The document discusses forecasting including its definition, uses, principles, process, methods, and accuracy. Forecasting refers to predicting future values and events. Common forecasting methods include qualitative approaches using expert opinions as well as quantitative time series and causal approaches.
The document discusses forecasting including its definition, uses, principles, process, methods, and accuracy. Forecasting refers to predicting future values and events. Common forecasting methods include qualitative approaches using expert opinions as well as quantitative time series and causal approaches.
The document discusses forecasting including its definition, uses, principles, process, methods, and accuracy. Forecasting refers to predicting future values and events. Common forecasting methods include qualitative approaches using expert opinions as well as quantitative time series and causal approaches.
The document discusses forecasting including its definition, uses, principles, process, methods, and accuracy. Forecasting refers to predicting future values and events. Common forecasting methods include qualitative approaches using expert opinions as well as quantitative time series and causal approaches.
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Unit 7
Forecasting Outline • We will discuss: – Definition – Uses of forecasting – Features of Forecasting – Process – Methods/techniques What is forecasting?
• It refers to: – A statement about the future value of a variable of interest such as demand. – Predicting future events. Uses of Forecasting 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
Principles of Forecasting
• Principles – Forecasts are rarely perfect – Forecasts are more accurate for groups or families of items rather than for individual items. – Forecasts are more accurate for shorter than longer time horizons. Steps in forecasting
“The forecast”
Step 6 Monitor the forecast
Step 5 Prepare the forecast Step 4 Gather and analyze data Step 3 Select a forecasting technique Step 2 Establish a time horizon Step 1 Determine purpose of forecast Forecasting Approaches
• Two: – Qualitative – Quantitative • Approaches vary in sophistication from scientifically conducted surveys to intuitive hunches about future events Qualitative Forecasting
• Forecasting based on – uses subjective inputs – judgments/opinions about causal factors – intuition and experience • Preferred in the absence of recorded previous data Qualitative Forecasting • Executive opinions • Sales force opinions • Consumer/market surveys • Marketing research • Outside opinion – experts • Historical analogy • Delphi method – Opinions of managers and staff – Achieves a consensus forecast Quantitative Forecasting
• Assumption – the “forces” that generated the past demand will generate the future demand, i.e., history will tend to repeat itself – Analysis of the past demand pattern provides a good basis for forecasting future demand Quantitative Forecasting
• Characters: – Simple to use – Quick and easy to prepare – Easily understandable – Can be a standard for accuracy Quantitative Forecasting
Two methods: • Time Series Analysis – uses historical data assuming the future will be like the past • Associative forecast – uses explanatory variables to predict the future Time Series Analysis
• It is based on – a sequence (order) of evenly spaced data points (weekly, monthly, quarterly, and so on). • Forecasting time-series data implies that future values are predicted only from past values and that other variables are ignored. • Analysis of the time series identifies patterns and develop a forecast Time Series Analysis
• Behaviors – Trend - long-term movement in data – Seasonality - short-term regular variations in data – Cycle – wavelike variations of more than one year’s duration – Irregular variations - caused by unusual circumstances – Random variations - caused by chance Time Series Analysis Techniques for Averaging
• Simple moving average
• Weighted moving average
• Exponential smoothing Simple moving average
• An averaging period k is given or selected
• The forecast for the next period is the arithmetic average of the k most recent actual demands • It is called a “simple” average because each period used to compute the average is equally weighted
F = (A n + A n-1 .... A n-k+1 )
1 n+1 k Simple moving average
• Example – Compute: the demand for tires in a tire store in the past 5 weeks were as follows. Compute a three-period moving average forecast for demand in week 6. 83 80 85 90 94
• Formula n
A i MAn = i=1
n Weighted Moving Average
• This is a variation on the simple moving average where
