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List the elements of a good forecast. Outline the steps in the forecasting process. Describe at least three qualitative forecasting techniques and the advantages and disadvantages of each. Compare and contrast qualitative and quantitative approaches to forecasting.
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Learning Objectives
Briefly describe averaging techniques, trend and seasonal techniques, and regression analysis, and solve typical problems. Describe two measures of forecast accuracy. Describe two ways of evaluating and controlling forecasts. Identify the major factors to consider when choosing a forecasting technique.
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FORECAST:
A statement about the future value of a variable of interest such as demand. Forecasting is used to make informed decisions. Long-range Short-range
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Forecasts
Forecasts affect decisions and activities throughout an organization
Accounting, finance Human resources Marketing MIS Operations Product / service design
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Uses of Forecasts
Accounting Finance Cost/profit estimates Cash flow and funding
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Features of Forecasts
Assumes causal system past ==> future
Forecasts rarely perfect because of randomness Forecasts more accurate for groups vs. individuals
I see that you will get an A this semester.
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Reliable
Accurate
Written
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The forecast
Step 5 Make the forecast Step 4 Obtain, clean and analyze data Step 3 Select a forecasting technique
Step 2 Establish a time horizon Step 1 Determine purpose of forecast
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Types of Forecasts
Judgmental - uses subjective inputs Time series - uses historical data assuming the future will be like the past Associative models - uses explanatory variables to predict the future
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Judgmental Forecasts
Executive opinions
Sales force opinions Consumer surveys Outside opinion
Delphi method
Opinions of managers and staff
Achieves a consensus forecast
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Forecast Variations
Figure 3.1
Irregular variatio n
Trend
Cycles
90 89 88 Seasonal variations
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Naive Forecasts
Uh, give me a minute.... We sold 250 wheels last week.... Now, next week we should sell....
The forecast for any period equals the previous periods actual value.
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Nave Forecasts
Simple to use Virtually no cost Quick and easy to prepare Data analysis is nonexistent Easily understandable Cannot provide high accuracy Can be a standard for accuracy
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Seasonal variations
F(t) = A(t-n)
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Moving Averages
Moving average A technique that averages a number of recent actual values, updated as new values become available.
Ft = MAn=
Weighted moving average More recent values in a series are given more weight in computing the forecast. Ft = WMAn= wnAt-n + wn-1At-2 + w1At-1 or: Ft+1 = wtAt & wt = 1.0 where t = (1,n)
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MA5
47 45 43 41 39 37 35 1 2 3 4 5 6 7 8 9 10 11 12
MA3
Ft = MAn=
Exponential Smoothing
Therefore, we should give more weight to the more recent time periods when forecasting.
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Exponential Smoothing
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50
Demand
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45 40 35 1 2 3 4 5 6 7 8
.1
9 10 11 12
Period
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Exponential
Growth
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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
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Calculating a and b
n (ty) - t y b = 2 2 n t - ( t)
y - b t a = n
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t = 15 t2 = 55 2 ( t) = 225
y = 812 ty = 2499
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y = 143.5 + 6.3t
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Seasonal relative
Percentage of average or trend
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Associative Forecasting
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
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Computed relationship
50 40 30 20 10 0 0 5 10 15 20 25
Forecast Accuracy
Error - difference between actual value and predicted value
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n
MSE = ( Actual forecast)
2
n -1
( Actual forecas t n
MAPE =
/ Actual*100)
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MSE
Squares error More weight to large errors
MAPE
Puts errors in perspective
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Example 10
Period 1 2 3 4 5 6 7 8 Actual 217 213 216 210 213 219 216 212 Forecast 215 216 215 214 211 214 217 216 (A-F) 2 -3 1 -4 2 5 -1 -4 -2 |A-F| 2 3 1 4 2 5 1 4 22 (A-F)^2 4 9 1 16 4 25 1 16 76 (|A-F|/Actual)*100 0.92 1.41 0.46 1.90 0.94 2.28 0.46 1.89 10.26
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Tracking Signal
Tracking signal
Ratio of cumulative error to MAD
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Operations Strategy
Forecasts are the basis for many decisions Work to improve short-term forecasts Accurate short-term forecasts improve
Profits Lower inventory levels Reduce inventory shortages Improve customer service levels Enhance forecasting credibility
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Exponential Smoothing
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