right?

Before answering the question we need to know how much traffic reduction

we needed and then check if this reduction has been reached!

Possible answer can be: Average rush hour speed (17:00 to 19:00)

increases from 10km/h to 20 km/h! Have we reached this reduction?

27


Example 2:

There is a need for a new leisure facilities to be built in the

neighbourhood because of the increasing population in the area

and lack of a leisure facility in the area.

Before we proceed to the next step we need to more accurately

specify the project’s specification:

What group of people? Families, youths, singles, seniors, middle

ages, men, women

What kind of leisure activities: sport, cultural, scientific, social, etc.

What kind of sport activities: football, pool, horse riding,

volleyball, basketball, etc.

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In class practice

Place yourself as the owner of the following projects.

1) In your perspective what has been the original need for

each project?

2) What can be the objective specification of the project

products?

Building metro lines in Tehran

Constructing Tehran-Shomal highway

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In class practice

Building metro lines in Tehran

Sample Answers:

Original need: More convenience for the city travellers and better

quality public transportation, traffic reduction, less air pollution, less

fuel consumption

Objective specification:

Reduce public transportation travel time by 30%

Encourage people to use 20% less car driving

Increase average car speeds during the rush hours by 10%

Reduce average annual air pollution by 20%

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In class practice

Constructing Tehran-Shomal highway

Sample Answers:

Original need: Reducing traffic and travelling time, reducing

number of accidents and hazards on the road, better economy for

the northern cities

Objective specification:

Reducing travel time to average of 2 hours during high traffic and

holiday seasons

Reducing number of accidents on the road by 80%

Improving economic situation of the northern cities by 10%

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A main success criteria after project implementation is whether

project could properly deliver product specifications:

Examples:

Has new overpass increased rush hour traffic speed from

10km/h To 20km/h?

Does new leisure facility have football, pool, basketball and

volleyball court?

Has the new school reduced average students daily

commute from one hour to 15 minutes?

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Step 2. Identify target market


Where does the demand originate from? And Where is the target

market?

A country wide: e.g., a new refinery project

A province or a region: e.g., a new dam project

A city or neighbourhood: e.g., a new highway in the city

Foreign countries: e.g., a new petrochemical complex project

A specific foreign country: e.g., Iran-Pakistan gas pipeline project

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Identify the target market

Questions:

Who are the target of the Pardis suburb’s Mehr residential building project?

People of Pardis, Rood-e-hen, and Boom-e-hen? Low income Tehran

citizens?

Who are the target of Milad tower project?

Tehran’s public? Tehran’s rich citizens? Foreign tourists? Tehran’s north-

west neighbours?

Who are the target of Niayesh tunnel project?

Tehran’s north-east population working at west? Tehran’s north-west

population working at east?

Who are the target of Setareh Khalij-e Fars refinery project?

Southern cities cars? Tehran and other main cities cars? Southern cities to

be developed? Export?

35


There are not always simple answers to these questions? Specially in the absence of

dependable databases! Sometimes we need to directly gather field information (e.g.,

distributing questionnaires, doing call survey, online survey, etc.)

Example: To be able to determine target demand Niayesh tunnel project, city might

need to design a survey to collect related information of the cars using alternative

highways, e.g., Hemmat, Resalaat, Chamran and Modarresset. A possible answer

can be:

40% people living in north-east and work in west

35% people living in north-west and work in east

10% people from all over the city passing occasionally

5% people living in suburb on the east (e.g., Pardis, Roode-hen, Boome-hen, and

Davand) working in west of tehran

5% people living in Karaj and work in the east of Tehran

5% variety of different clients.

36

37


Step 3. Collecting supply-demand information

Market elements

A project need is calculated based on two main market elements:

Supply and Demand

A construction project need is created when Demand for the output (product or

service) of a project exceeds its supply: Net need = Demand - Supply

So, for evaluating the actual need we should quantify supply and demand.

In most cases quantification of supply is easier than quantification of demand:

For Supply we have:

Quantification of supply = Measuring capacity of completed and in progress

projects

For Demand we have:

Hidden demands.

Example: Currently I avoid some intra-city travels because of traffic => I will

start my travels (or add to the travel demand) if traffic is reduced!

38

Market elements

Competing alternatives to respond demands.

Example: Economic condition enhancement may shift travel demands to

flight and reduce interest in railway travelling! New railway project might fail

as a result of economic changes!

