WHICH TO USE?

• When using time series data, plotting the

data can be very helpful in choosing an
appropriate forecasting technique
• You want to achieve:
– No pattern or direction in forecast error
• Error = (At - Ft) = (Actual - Forecast)
• Seen in plots of errors over time
– Smallest forecast error
• Mean square error (MSE)
• Mean absolute deviation (MAD)

ADM 3301~ Rim Jaber 1

 WHICH TO USE?
(Stable time series)
25

20
SALES

15

10

0
0 1 2 3 4 5 6 7 8 9 10 11 12
WEEK
• Moving average with large N
• Weighted moving average (large number of periods)
• Exponential smoothing with close to 0

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 WHICH TO USE?
(Time series with changing pattern)

15000
PATIENTS

10000

5000

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
PERIOD

• Moving average with small N

• Weighted moving average (small number of periods)
• Exponential smoothing with  close to 1
• Naïve method
• Adaptive Forecasting 3
 Adaptive Forecasting
• It’s possible to use the computer to
continually monitor forecast error and
adjust the values of the  and b
coefficients used in exponential
smoothing to continually minimize
forecast error
• This technique is called adaptive
smoothing

ADM 3301~ Rim Jaber 4

 WHICH TO USE?
(Time series with trend)
6000

5500
SALES

5000

4500

4000
0 2 4 6 8 10 12 14 16 18 20
PERIOD

• Double exponential smoothing

• Linear regression (only if data are linear)
• Trend projection
• Naïve method that would account for the trend
ADM 3301~ Rim Jaber 5
 WHICH TO USE?
(Time series with seasonality)
90000

70000
DEMAND

50000

30000

10000

0 12 24 36 48
MONTH

• Multiplicative model
• Additive model
• Naïve method that would account for seasonality
ADM 3301~ Rim Jaber 6
 Time Horizon
The time horizon for a forecast has a direct bearing
on the selection of a forecasting techniques
• Short range techniques: they produce forecasts for
the next period (e.g. Moving averages and
exponential smoothing techniques).
• Medium-range techniques: e.g. linear regression,
Multiplicative model
• Long-range techniques: e.g. qualitative forecasting
techniques…
ADM 3301~ Rim Jaber 7
 FORECAST ERRORS
• Forecast Error:
Et = At - Ft
• Running Sum of Forecast Errors:
RSFE = S Et
• Mean Error:
ME = (S Et) / n
RSFE and ME are useful for measuring the bias in
a forecast. The bias is the tendency of a forecast to
always be too high or too low.
ADM 3301~ Rim Jaber 8
 FORECAST ERRORS
• Mean Squared Error:
MSE = (S Et2) / n
• Standard Deviation of Forecast Errors:

 = MSE
• Mean Absolute Deviation of Forecast Errors:
MAD = (S |Et|) / n
MSE,  and MAD are measures of the dispersion
of forecast errors from the value zero.
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 MAD AND STANDARD DEVIATION
• If forecast errors Et are normally distributed (errors exhibit only
random variations) with a mean of zero (no bias ME almost equal
zero) then the forecast is deemed to perform adequately and:

= MAD  1.25 MAD
2
MAD  0.8 
• Then we can give a forecast range and an associated confidence
level in which the actual observation, At,would fall
– Ft ± z 
– Ft ± 3  for 99.7% confidence level
– Ft ± 2  for 95.44% confidence level
• The number of observations, n, used in the computation
of  must be at least 30 if it is less use Ft ± t  with df= n-2
 MAD AND 
Number Number Area of Normal Probability
of MADs of 's Distribution Within Limits
±1.0 ±0.8 57.62
±1.5 ±1.2 76.98
±2.0 ±1.6 89.04
±2.5 ±2.0 95.44
±3.0 ±2.4 98.36
±3.5 ±2.8 99.48
±4.0 ±3.2 99.86

