Professional Documents
Culture Documents
Operations
Management
Forecasting
Murat Erkoc
MGT303
University of Miami
41
What is Forecasting?
Process of
predicting a future
event
Underlying basis of
all business
decisions
??
Production
Inventory
Personnel
Facilities
42
Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting
Long-range forecast
3+ years
New product planning, facility location,
research and development
43
2/1/2012
Introduction
Growth
Maturity
Best period to
increase market
share
Practical to change
price or quality
image
Poor time to
change image,
price, or quality
R&D engineering is
critical
Strengthen niche
Competitive costs
become critical
Defend market
position
Decline
Cost control
critical
CD-ROMs
Analog TVs
Drive-through
restaurants
iPods
Xbox 360
3 1/2
Floppy
disks
44
Types of Forecasts
Economic forecasts
Address business cycle inflation rate,
money supply, housing starts, etc.
Technological forecasts
Predict rate of technological progress
Impacts development of new products
Demand forecasts
Predict sales of existing products and
services
45
2/1/2012
The Realities!
Forecasts are seldom perfect
Most techniques assume an
underlying stability in the system
Product family and aggregated
forecasts are more accurate than
individual product forecasts
47
Forecasting Approaches
Qualitative Methods
Used when situation is vague
and little data exist
New products
New technology
48
Forecasting Approaches
Quantitative Methods
Used when situation is stable and
historical data exist
Existing products
Current technology
2/1/2012
Overview of Qualitative
Methods
Jury of executive opinion
Pool opinions of high-level experts,
sometimes augment by statistical
models
Delphi method
Panel of experts, queried iteratively
4 10
Overview of Qualitative
Methods
Sales force composite
Estimates from individual
salespersons are reviewed for
reasonableness, then aggregated
4 11
Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential
smoothing
Time-Series
Models
4. Trend projection
5. Linear regression
Associative
Model
4 12
2/1/2012
Cyclical
Seasonal
Random
4 14
Components of Demand
Trend
component
Seasonal peaks
Actual
demand
Average
demand over
four years
Random
variation
|
1
|
2
|
3
Year
|
4
Figure 4.1
4 15
2/1/2012
Trend Component
Persistent, overall upward or
downward pattern
Changes due to population,
technology, age, culture, etc.
Typically several years
duration
4 16
Seasonal Component
Regular pattern of up and
down fluctuations
Due to weather, customs, etc.
Occurs within a single year
Period
Length
Number of
Seasons
Week
Month
Month
Year
Year
Year
Day
Week
Day
Quarter
Month
Week
7
4-4.5
28-31
4
12
52
4 17
Cyclical Component
Repeating up and down movements
Affected by business cycle, political,
and economic factors
Multiple years duration
Often causal or
associative
relationships
0
10
15
20
4 18
2/1/2012
Random Component
Erratic, unsystematic, residual
fluctuations
Due to random variation or
unforeseen events
Short duration and
nonrepeating
F
4 19
Naive Approach
Assumes demand in next
period is the same as
demand in most recent period
e.g., If January sales were 68, then
February sales will be 68
Moving average =
2/1/2012
Actual
Shed Sales
3-Month
Moving Average
January
February
March
April
May
June
July
10
12
13
16
19
23
26
4 22
Shed Sales
Moving
Average
Forecast
Actual
Sales
D
4 23
4 24
2/1/2012
Weights Applied
Period
Weighted Moving
Average
3
Last
month
2
1
6
Month
Actual
Shed Sales
January
February
March
April
May
June
July
10
12
13
16
19
23
26