instead of the weights used to compute the average being equal, they are not equal • The weights must add to 1.0 and generally decrease in value with the age of the data • This allows more recent demand data to have a greater effect on the moving average
F4 = 0.5 A 3 + 0.3 A 2 0.2 A1
Weighted Moving Average
• Formula n
MAn = WiAi=1 i
• Example: – For the previous demand data, compute a weighted average forecast using a weight of .40 for the most recent period, .30 for the next most recent, .20 for the next and .10 for the next. – If the actual demand for week 6 is 91, forecast demand for week 7 using the same weights Exponential Smoothing
• Weighted averaging method based on previous
forecast plus a percentage of the forecast error • The forecast is the weighted average of the old forecast and the actual/observed value • Premise: the most recent observations might have the highest predictive value. Exponential Smoothing
• Formula Ft = Ft-1 + (At-1 - Ft-1) • Where, Ft = forecast for period t
– Ft-1= forecast for period t-1
– = smoothing constant
– At-1 = actual forecast for t-1
Exponential Smoothing
• Example – Suppose the previous forecast was 42 units, actual demand was 40 units and α=0.10. – Compute the new forecast. Linear Trend Equation
• Form Ft
Ft = a + bt
0 1 2 3 4 5 t
Ft = Forecast for period t
t = Specified number of time periods a = Value of Ft at t = 0 b = Slope of the line Linear Trend Equation
• Calculating a and b
n (ty) - t y b = n t 2 - ( t) 2
y - b t a = n Linear Trend Equation t y 2 W eek t S a le s ty 1 1 150 150 2 4 157 314 3 9 162 486 4 16 166 664 5 25 177 885
2 t = 15 t = 55 y = 812 ty = 2 4 9 9 2 ( t) = 2 2 5 Linear Trend Calculation
5 (2499) - 15(812) 12495 - 12180
b = = = 6.3 5(55) - 225 275 - 225
812 - 6.3(15) a = = 143.5 5
y = 143.5 + 6.3t Exercise 1 • National Mixer Inc. sells can openers. Monthly sales for a seven-month period were as follows: Month Sales (1000) – Forecast September sales volume using each of the following: Feb 19 • A five-month moving average Mar 18 • Exponential smoothing with a smoothing Apr 15 constant equal to .20, assuming a March forecast of 19. May 20 • A weighted average using .60 for August, Jun 18 .30 for July, and .10 for June. Jul 22 Aug 20 Common Nonlinear Trends
Parabolic
Exponential
Growth Associative models
• It uses explanatory variables to predict the
future • Assumption: – the forecast for any period equals the previous period’s actual value Associative models
• It refers to: – Identification of related variables that can be used to predict values of the variable of interest. • Key: – Predictor variables - used to predict values of variable interest – Regression - technique for fitting a line to a set of points – Least squares line - minimizes sum of squared deviations around the line Associative models
• Simple linear regression analysis
– analyzes the linear relationship that exists between two variables.
F a bt where: F= Value of the dependent variable t = Value of the independent variable a = Population’s F-intercept b = Slope of the population regression line Example X Y Computed 7 15 2 10 relationship 6 13 50
4 15 40
14 25 30
15 27 20
16 24 10
0 12 20 0 5 10 15 20 25
14 27 20 44 15 34 7 17 Forecast Accuracy
• Error - difference between actual value and predicted value
• Accuracy is how well the forecasted values match the actual
values
• Accuracy of a forecasting approach needs to be monitored to
assess the confidence you can have in its forecasts and
changes in the market may require reevaluation of the
approach Accuracy can be measured in several ways
• Mean Absolute Deviation (MAD)
– Average absolute error • Mean Squared Error (MSE) – Average of squared error • Mean Absolute Percent Error (MAPE) – Average absolute percent error MAD, MSE, and MAPE
MAD= 2.75 MSE= 10.86 MAPE= 1.28 Controlling the Forecast
• Control chart – A visual tool for monitoring forecast errors – Used to detect non-randomness in errors • Forecasting errors are in control if – All errors are within the control limits – No patterns, such as trends or cycles, are present Control chart
• Example Tracking Signal • It refers to: – The ratio of cumulative forecast error to the corresponding value of MAD. • Formula Controlling the Forecast • Sources of error
– Model may be inadequate
– Irregular variations – Incorrect use of forecasting technique Choosing a Forecasting Technique
• No single technique works in every situation
• Two most important factors – Cost – Accuracy • Other factors include the availability of: – Historical data – Computers – Time needed to gather and analyze the data – Forecast horizon Next