ADM 3301~ Rim Jaber 11

 EXAMPLE 4
(Blitz Beer Sales)
We have used three forecasting models:

Exp. Smoothing Double Exp. Sm. Regression

 = 0.2  = 0.2, b = 0.3
ME 147.37 16.90 0.00
MSE 24,253.70 1,734.64 581.86
MAD 147.37 34.84 19.13
 155.74 41.65 24.12

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Period Sales Exp. Smoothing Double Exp. Sm. Regression
t At Ft Et Ft Et Ft Et
1 4,890 4,890.0 - - - 4,887.86 2.14
2 4,910 4,890.0 20.0 - - 4,925.19 -15.19
3 4,970 4,894.0 76.0 4,910.0 60.0 4,962.52 7.48
4 5,010 4,909.2 100.8 4,945.6 64.4 4,999.85 10.15
5 5,060 4,929.4 130.6 4,985.9 74.1 5,037.18 22.82
6 5,100 4,955.5 144.5 5,032.7 67.3 5,074.51 25.49
7 5,050 4,984.4 65.6 5,082.1 -32.1 5,111.84 -61.84
8 5,170 4,997.5 172.5 5,109.7 60.3 5,149.17 20.83
9 5,180 5,032.0 148.0 5,159.4 20.6 5,186.50 -6.5
10 5,240 5,061.6 178.4 5,202.4 37.6 5,223.83 16.17
11 5,220 5,097.3 122.7 5,251.0 -31.1 5,261.16 -41.16
12 5,280 5,121.8 158.2 5,284.1 -4.1 5,298.49 -18.49
13 5,330 5,153.5 176.5 5,322.3 7.7 5,335.82 -5.82
14 5,380 5,188.8 191.2 5,363.3 16.7 5,373.15 6.85
15 5,440 5,227.0 213.0 5,407.2 32.8 5,410.48 29.52
16 5,460 5,269.6 190.4 5,456.2 3.8 5,447.81 12.19
17 5,520 5,307.7 212.3 5,499.6 20.4 5,485.14 34.85
18 5,490 5,350.2 139.8 5,547.6 -57.6 5,522.47 -32.47
19 5,550 5,378.1 171.9 5,576.5 -26.5 5,559.80 -9.8
20 5,600 5,412.5 187.5 5,610.1 -10.1 5,597.13 2.87
 ERRORS
(Blitz Beer Sales)
200 Exponential Smoothing
ERRORS

100
Double exponential smoothing
Regression
0

-100
0 2 4 6 8 10 12 14 16 18 20
PERIOD
14
ADM 3301~ Rim Jaber
 EXAMPLE 5
(Tackey Toys)
• Mean Error (ME) = -166.39;
• Mean Absolute Deviation (MAD) = 1,505.42;
• Mean Squared Error (MSE) = 4,093,122.06.
Because the bias is small,
•  =2,023.14;
• 2   4,000
• 95.44 % confidence level that At would fall in the
forecasting range: Ft ± 4,000
The Relative Errors vary between:
• MIN = 0.90 (Demand is 10% below Forecasted Value)
• MAX = 1.14 (Demand is 14% above Forecasted Value)
15
ADM 3301~ Rim Jaber
 Monitoring and Controlling
Forecasts
Control Chart
• Monitoring approach that sets limits for the
individual forecast errors, Et; the limits are
multiple of .
• Et are normally distributed with a mean of zero.
for a normal distribution, approximately 99.7%
the errors can be expected to fall with the limits
of: 0 ± 3 .
• If the forecast is in control 99.7 % of the
errors should fall within the limits of 3 
16
ADM 3301~ Rim Jaber
 Control Chart
• MSE = 4,089,122.14
•  = MSE
•  = 2,023.14
• 3 = 6,069.42
• Draw the Control chart (Error Vs. Period),
where 6,069 as the upper limit and – 6,069
as the lower limit on the y axis. The mean
of 0 as the center of the y axis.
ADM 3301~ Rim Jaber 17
 Control Chart
(Tackey Toys)
Contol Chart