4 26
Sales demand
30
25
Actual
sales
20
15
Moving
average
10
5
|
Figure 4.2
|
F
|
M
|
A
|
M
|
J
|
J
|
A
|
S
|
O
|
N
|
D
4 27
2/1/2012
Exponential Smoothing
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
Exponential Smoothing
New forecast = Last periods forecast
+ (Last periods actual demand
Last periods forecast)
Ft = Ft 1 + (At 1 - Ft 1)
where
Ft = new forecast
Ft 1 = previous forecast
= smoothing (or weighting)
constant (0 1)
4 29
Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
4 30
10
2/1/2012
Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
New forecast = 142 + .2(153 142)
4 31
Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
New forecast = 142 + .2(153 142)
= 142 + 2.2
= 144.2 144 cars
4 32
Effect of
Smoothing Constants
Weight Assigned to
Smoothing
Constant
Most
Recent
Period
()
= .1
.1
.09
.081
.073
.066
= .5
.5
.25
.125
.063
.031
4 33
11
2/1/2012
Impact of Different
Demand
225
= .5
Actual
demand
200
175
= .1
150 |
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
Quarter
4 34
Impact of Different
225
= .5
Demand
Actual
Chose
high values
of
demand
200
= .1
|
6
|
7
|
8
|
9
Quarter
4 35
Choosing
The objective is to obtain the most
accurate forecast no matter the
technique
We generally do this by selecting the
model that gives us the lowest forecast
error
Forecast error = Actual demand - Forecast value
= At - Ft
4 36
12
2/1/2012
|Actual - Forecast|
n
(Forecast Errors)2
n
4 37
100|Actuali - Forecasti|/Actuali
MAPE =
i=1
4 38
Comparison of Forecast
Error
Quarter
Actual
Tonnage
Unloaded
Rounded
Forecast
with
= .10
Absolute
Deviation
for
= .10
1
2
3
4
5
6
7
8
180
168
159
175
190
205
180
182
175
175.5
174.75
173.18
173.36
175.02
178.02
178.22
5.00
7.50
15.75
1.82
16.64
29.98
1.98
3.78
82.45
Rounded
Forecast
with
= .50
175
177.50
172.75
165.88
170.44
180.22
192.61
186.30
Absolute
Deviation
for
= .50
5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
4 39
13
2/1/2012
Comparison of Forecast
Error
|deviations|
Rounded
Absolute
MADActual
=
Forecast
Deviation
n
Tonnage
with
for
Quarter
Unloaded
= .10
= .10
For 180
= .10 175
5.00
168 = 82.45/8
175.5 = 10.31
7.50
1
2
3
4 For
5
6
7
8
159
174.75
175
= .50 173.18
190
173.36
205 = 98.62/8
175.02
180
178.02
182
178.22
15.75
1.82
16.64
12.33
29.98
1.98
3.78
82.45
Rounded
Forecast
with
= .50
175
177.50
172.75
165.88
170.44
180.22
192.61
186.30
Absolute
Deviation
for
= .50
5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
4 40
Comparison of Forecast
Error2
(forecast errors)
Rounded
Absolute
MSE = Actual
Forecast
Deviation
n
Tonnage
with
for
Quarter
Unloaded
= .10
= .10
For 180
= .10 175
5.00
168
175.5 = 190.82
7.50
= 1,526.54/8
1
2
3
4 For
5
6
7
8
159
174.75
15.75
180
182
178.02
178.22
1.98
3.78
82.45
10.31
1.82
175
= .50 173.18
190
173.36
16.64
=
1,561.91/8
=
195.24
205
175.02
29.98
MAD
Rounded
Forecast
with
= .50
175
177.50
172.75
165.88
170.44
180.22
192.61
186.30
Absolute
Deviation
for
= .50
5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33
4 41
Comparison of Forecast
n
Error
100|deviationi|/actuali
Rounded
Absolute
Rounded
i=1
MAPE =
Actual
Forecast
Deviation
Forecast
Tonnage
with n
for
with
Quarter Unloaded
= .10
= .10
= .50
For
=
.10
1
180
175
5.00
175
2
168
175.5
= 44.75/8
= 7.50
5.59% 177.50
3
4
5
6
7
8
159
174.75
15.75
180
182
178.02
178.22
1.98
3.78
82.45
10.31
190.82
1.82
For 175
= .50 173.18
190
173.36
16.64
=
54.05/8
=
6.76%
205
175.02
29.98
MAD
MSE
172.75
165.88
170.44
180.22
192.61
186.30
Absolute
Deviation
for
= .50
5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33
