BHARTI VIDYAPEETH COLLEGE OF ENGINEERING NAVI MUMBAI FORECASTING SUBMITTED BY

SANJAY SOPAN MORE ROLL NO-4745

What is Forecasting?
FORECAST:

A statement about the future value of a variable of interest such as demand. Forecasts affect decisions and activities throughout an organization Accounting, finance Human resources Marketing MIS Operations Product / service design

Uses of Forecasts
Accounting Finance Cost/profit estimates Cash flow and funding

Human Resources Marketing

MIS Operations Product/service design

Hiring/recruiting/training Pricing, promotion, strategy

IT/IS systems, services Schedules, MRP, workloads New products and services

Common in all forecasts

Assumes causal system past ==> future Forecasts rarely perfect because of randomness

Forecasts more accurate for groups vs. individuals

Forecast accuracy decreases as time horizon increases

I see that you will get an A this semester.

Elements of a Good Forecast

Timely

Reliable

Accurate

Written

Steps in the Forecasting Process

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

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

Judgmental Forecasts

Executive opinions
Sales force opinions Consumer surveys Outside opinion

Time Series Forecasts

Trend - long-term movement in data Seasonality - short-term regular variations in data Cycle wavelike variations of more than one years duration Irregular variations - caused by unusual circumstances Random variations - caused by chance

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.

Naive Forecasts

Simple to use Virtually no cost Quick and easy to prepare Easily understandable Can be a standard for accuracy Cannot provide high accuracy

Review: forecast

Nave technique

Stable time series data Seasonal variations Data with trends

Averaging

Moving average Weighted moving average Exponential smoothing

Techniques for Trend

Develop an equation that will suitably describe trend, when trend is present. The trend component may be linear or nonlinear We focus on linear trends

CASE STUDY

The manager of a seafood restaurant was asked to establish a pricing policy on lobster dinners. Experimenting with prices produced the following data:

Sold (y) 200

Price (x) 6.00

190
188 180

6.50
6.75 7.00

Create the scatter plot and determine if a linear relationship is appropriate.

170
162 160 155

7.25
7.50 8.00 8.25

Determine the correlation coefficient and interpret it

Obtain the regression line and interpret its coefficients.

156

8.50
8.75 9.00 9.25

148 140 133

Forecast Accuracy

Source of forecast errors:

Model may be inadequate Irregular variations Incorrect use of forecasting technique Random variation

Key to validity is randomness

Accurate models: random errors Invalid models: nonrandom errors

Key question: How to determine if forecasting errors are random?

Error measures

Error - difference between actual value and predicted value

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 = Actual forecast

n
MSE = ( Actual forecast)
2

n -1

MAPE

Actual Forecast 100 Actual n

Example
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

MAD= MSE= MAPE=

2.75 10.86 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

Controlling the forecast

Control charts

Control charts are based on the following assumptions: when errors are random, they are Normally distributed around a mean of zero. Standard deviation of error is MSE 95.5% of data in a normal distribution is within 2 standard deviation of the mean 99.7% of data in a normal distribution is within 3 standard deviation of the mean Upper and lower control limits are often determine via 0 2 MSE or 0 3 MSE

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

THANK YOU