8,000.00
6,000.00
4,000.00
2,000.00
Errors

0.00
-2,000.00 1 10 19 28 37 46
-4,000.00
-6,000.00
-8,000.00
Month

ADM 3301~ Rim Jaber 18

 Comments on Control Chart
• Forecasts errors, Et, should be randomly
distributed around the mean of 0 in order
for the forecast to perform adequately.
• The distribution of errors is normal
• Points that falls outside the limits (the
range of random variability of Et) should
be regarded as evidence that corrective
action is needed.
ADM 3301~ Rim Jaber 19
 Monitoring and Controlling
Forecasts
Tracking Signal
• Measures how well the forecast is predicting
actual values
• Ratio of cumulative forecast errors to mean
absolute deviation (MAD)
– Good tracking signal has low values
– If forecasts are continually high or low, the forecast
has a bias error
ADM 3301~ Rim Jaber 20
 Monitoring and Controlling
Forecasts
Tracking Cumulative error
signal =
MAD

=
å (Actual demand in period i -Forecast demand in period i)
å Actual -Forecast
n
 Tracking Signal

Signal exceeding limit

Tracking signal
Upper control limit
+

0 MADs Acceptable
range

–
Lower control limit

Time

22
Copyright © 2014 Pearson Canada Inc.
 Tracking Signal Example
ABSOLUTE CUM ABS TRACKING
ACTUAL FORECAST CUM FORECAST FORECAST SIGNAL (CUM
QTR DEMAND DEMAND ERROR ERROR ERROR ERROR MAD ERROR/MAD)
1 90 100 –10 –10 10 10 10.0 –10/10 = –1

2 95 100 –5 –15 5 15 7.5 –15/7.5 = –2

3 115 100 +15 0 15 30 10.0 0/10 = 0

4 100 110 –10 –10 10 40 10.0 10/10 = –1

5 125 110 +15 +5 15 55 11.0 +5/11 = +0.5

6 140 110 +30 +35 30 85 14.2 +35/14.2 = +2.5

At the end of quarter 6, MAD =

å Forecast errors 85
= = 14.2
n 6
Cumulative error 35
Tracking signal = = = 2.5 MADs
MAD 14.2
 Tracking Signal Example
Cumulative
Absolute Absolute
Actual Forecast Cumm Forecast Forecast
Qtr Demand Demand Error Error Error Error MAD

1 90 100 -10 -10 10 10 10.0

2 95 100 -5 -15 5 15 7.5
3 115 100 +15 0 15 30 10.0
4 100 110 -10 -10 10 40 10.0
5 125 110 +15 +5 15 55 11.0
6 140 110 +30 +35 30 85 14.2

ADM 3301~ Rim Jaber 24

 Tracking Signal Example
Tracking Cumulative
Absolute Absolute
Signal Forecast
Actual Cumm Forecast Forecast
Qtr (Cumm Error/MAD)
Demand Demand Error Error Error Error MAD

1 -10/10
90 =100 -1 -10 -10 10 10 10.0
2 -15/7.5
95 100
= -2 -5 -15 5 15 7.5
3 0/10
115 = 0100 +15 0 15 30 10.0
4 100
-10/10 =110
-1 -10 -10 10 40 10.0
5 125
+5/11 =110
+0.5 +15 +5 15 55 11.0
6 140
+35/14.2110= +2.5+30 +35 30 85 14.2

The variation of the tracking signal between -2.0

and +2.5 is within acceptable limits
ADM 3301~ Rim Jaber 25
 Focus Forecasting
• Developed at American Hardware Supply, based
on two principles:
1. Sophisticated forecasting models are not always
better than simple ones
2. There is no single technique that should be used
for all products or services
• This approach uses historical data to test multiple
forecasting models for individual items
• The forecasting model with the lowest error is then
used to forecast the next demand