Demand origins are often more distributed compared to the supply.

Example: Every single household within the city demands for electricity. But

how many power plants do we have to supply the city’s demand?

Demands are dynamically changing.

Example: Past research studies indicate that construction of new streets and

highways within cities (in a recursive manner) has increased the driving

demand of the city:

High traffic -> New street/ highway construction -> Traffic reduction

-> More satisfaction -> More interest in using cars -> High traffic

Other factors such as market strategies, price, cultural change, technological

change, etc. can play a role in shaping demands.

39

How to collect supply information

What is the current supply/ serving capacity?

What is the capacity of in-progress projects?

What is the capacity of to be started projects?

A residential building?

Example: Suppose a 300 unit residential building complex project. To estimate

supply or serving capacity of residential buildings in the target

neighbourhoods we need to collect number and type of houses (i.e., one

bedroom, two bedroom, etc) as well as the population of the target

neighbourhoods. We also need to collect the information from in-progress

residential projects as well as projects are about to be started!

Question: Which government body is the source of information here?

Question: If you are going to build a four storey building with 8 unit residential

building how are you going to approach estimation of supply/ serving

capacity?

40


A commercial building?

Example: Suppose a new 500-store mall project. For the supply estimation we

need to collect information of competing malls and stores as well as in

progress and to be built projects in the target neighbourhoods. In this project

we need to collect supply information based on the type of different retail

stores.

An infrastructure project?

Example: Suppose an intra-city highway project. For the supply estimation we

need to first identify different alternative routes including streets highways and

metro and their capacities. Any other in-progress or to be built alternative

route also should also be considered.

41


An industrial project?

Industrial projects have more dynamic supply market compared to other

types of construction projects because of portable nature of the project’s

product. In many cases any shortage in supply or serving capacity of the

product can be responded through product imports. So, tracing changes

in supply capacity of foreign suppliers also might be required.

New customs regulations and laws also can change the supply/ serving

capacity. In cases that target markets are foreign countries, tracing

regulation changes in the target market is more difficult and politically

affected

Question: Who is the source of this information?

42

Common sources of data collection

There are different public sources of information which help us to collect

supply (and demand) information:

- Portal of Iran National Census Center (مرکز آمار ایران)

(http://www.amar.org.ir/) is useful source of data which can be used in

many cases.

- Portal of Ministry of Industry, Mine and Trade is another source of

information (http://www.mimt.gov.ir/) for industrial construction projects.

-Portal of Ministry of Roads and Urban Development

(http://www.mrud.ir/Portal/Home/) for building and road information.

- Portal of Iran Customs Administration

(http://www.irica.gov.ir/Portal/Home/) is another source of information for

import and export stats!

43

http://www.amar.org.ir/

http://www.mimt.gov.ir/

http://www.mrud.ir/Portal/Home/

http://www.irica.gov.ir/Portal/Home/

Quantify the need44

Quantify the need45

Quantify the need46

Quantify the need47

93-S2-PCM-L02_Support/4_SanatStat_Mehr1393.pdf

93-S2-PCM-L02_Support/4_SanatStat_Mehr1393.pdf

Quantify the need48

Quantify the need49

Quantify the need50

Quantify the need51

Quantify the need52

Quantify the need53

Common sources of data collection

Although major parts of information are provided online, direct

connection to the related departments of organization in charge

is very useful and can result in getting more detailed

information!

54

How to collect demand information

Despite all complexity involved in estimation of market demand, we need

to find a way to collect data and estimate it!!!

Depending on the nature of a project and availability of related data,

different methods might be used for collecting the market demand.

Direct data collection:

In this method of data collection we directly count number expected

project’s clients. For example in road, bridge and tunnel construction

projects by directly counting number of cars travelling in alternative

routes we can estimate demand for the project. There are different

automated car counting systems developed for this purpose.

55

How to collect demand information56


Use of historical data:

In this method of data collection data published by regulating bodies (as listed

before) are used.

Example: For collecting fuel demand we can get past fuel consumption from

Energy Ministry as:

57

Year 1384 1385 1386 1387 1388 1389 1390 1391

Consumption (M m3) 24.27 26.87 24.17 24.50 23.62 22.37 21.88 23.24


Demand calculation by using norms and related data:

In this method of data collection data published by regulating bodies (as listed

before) are used.