195.24
4 42
14
2/1/2012
Comparison of Forecast
Error
Quarter
Actual
Tonnage
Unloaded
Rounded
Forecast
with
= .10
1
2
3
4
5
6
7
8
180
168
159
175
190
205
180
182
175
175.5
174.75
173.18
173.36
175.02
178.02
178.22
MAD
MSE
MAPE
Absolute
Deviation
for
= .10
5.00
7.50
15.75
1.82
16.64
29.98
1.98
3.78
82.45
10.31
190.82
5.59%
Rounded
Forecast
with
= .50
175
177.50
172.75
165.88
170.44
180.22
192.61
186.30
Absolute
Deviation
for
= .50
5.00
9.50
13.75
9.12
19.56
24.78
12.61
4.30
98.62
12.33
195.24
6.76%
4 43
4 44
15
2/1/2012
Actual
Demand (At)
12
17
20
19
24
21
31
28
36
Smoothed
Forecast, Ft
11
Smoothed
Trend, Tt
2
Forecast
Including
Trend, FITt
13.00
Table 4.1
4 46
Forecast
Actual
Smoothed
Smoothed
Including
Demand (At) Forecast, Ft
Trend, Tt
Trend, FITt
12
11
2
13.00
17
20
19
Step 1: Forecast for Month 2
24
21
F2 = A1 + (1 - )(F1 + T1)
31
28
F2 = (.2)(12) + (1 - .2)(11 + 2)
36
Table 4.1
4 47
Forecast
Actual
Smoothed
Smoothed
Including
Demand (At) Forecast, Ft
Trend, Tt
Trend, FITt
12
11
2
13.00
17
12.80
20
19
Step 2: Trend for Month 2
24
21
T2 = (F2 - F1) + (1 - )T1
31
28
T2 = (.4)(12.8 - 11) + (1 - .4)(2)
36
Table 4.1
4 48
16
2/1/2012
Forecast
Actual
Smoothed
Smoothed
Including
Demand (At) Forecast, Ft
Trend, Tt
Trend, FITt
12
11
2
13.00
17
12.80
1.92
20
19
Step 3: Calculate FIT for Month 2
24
21
FIT2 = F2 + T1
31
28
FIT2 = 12.8 + 1.92
36
= 14.72 units
Table 4.1
4 49
Actual
Demand (At)
12
17
20
19
24
21
31
28
36
Smoothed
Forecast, Ft
11
12.80
15.18
17.82
19.91
22.51
24.11
27.14
29.28
32.48
Smoothed
Trend, Tt
2
1.92
2.10
2.32
2.23
2.38
2.07
2.45
2.32
2.68
Forecast
Including
Trend, FITt
13.00
14.72
17.28
20.14
22.14
24.89
26.18
29.59
31.60
35.16
Table 4.1
4 50
Product demand
30
25
20
15
10
5
0 |
Time (month)
Figure 4.3
4 51
17
2/1/2012
Trend Projections
Fitting a trend line to historical data points
to project into the medium to long-range
Linear trends can be found using the least
squares technique
y^ = a + bx
^ = computed value of the variable to
where y
be predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
4 52
Deviation7
Deviation5
Deviation6
Deviation3
Deviation4
Deviation1
(error)
Deviation2
Trend line, y^ = a + bx
Time period
Figure 4.4
4 53
Deviation7
Deviation5
Deviation3
Deviation6
Deviation1
Deviation2
Trend line, y^ = a + bx
Time period
Figure 4.4
4 54
18
2/1/2012
b=
xy - nxy
x2 - nx2
a = y - bx
4 55
Time
Period (x)
1
2
3
4
5
6
7
x = 28
x=4
b=
Electrical Power
Demand
74
79
80
90
105
142
122
y = 692
y = 98.86
x2
xy
1
4
9
16
25
36
49
2
x = 140
74
158
240
360
525
852
854
xy = 3,063
3,063 - (7)(4)(98.86)
xy - nxy
=
= 10.54
140 - (7)(42)
x2 - nx2
Electrical Power
Demand
x2
xy
1999
1
74
1
2000
2
79
4
The
trend
line
is
2001
3
80
9
2002
4
90
16
^
2003
105
25
y 5= 56.70 + 10.54x
2004
6
142
36
2005
7
122
49
x = 28
y = 692
x2 = 140
x=4
y = 98.86
74
158
240
360
525
852
854
xy = 3,063
Year
b=
3,063 - (7)(4)(98.86)
xy - nxy
=
= 10.54
140 - (7)(42)
x2 - nx2
19
2/1/2012
Power demand
Trend line,
y^ = 56.70 + 10.54x
|
2001
|
2002
|
2003
|
2004
|
2005
Year
|
2006
|
2007
|
2008
|
2009
4 58
The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand
4 59
20
2/1/2012
Demand
2005 2006 2007
80
70
80
90
113
110
100
88
85
77
75
82
85
85
93
95
125
115
102
102
90
78
72
78
105
85
82
115
131
120
113
110
95
85
83
80
Average
2005-2007
Average
Monthly
90
80
85
100
123
115
105
100
90
80
80
80
94
94
94
94
94
94
94
94
94
94
94
94
Seasonal
Index
4 61
Demand
2005 2006 2007
Average
2005-2007
Average
Monthly
Jan
80
85 105
90
94
Feb
70
85
85
80
94
Mar
80
93 average
