Professional Documents
Culture Documents
Forecasting
McGraw-Hill/Irwin
Forecast
Forecast a statement about the future value of a variable of interest
We make forecasts about such things as weather, demand, and resource availability Forecasts are an important element in making informed decisions
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Forecast Uses
Plan the system
Generally involves long-range plans related to: Types of products and services to offer Facility and equipment levels Facility location
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Forecasting Approaches
Qualitative Forecasting Qualitative techniques permit the inclusion of soft information such as: Human factors Personal opinions Hunches These factors are difficult, or impossible, to quantify Quantitative Forecasting Quantitative techniques involve either the projection of historical data or the development of associative methods that attempt to use causal variables to make a forecast These techniques rely on hard data
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Judgemental Forecasting
Executive opinions Sales force opinion Consumer surveys Other approaches Delphi method
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Time-Series Behaviors
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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
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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 Quick and easy to prepare Easily understandable Cannot provide high accuracy
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Seasonal variations
F(t) = A(t-n)
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Muffins 30 34 32
Cinemon buns 18 17 19
Cupcakes 45 26 27
34
35 30 34 36 29 31
19
22 23 23 25 24 26
23
22 48 29 20 14 18
35
31 37 34 33
27
28 29 31 33
47
26 27 24 22
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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=
MA5
MA3
Ft = MAn=
Exponential Smoothing
Therefore, we should give more weight to the more June 18 recent time periods when forecasting.
Jul aug 22 20
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Exponential Smoothing
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Actu al
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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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Ft = a + bt
Ft = Forecast for period t t = Specified number of time periods a = Value of Ft at t = 0 b = Slope of the line
0 1 2 3 4 5 t
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Calculating a and b
n (ty) - t y b = 2 - ( t) 2 n 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
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Forecast Accuracy
Error - difference between actual value and predicted value
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n
MSE = ( Actual forecast)
2
n -1
( Actual forecast n
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MAPE =
/ Actual*100)
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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Control charts are useful for identifying the presence of nonrandom error in forecasts Tracking signals can be used to detect forecast bias
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Proactive approach
Seeks to actively influence demand Advertising Pricing Product/service modifications Generally requires either and explanatory model or a subjective assessment of the influence on demand
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Operations Strategy
The better forecasts are, the more able organizations will be to take advantage of future opportunities and reduce potential risks
A worthwhile strategy is to work to improve short-term forecasts Accurate up-to-date information can have a significant effect on forecast accuracy:
Prices Demand Other important variables
Reduce the time horizon forecasts have to cover Sharing forecasts or demand data through the supply chain can improve forecast quality
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