Example 1: Suppose Mehr residential suburb in Pardis is going to accommodate

250,000 population and average electricity power supply required for every

person during peak hours according to in the country Energy Ministry is 500 w,

total power demand for the suburb is going to be:

250,000 x 500 w = 125 Mega W

Example 2: Suppose Mehr residential suburb in Pardis is going to accommodate

250,000 population. Our population structure shows that primary school students

are 8% and high school students contribute 8% of the total population. So we

have: 250,000 x 8% = 20000

with the normal capacity of 250 students for each school, there is a demand for

80 primary and 80 high school in Pardis-Mehr-suburb

58


Use of supply data:

This method specially can be used for projects with importable/ exportable

products (e.g., steel, cement, fuel, cord, etc.). In general we have:

Local Supply + Foreign Imports = Local Consumption+ Foreign exports

So we can calculate Local Consumption (≈ local demand) as:

Local Consumption = Local Supply + Foreign Imports - Foreign exports

So, by collecting Local Supply, Foreign Imports and Foreign exports we can

calculate the local demand.

Import>Export => Lack of local supply => There local needs which is

not responded by local supply

Export>Import => Local supply surplus => Export opportunity

59


Example: Table below presents cement local consumption calculated

based on historical production, import and export data collected from

government online portals:

60

Year Production (M Ton)* Export (M Ton)** Import (M Ton)** Consumption (M Ton)

A B C = A+C-B

1385 35.31 0.49 0 34.82

1386 39.97 0.3 0 39.67

1387 44.39 0.38 0 44.01

1388 52.14 4.1 0 48.04

1389 61.62 6.5 0 55.12

1390 66.46 7.9 0 58.56

1391 70.26 11.30 0 58.96

*

**

From Minstry of Industry, Mine and Trade

From Iran Customes Administration

61


Step 4. Forecasting the Need

Why forecasting?

In many cases market information collected represent supply and

demand information in the past or (if we are lucky) for the current

market situation. But, we need to evaluate the project needs by the time

project gets complete and thereafter.

The forecasting is done fort the time of project completion and during

the project’s operation!

Remember: Forecasts are usually wrong!!!

We are trying to not to be too wrong.

A forecast is considered more accurate if it also includes a range (high and low) and a confidence level

Accuracy fades when we go further in the time

62

Why forecasting?

Remember: Never replace historical data with forecasts!

Example: Cement demand

63

Year Production (M Ton)* Export (M Ton)** Import (M Ton)** Consumption (M Ton)

A B C = A+C-B

1385 35.31 0.49 0 34.82

1386 39.97 0.3 0 39.67

1387 44.39 0.38 0 44.01

1388 52.14 4.1 0 48.04

1389 61.62 6.5 0 55.12

1390 66.46 7.9 0 58.56

1391 70.26 11.3 0 58.96

1392 ? ? ? ?

1393 ? ? ? ?

1394 ? ? ? ?

1395 ? ? ? ?

... ? ? ? ?

Forecasting methods

Quantitative forecasting methods

In the presence of dependable past data quantitative methods are

used by manipulating past data using different time series methods.

Some prevalent methods are: Moving Averages, Weighted Moving

Averages, Regression, and Seasonal Series

Qualitative forecasting methods

It is usually done in the absence of dependable past data and is

dependent on a specific market experts judgements.

Some prevalent methods are: Delphi, Scenario Writing and

brainstorming.

64

Forecasting methods

Discussion: While Quantitative forecasting methods relate the

forecasted values with the trend of past records, they are missing

recent change of market’s effective factors. The main advantage

of Qualitative forecasting methods is to account for changes in the

market; however, they are inaccurate when it comes to,

mathematically, drawing future trends.

In the presence of past data and when there is no significant

change in market players, use quantitative methods.

In the absence of past data and highly fluctuating market with

changes made to the market players, use qualitative methods.

65

Quantitative forecasting methods66

Identify data pattern:

At the beginning of the quantitative forecasting plot data (or time series) you

collected on a scattered diagram to see type of trend data has.

In MS Excel scattered diagrams can be drawn by using scattered diagram

feature.

67

Identify data pattern: Prevalent data (or time series) patterns


68

Moving average:

This method is a good candid method for non recognizable (or stationary)

patterns. For forecasting demand for time t (Dt) average last n data items:

Dt = (Dt-1 + Dt-2 + ... + Dt-n) / n

Example:

Forecasted values converge to a value after a while.

