Demand Forecasts

The three principles of all forecasting

techniques:
Forecasting is always wrong
Every forecast should include an estimate of
error
The longer the forecast horizon the worst is
the forecast
Aggregate forecasts are more accurate

Two comments frequently made by

managers
Weve got to have better forecasts
I dont trust these forecasts or
understand where they came from

These comments suggest that

forecasts are held in disrepute by
many managers

The truth about forecasts

They are always wrong
Sophisticated forecasting techniques
do not mean better forecasts
Forecasting is still an art rather than
an esoteric science
Avoid single number forecasting
Single number substitutes for the
decision

Selecting a forecasting
technique
What is the purpose of the forecast?
How is it to be used?
What are the dynamics of the system
for which forecast will be made?
How important is the past in
estimating the forecast?

Forecasting Techniques
Judgmental methods
Qualitative
Market research methods
Time series methods
Quantitative
Casual methods

Judgmental methods
Sales-force composite
Panels of experts
Delphi method

Market research method

Markey testing
Market survey

Time Series methods

Moving average
Exponential smoothing
Trend analysis
Seasonality
Use de-seasonalized data for forecast
Forecast de-seasonalized demand
Develop seasonal forecast by applying
seasonal index to base forecast

Components of an
observation
Observed demand (O) =
Systematic component (S) + Random
component (R)
Level (current deseasonalized demand)
Trend (growth or decline in demand)
Seasonality (predictable seasonal fluctuation)

Causal methods
Single Regression analysis
Multiple Regression analysis

Error measures
MAD
Mean Squared Error (MSE)
Mean Absolute Percentage Error
(MAPE)
Bias
Tracking Signal

Collection and preparation

of data
Record data in the same terms as
needed for forecast
Demand vs. shipment
Time interval should be the same

Record circumstances related to data

Record demand separately for
different customer groups

Time Series Forecasting

Quarter
II, 1998
III, 1998
IV, 1998
I, 1999
II, 1999
III, 1999
IV, 1999
I, 2000
II, 2000
III, 2000
IV, 2000
I, 2001

Demand Dt
8000
13000
23000
34000
10000
18000
23000
38000
12000
13000
32000
41000

Forecast demand for the

next four quarters.

Time Series Forecasting

50,000
40,000
30,000
20,000
10,000
0