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Management
Topic 2 – Forecasting
Trend Cyclical
Seasonal Random
Actual
demand
Average demand
over four years
Random
variation
| | | |
1 2 3 4
Year Figure 4.1
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Trend Component
1. Persistent, overall upward or
downward pattern
2. Changes due to population,
technology, age, culture, etc.
3. Typically several years duration
M T W T F
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Naive Approach
Assumes demand in next
period is the same as
demand in most recent period
e.g., If January sales were 68, then
February sales will be 68
Sometimes cost effective and efficient
Can be good starting point
1. Moving average
2. Weighted moving average
3. Exponential smoothing
Moving
30 –
Average
28 –
Forecast
26 – Actual
24 – Sales
22 –
Sales
20 –
18 –
16 –
14 –
12 –
10 –
| | | | | | | | | | | |
J F M A M J J A S O N D
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Weighted Moving Average
20 – Actual
sales
15 –
Moving
10 – average
5 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Figure 4.2
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3/12/2019 27
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Potential Problems With
Moving Average
Ft = Ft – 1 + (At – 1 - Ft – 1)
∑ |Actual - Forecast|
MAD =
n
∑ (Actual - Forecast )2
MSE =
n
n
MAPE = ∑100|Actuali - Forecasti|/Actuali
i=1 n
i=1 n
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Exponential Smoothing Example
B)
Month March April May June
Demand 6 8 10 8
Naïve - 6 8 10
Absolute Error - 2 2 2
MAD = (2+2+2) /3 = 2
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Other Examples
Moving Average
Weekly sales of ten-grain bread at the local organic food market are in the
table below. Based on this data, forecast week 9 using a five-week moving
average.
Week 1 2 3 4 5 6 7 8
(382+410+432+405+421)/5 = 410.0
1 24 28.00 -4 4 16 16.6 %
2 23 26.40 -3.40 3.40 11.56 14.78 %
3 26 25.04 0.96 0.96 0.92 3.69 %
4 36 25.42 10.58 10.58 111.94 29.39 %
5 26 29.65 -3.65 3.65 13.32 14.04%
6 30 28.19 1.81 1.81 3.28 6.03%
7 32 28.92 3.08 3.08 9.49 9.63 %
8 26 30.15 -4.15 4.15 17.22 15.96 %
9 25 28.49 -3.49 3.49 12.18 13.96%
10 28 27.09 0.91 0.91 0.83 3.25%
Total -1.36 36.03 196.74 127.33 %
Average -0.14 3.6 19.6 12.73 %
Bias MAD MSE MAPE