88 89 90 91 92 93 94 95 96 97

D 5.0 3.0 12.0 7.0 6.0 7.0 8.0 7.0 7.0 7.3

n=4

Data Forecast

0

4

8

12

16

0 2 4 6


69

Weighted moving average:

It is a similar method to moving average, just more weight is given to more

recent data items.

Dt = (a Dt-1 + b Dt-2 + ... + z Dt-n) / (a + b + … +z)

Having: a > b > … > z

Example:

D93 = (5 * 6 + 3 * 7 + 2 * 12 + 1 * 3) / 11 = 7.1

Again in this method forecasted values converge to a value after a while.

88 89 90 91 92 93 94 95 96 97

D 5.0 3.0 12.0 7.0 6.0 7.1 7.2 6.9 7.0 7.0

n=4

a=5 b=3 c=2 d=1

Data Forecast


70

Regression:

In regression method we relate demand values over time (Dt) to a linear function

of time (t):

Dt = a + b t + t.

It is a suitable method in cases we a see a linear trend in our data.

Regression methods have extensive

theoretical background which are

discussed in detail in many statistical

books.

Thanks to computer programs (e.g.,

M.S. Excel) which have made it easy

use without entering into its complexity.


Regression:

Initialize data analysis and regression add-in in MS Excel:

71


72

Regression:



73

Regression:



74

Regression:

Example:

Year Demand1 Demand2

88 5.0 5.0

89 3.0 5.5

90 12.0 6.3

91 7.0 7.0

92 6.0 8.9


75

Regression:

Example:

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.282216261

R Square 0.079646018

Adjusted R Square -0.227138643

Standard Error 3.723797345

Observations 5

ANOVA

df SS MS F Significance F

Regression 1 3.6 3.6 0.259615385 0.645499621

Residual 3 41.6 13.86666667

Total 4 45.2

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%

Intercept -47.4 105.9942137 -0.447194223 0.685050159 -384.7208937 289.9208937 -384.7208937 289.9208937

X Variable 1 0.6 1.177568116 0.509524665 0.645499621 -3.147547298 4.347547298 -3.147547298 4.347547298

For Demand 1


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Regression:

Example:

SUMMARY OUTPUT



R Square 0.930800689

Adjusted R Square 0.907734252


Observations 5

ANOVA


Regression 1 8.649 8.649 40.35303266 0.007892377

Residual 3 0.643 0.214333333

Total 4 9.292


Intercept -77.16 13.17774133 -5.855328166 0.009931067 -119.0974542 -35.22254578 -119.0974542 -35.22254578

X Variable 1 0.93 0.146401275 6.352403691 0.007892377 0.464085803 1.395914197 0.464085803 1.395914197

= -77.16 + 0.93 * Year 9.33

Year 93

For Demand 2


After class practice

Forecast demand 1 and demand 2 up to year 1403 using

the proper technique (between weighted moving average

and regression) using MS Excel (send the result to the TA

before midnight):

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Year Demand1 Demand2

91 4.0 6.0

92 12.0 6.3

93 7.0 8.0

94 6.0 8.9

95 8.0 9.3

96 9.0 10.0

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Seasonal Series:

Seasonality corresponds to a pattern in the data that repeats at regular intervals.

Forecasting seasonal series with central moving average or CMA method:

1) Calculate data item factors:

Suppose i=1, 2, 3, …, n represents number of periods or cycles and j = 1, 2, 3,

…, N represents number of seasons within every period. Dij represents demand

of season j in period i.

Calculate the sample mean or average of total Demand or Dav = (S S Dij) / (n.N)


i=1 i=2 i = 3 = n

j=1

j=2

j=3j=4

j=5=N

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Forecasting seasonal series with CMA method (cont’d):

Calculate data item factors by dividing data items by sample mean: Fij = Dij / Dav

2) Remove seasonal effects or normalize the items:

Calculate seasonal factor or seasonal average for every season of j or

Savj = S Fij / n , for every j= 1, 2, …, N

To remove effect of seasonal factor for every single data item (or normalizing the

data), divide every data item by its related seasonal average as:

Nij = Fij / Savj

3) Predict normalized values using a prediction method:

Now that seasonal effect has been removed from data, use a proper method for

predicting normalized values.

4) Return values to their seasonal pattern:

Once forecast is made convert values to their seasonal form by multiplying each

forecasted item to the sample mean of Dav and its related seasonal factor of Savj.