ADM 3301~ Rim Jaber 26

Forecasting in the Service Sector

• Presents unusual challenges

– Special need for short term records
– Needs differ greatly as function of
industry and product
– Holidays and other calendar events
– Unusual events

ADM 3301~ Rim Jaber 27

 Fast Food Restaurant Forecast
20% –
Percentage of sales

15% –

10% –

5% –

11-12 1-2 3-4 5-6 7-8 9-10

12-1 2-3 4-5 6-7 8-9 10-11
(Lunchtime) (Dinnertime)
Figure 4.12
Hour of day
28
Copyright © 2014 Pearson Canada Inc.
 FedEx Call Center Forecast
12% –

10% –

8% –

6% –

4% –

2% –

0% –
2 4 6 8 10 12 2 4 6 8 10 12
A.M. P.M.
Hour of day Figure 4.12
29
Copyright © 2014 Pearson Canada Inc.
OVERVIEW OF QUALITATIVE
METHODS
• Sales force composite
– Estimates from individual salespersons are reviewed
for reasonableness, then aggregated
• Jury of executive opinion
– Pool opinions of high-level executives, sometimes
augment by statistical models
• Consumer Market Survey
– Ask the customer
• Delphi method
– Panel of experts, queried iteratively
ADM 3301~ Rim Jaber 30
 SALES FORCE COMPOSITE
• Each salesperson projects their sales
• Combined at district & national levels
• Sales rep’s know customers’ wants
• Tends to be overly optimistic after several
periods of good sales

ADM 3301~ Rim Jaber 31

 JURY OF EXECUTIVE
OPINION
• Involves small group of high-level
managers
– Group estimates demand by working together
• Combines managerial experience with
statistical models
• Relatively quick
• ‘Group-think’
disadvantage
ADM 3301~ Rim Jaber 32
 CONSUMER MARKET
SURVEY
• Ask customers about purchasing plans
• What consumers say, and what they
actually do are often different
• Sometimes difficult to answer

ADM 3301~ Rim Jaber 33

 Delphi Method
• Iterative group
Decision Makers
process, continues (Evaluate
until consensus is responses and
make decisions)
reached
• 3 types of Staff
(Administering
participants survey)
– Decision makers
– Staff
Respondents
– Respondents (People who can
make valuable
ADM 3301~ Rim Jaber judgments) 34
 SOME TECHNICAL POINTS
• Most practitioners use Error = Actual - Forecast.
Thus, if Forecasts tend to underestimate Actuals,
Bias will be positive. However, some practitioners
use Error = Forecast - Actual, which will yield the
opposite sign for Bias. KNOW YOUR
COMPUTER PROGRAM.
• MSE: some divide by n-1 (textbook), some by n.
As long as n is not too small, it makes little
difference.
• Exponential smoothing: picking the first forecast is
done in a variety of ways.
35
ADM 3301~ Rim Jaber
 SOME TECHNICAL POINTS
• Decomposition: there are two common approaches:
– calculate seasonals using raw data and centered moving
averages, deseasonalize the data, then use regression on
deseasonalized data to get trend line
– calculate seasonals using raw data and centered moving
averages, then use regression on centered moving averages to
get trend line.
• There are other commonly used models, more
complicated: Winter’s model, Box-Jenkins, ... If your
forecasts don’t cut the mustard, you may need to call
on the experts who are familiar with a variety of other
approaches (or take the Forecasting course).
36
ADM 3301~ Rim Jaber
ELEMENTS OF A GOOD
FORECAST

Timely

Accurate
Reliable

Written

37
ADM 3301~ Rim Jaber
 Summary
 Forecasts are important for operations
managers and their planning
 However, it is difficult to predict the future.
Two types of forecasting:
– Qualitative
– Quantitative
 Qualitative forecasting is the most used
methodology, due to the mathematical
complexities of the quantitative methodology

Copyright © 2014 Pearson

Canada Inc.