• We assume that what has happened in past will repeat itself
• What if the product has no background or is a new one?
• Can the demand prediction of one set of products be better than others?
What all may go wrong … if we use the same method for all of them Certain Characteristics of Forecast
• Forecasts are always inaccurate and should thus include both the expected value of the forecast and the measure of forecast error
• Long term forecasts are less accurate than short term forecasts
• Aggregate forecasts are usually more accurate than disaggregate
forecast. Components of Forecast : If product has a history
• Companies must identify the factors that influence future demand and then ascertain the relationship between these factors and future demand • Past demand (and not past sales) • Lead time of product replenishment • Planned advertising or marketing efforts • Planned price discounts • State of the economy • Actions that competitors have taken
But what if no history……………
Forecasting Methods
1. Qualitative 2. Time Series
• Primarily subjective • Use historical demand • Rely on judgment only • Best with stable demand
3. Causal 4. Simulation • Relationship between • Imitate consumer demand and some choices that give rise to other factor demand Lets have a look at some data patterns…
Do You find some
similarity ???............
Or Dissimilarity
Do you think …….they can
be forecasted using same method??? Lets have a look at some data patterns… Slices
1. Trend: This refers to the general long-term direction of the data, indicating whether it's consistently increasing, decreasing, or remaining stable. Imagine a sales chart rising steadily over several years - that's an upward trend.
2. Seasonal: These patterns occur repeatedly within a specific timeframe, often tied to natural cycles or human behavior. For example, ice cream sales typically soar in summer and dip in winter, exhibiting a seasonal pattern.
3. Cyclic: Similar to seasonal patterns, cyclic patterns repeat over time, but their timeframes are typically longer and less predictable. Economic recessions, for instance, might follow a cyclical pattern, but their exact timing can be difficult to pinpoint. Lets have a look at some data patterns…
How far is the data from the average?
Lets have a look at some data patterns… Components of An Observation
Observed demand (O) = systematic component (S) + random
component (R)
• Systematic component – expected value of demand
– Level (current deseasonalized demand) – Trend (growth or decline in demand) – Seasonality (predictable seasonal fluctuation) • Random component – part of forecast that deviates from systematic part • Forecast error – difference between forecast and actual demand Time-Series Forecasting Methods
• Three ways to calculate the systematic component
– Multiplicative S = level × trend × seasonal factor – Additive S = level + trend + seasonal factor – Mixed S = (level + trend) × seasonal factor
A static method assumes that the estimate of level, trend, and seasonality within the systematic component do not vary as a new demand is observed. Forecast Model Description Naïve Uses last period’s actual value as a forecast
Simple Mean (Average) Uses an average of all past data as a forecast
Simple Moving Average Uses an average of a specified number of the
most recent observations, with each observation receiving the same emphasis (weight)
Weighted Moving Average Uses an average of a specified number of the
most recent observations, with each observation receiving a different emphasis (weight)
Exponential Smoothing A weighted average procedure with weights
declining exponentially as data become older
Trend Projection
Seasonal Indexes Moving Average
• Used when demand has no observable trend or seasonality
Systematic component of demand = level • The level in period t is the average demand over the last N periods
(Dt + Dt -1 + … + Dt – N +1 ) Lt = N Ft +1 = Lt and Ft + n = Lt
• After observing the demand for period t + 1, revise the estimates
(Dt +1 + Dt + … + Dt -N + 2 ) Lt +1 = , Ft + 2 = Lt +1 N Naïve Naïve Method Method Moving Average Example (SIMPLE AVERAGE) METHOD SIMPLE MOVING AVERAGE METHOD WEIGHTED MOVING AVERAGE METHOD EXPONENTIAL SMOOTHING METHOD
An attractive feature of this method is that forecasts made with this model will include a portion of every piece of historical demand. Furthermore, there will be different weights placed on these historical demand values, with older data receiving lower weights. At first glance this may not be obvious, however, this property is illustrated on the following page. EXPONENTIAL SMOOTHING METHOD EXPONENTIAL SMOOTHING METHOD