See example on Excel file!!


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Forecasting seasonal series with CMA method-Example:

Year Demand

90-S1 15.0

90-S2 14.0

90-S3 10.0

90-S4 13.0

91-S1 16.5

91-S2 14.5

91-S3 10.6

91-S4 14.6

92-S1 17.6

92-S2 16.1

92-S3 11.4

92-S4 15.7

93-S1 20.1

93-S2 17.5

93-S3 12.3

93-S4 16.4


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Forecasting seasonal series with CMA method-Example (cont’d):

Demand Factors

Dij Fij=Dij/Dav

90-S1 1 1 15.0 14.7 1.02 1.2 0.868 1

90-S2 1 2 14.0 0.95 1.1 0.902 2

90-S3 1 3 10.0 0.68 0.8 0.902 3

90-S4 1 4 13.0 0.88 1.0 0.871 4

91-S1 2 1 16.5 1.12 0.953 5

91-S2 2 2 14.5 0.99 0.935 6

91-S3 2 3 10.6 0.72 0.960 7

91-S4 2 4 14.6 0.99 0.979 8

92-S1 3 1 17.6 1.19 1.016 9

92-S2 3 2 16.1 1.10 1.038 10

92-S3 3 3 11.4 0.77 1.026 11

92-S4 3 4 15.7 1.07 1.052 12

93-S1 4 1 20.1 1.37 1.163 13

93-S2 4 2 17.5 1.19 1.126 14

93-S3 4 3 12.3 0.84 1.112 15

93-S4 4 4 16.4 1.11 1.098 16

YearDav=

Avg(Dij)

Savj=

Avgj(Fij)

i:

period

j:

season

Nij=

Fij/Savj

Normalized

Period


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SUMMARY OUTPUT



R Square 0.901205153

Adjusted R Square 0.894148379


Observations 16

ANOVA


Regression 1 0.118295287 0.118295287 127.7077963 2.01337E-08

Residual 14 0.012968151 0.000926297

Total 15 0.131263438


Intercept 0.841451117 0.015960311 52.72147221 1.66678E-17 0.807219653 0.87568258 0.807219653 0.87568258

X Variable 1 0.01865281 0.001650576 11.30078742 2.01337E-08 0.015112676 0.022192943 0.015112676 0.022192943

= 0.841451 + 0.018653 * Year 1.158548883

Year 17


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Demand Factors

Dij Fij=Dij/Dav

90-S1 1 1 15.0 14.7 1.0 1.2 0.868 1 Use Reg Multiply by

90-S2 1 2 14.0 1.0 1.1 0.902 2 Formula Savj and Dav

90-S3 1 3 10.0 0.7 0.8 0.902 3 Intercept

90-S4 1 4 13.0 0.9 1.0 0.871 4 0.8414511

91-S1 2 1 16.5 1.1 0.953 5 X Variable 1

91-S2 2 2 14.5 1.0 0.935 6 0.0186528

91-S3 2 3 10.6 0.7 0.960 7

91-S4 2 4 14.6 1.0 0.979 8

92-S1 3 1 17.6 1.2 1.016 9

92-S2 3 2 16.1 1.1 1.038 10

92-S3 3 3 11.4 0.8 1.026 11

92-S4 3 4 15.7 1.1 1.052 12

93-S1 4 1 20.1 1.4 1.163 13

93-S2 4 2 17.5 1.2 1.126 14

93-S3 4 3 12.3 0.8 1.112 15

93-S4 4 4 16.4 1.1 1.098 16

94-S1 ? 17 1.159 20.0

94-S2 ? 18 1.177 18.3

94-S3 ? 19 1.196 13.3

94-S4 ? 20 1.215 18.1

Nij-

Predicted

Dij-P=

Nij-P*Dav*SavjYear

Dav=

Avg(Dij)

Savj=

Avgj(Fij)

i:

period

j:

season

Nij=

Fij/Savj

Normalized

Period


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M.S. Excel Forecasting:

In reality time series may follow a variety of trends:


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Mathematical formulas have been developed for different trends. The most

famous mathematical methods have been incorporated in statistical and data

manipulation computer programs (e.g., MS Excel.)

Linear trends:

It is an alternative method to regression.

Y = m.X + c (where m is slope and c is the intercept or value of y at x=0)

Use Slope and Intercept functions for calculating m and c and then

calculating the values.