82
85 monthly demand
94
2005-2007
Seasonal90index95= 115 average monthly
Apr
100
94
demand
May
113 125 131
123
94
= 90/94 = .957
Jun
110 115 120
115
94
Jul
100 102 113
105
94
Aug
88 102 110
100
94
Sept
85
90
95
90
94
Oct
77
78
85
80
94
Nov
75
72
83
80
94
Dec
82
78
80
80
94
Seasonal
Index
0.957
4 62
Demand
2005 2006 2007
80
70
80
90
113
110
100
88
85
77
75
82
85
85
93
95
125
115
102
102
90
78
72
78
105
85
82
115
131
120
113
110
95
85
83
80
Average
2005-2007
Average
Monthly
Seasonal
Index
90
80
85
100
123
115
105
100
90
80
80
80
94
94
94
94
94
94
94
94
94
94
94
94
0.957
0.851
0.904
1.064
1.309
1.223
1.117
1.064
0.957
0.851
0.851
0.851
4 63
21
2/1/2012
Month
Average
2005-2007
Average
Monthly
Seasonal
Index
80
85 105
90
94
for802008
70
85 Forecast
85
94
80
93
82
85
94
annual demand
= 1,200
90Expected
95 115
100
94
113 125 131
123
94
110 115 120 1,200 115
94
Jan
x
.957
=
96
100 102 113 12
105
94
88 102 110
100
94
1,200
85
90
Feb 95
x90
.851 = 85 94
77
78
85 12
80
94
75
72
83
80
94
82
78
80
80
94
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
0.957
0.851
0.904
1.064
1.309
1.223
1.117
1.064
0.957
0.851
0.851
0.851
4 64
140
130
Demand
120
110
100
90
80
70
|
J
|
F
|
M
|
A
|
M
|
J
|
J
|
A
|
S
|
O
|
N
|
D
Time
4 65
10,000
9,800
9,400
9551
9594
9637
9745
9702
9659
9616
9573
9,600 9530
9680
9724
9766
9,200
9,000
|
|
|
|
|
|
|
|
|
|
|
|
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.6
4 66
22
2/1/2012
1.06
1.04
1.04
1.02
1.02
1.03
1.04
1.01
1.00
0.99
1.00
0.98
0.98
0.99
0.96
0.97
0.97
0.96
0.94
0.92
|
|
|
|
|
|
|
|
|
|
|
|
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.7
4 67
10068
9949
Inpatient Days
10,000 9911
9,800
9764
9724
9691
9572
9,600
9520 9542
9,400
9,200
9,000
9411
9265
9355
|
|
|
|
|
|
|
|
|
|
|
|
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.8
4 68
Associative Forecasting
Used when changes in one or more
independent variables can be used to predict
the changes in the dependent variable
Most common technique is linear
regression analysis
We apply this technique just as we did
in the time series example
4 69
23
2/1/2012
Associative Forecasting
Forecasting an outcome based on
predictor variables using the least squares
technique
y^ = a + bx
^ = computed value of the variable to
where y
be predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable though to
predict the value of the dependent
variable
4 70
Associative Forecasting
Example
Local Payroll
($ billions), x
1
3
4
4.0
2
1
3.0
7
Sales
Sales
($ millions), y
2.0
3.0
2.5
2.0
2.0
3.5
2.0
1.0
0
|
1
|
2
|
|
|
|
3
4
5
6
Area payroll
|
7
4 71
Associative Forecasting
Example
Sales, y
2.0
3.0
2.5
2.0
2.0
3.5
y = 15.0
Payroll, x
1
3
4
2
1
7
x = 18
x = x/6 = 18/6 = 3
y = y/6 = 15/6 = 2.5
b=
x2
1
9
16
4
1
49
2
x = 80
xy
2.0
9.0
10.0
4.0
2.0
24.5
xy = 51.5
51.5 - (6)(3)(2.5)
xy - nxy
= 80 - (6)(32) = .25
x2 - nx2
24
2/1/2012
Associative Forecasting
Example
Sales
y^ = 1.75 + .25x
2.0
1.0
0
|
1
|
2
|
|
|
|
3
4
5
6
Area payroll
|
7
4 73
25
2/1/2012
Tracking Signal
Signal exceeding limit
Tracking signal
+
Acceptable
range
0 MADs
4 76
Adaptive Forecasting
Its possible to use the computer to
continually monitor forecast error and
adjust the values of the and
coefficients used in exponential
smoothing to continually minimize
forecast error
This technique is called adaptive
smoothing
4 77
4 78
26
2/1/2012
20%
15%
10%
5%
11-12
1-2
12-1
(Lunchtime)
3-4
2-3
5-6
7-8
6-7
(Dinnertime)
Hour of day
4-5
9-10
8-9
10-11
Figure 4.12
4 79
6
8
A.M.
10
12
6
8
P.M.
10
12
Hour of day
Figure 4.12
4 80
27