Alternatively you can use Trend function to directly calculating the forecast

values. Example:

c = INTERCEPT(B2:B6;A2:A6) = -77.16

m = SLOPE(B2:B6;A2:A6) = 0.93

Forecast in Year 95 =TREND(B2:B6;A2:A6;95) = 11.19

The same as

regression

calculation


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Exponential Functions:

Exponential functions are based around the formula y = b.m^x

So for forecasting the trend we need to estimate b and m values.

LOGEST is the function for calculating exponential trends.

First index of return function represents m and the second index is b.

Example:

m = INDEX(LOGEST(B2:B6;A2:A6;TRUE;FALSE);1) = 1.48

b = INDEX(LOGEST(B2:B6;A2:A6;TRUE;FALSE);2) = 1.93

Forecast for year 6 = b * m ̂6 =

Forecast for year 10 = b * m ̂10 = 94.3

19.9


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Polynomial Functions:

Polynomial functions are based around the formula

y = a.x^n + b.x^(n-1) + c.x^(n-2) + … + m

Excel has a specific function dealing with Polynomial functions: LINESTfunction.

Form: = LINEST( Known Y Values, Known X Values^{1,2,3,..n})

Where n represents maximum power of x.

For example for a polynomial trend of power 3 such as:

y = a.x^3 + b.x^2 + c.x +m

We can :

= LINEST(A2:A10, B2:B10^{1,2,3})

Different parameters are stored as different indexes and we need to apply index

function to be able to return their values. For example returning parameter 2 or b

in the polynomial function we have:

= INDEX(LINEST(A2:A10, B2:B10^{1,2,3});2)


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Polynomial Functions (cont’d):

Example: a=INDEX(LINEST(B2:B6;A2:A6 ^ {1,2,3};TRUE;FALSE);1) = 0.3

b=INDEX(LINEST(B2:B6;A2:A6 ^ {1,2,3};TRUE;FALSE);2) = -3.2

c=INDEX(LINEST(B2:B6;A2:A6 ^ {1,2,3};TRUE;FALSE);3) = 11.6

d=INDEX(LINEST(B2:B6;A2:A6 ^ {1,2,3};TRUE;FALSE);4) = -5.4


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Logarithmic trends:

Excel does not provide function for Logarithmic trends.

However you can first transfer logarithmic trends to linear trends

Then you can use linear TREND or LINEST functions to estimate them.

For Logarithmic trends, instead of X values use LN of X values in LINEST

function


Qualitative forecasting methods91

Delphi:

The Delphi method is a structured communication technique, originally

developed as a systematic, interactive forecasting method which relies on a

panel of experts. The experts answer questionnaires in two or more rounds.

After each round, a facilitator provides an anonymous summary of the experts’

forecasts from the previous round as well as the reasons they provided for

their judgments. Thus, experts are encouraged to revise their earlier answers

in light of the replies of other members of their panel. It is believed that during

this process the range of the answers will decrease and the group will

converge towards the "correct" answer. Finally, the process is stopped after a

pre-defined stop criterion (e.g. number of rounds, achievement of consensus,

stability of results) and the mean or median scores of the final rounds

determine the results.

Qualitative forecasting methods92

Scenario Writing:

In Scenario Writing, the forecaster generates different outcomes based on

different starting criteria. The decision-maker then decides on the most likely

outcome from the numerous scenarios presented. Scenario writing typically

yields best, worst and middle options.

Brainstorming:

Brainstorming comes in handy in many situations where creative, cognitive

thinking is required. In brainstorming sessions efforts are made to find a

conclusion for a specific problem (e.g., in our case forecasting demand) by

gathering a list of ideas spontaneously contributed by the session participants.

They try to generate ideas and to solve problems casually, free from criticism

and peer pressure. They are often used when time constraints prevents

quantitative forecasts. Of course it is subject to more biases and should be

viewed skeptically by decision-makers.

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a) Collect residential buildings supply and demand information (at least) for years of

1388 to 1396. For each data present your references! (40%)

b) Draw supply and demand on a diagram. (20%)

c) Use a proper forecasting method for residential buildings supply and demand and

estimating steel (used in buildings) supply and demand up to year 1405. (40%)

Note: It is fine to only using linear or random forecasting, based on the data trend!

Due: two weeks

Home assignment 2

Thank you!

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