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Forecas(ng
Techniques
What
is
Forecas0ng?
þ Process
of
predic0ng
a
future
event
þ Underlying
basis
of
all
business
decisions
þ Produc0on
þ Inventory
þ Personnel
þ Facili0es
FORECAST:
• A
statement
about
the
future
value
of
a
variable
of
interest
such
as
demand.
• Forecas0ng
is
used
to
make
informed
decisions.
– Long-‐range
– Short-‐range
3-‐5
Forecasts
• Forecasts
affect
decisions
and
ac0vi0es
throughout
an
organiza0on
– Accoun0ng,
finance
– Human
resources
– Marke0ng
– MIS
– Opera0ons
– Product
/
service
design
3-‐6
Uses
of
Forecasts
Accounting Cost/profit estimates
3-‐7
Features
of
Forecasts
• Assumes
causal
system
past
==>
future
• Forecasts
rarely
perfect
because
of
randomness
• Forecasts
more
accurate
for
groups
vs.
individuals
• Forecast
accuracy
decreases
as
0me
horizon
increases
3-‐8
Elements
of
a
Good
Forecast
Timely
Reliable Accurate
WriAen
3-‐9
Steps
in
the
Forecas0ng
Process
“The forecast”
3-‐10
The basic forecasting methods are:
y
=
a
+
bx
y
=
a
+
bx
•
y
is
the
dependent
variable
•
a
is
a
constant
•
b
is
the
slope
of
the
line
(Coefficient
of
independent
variable)
•
x
is
the
independent
variable
•
For
every
increase
of
1
in
x,
y
changes
by
an
amount
equal
to
b
•
Some
rela0onships
are
perfectly
linear
and
fit
this
equa0on
exactly.
Your
cell
phone
bill,
for
instance,
may
be:
Total
Charges
=
Base
Fee
+
30
fils
(overage
minutes)
If
you
know
the
base
fee
and
the
number
of
overage
minutes,
you
can
predict
the
total
charges
exactly.
Correla(on
Coefficient,
r
:
The
value
of
r
is
such
that
-‐1
<
r
<
+1.
The
+
and
–
signs
are
used
for
posi0ve
linear
correla0ons
and
nega0ve
linear
correla0ons,
respec0vely.
Posi7ve
correla7on:
If
x
and
y
have
a
strong
posi0ve
linear
correla0on,
r
is
close
to
+1.
Nega7ve
correla7on:
If
x
and
y
have
a
strong
nega0ve
linear
correla0on,
r
is
close
to
-‐1.
No
correla7on:
If
there
is
no
linear
correla0on
or
a
weak
linear
correla0on,
r
is
close
to
0.
A
value
near
zero
means
that
there
is
a
random,
nonlinear
rela0onship
between
the
two
variables
Rela(onship
explained
+Ve
-‐Ve
+1
0
-‐1
Coefficient
of
Determina(on,
r
2
or
R2
:
then
r
2
=
0.850,
which
means
that
85%
of
the
total
varia0on
in
y
can
be
explained
by
the
linear
rela0onship
between
x
and
y
(as
described
by
the
regression
equa0on).
The
other
15%
of
the
total
varia0on
in
y
remains
unexplained.
?????????
Learning
Curves:
introduc0on
Learning
Curves
After 4 units have been built, the total time required to built 4 units
will be 10x(2x.80)2, or 25.6 hours, and the third and fourth units
took a total of 9.6 hours, or only 4.8 hours each.
Incremental
unit-‐(me
learning
model
The increment unit-time learning model assumes that each time the
cumulative quantity of units produces doubles, the time needed to
produce the last unit (incremental unit time) declines by a constant
percentage.
If the learning curve is 80% and the time required to build the first
units is 10 hours, then the time required to manufacture the second
unit will be .80* hours. Thus, the total time required to produce the
two units will be:
10 + 8 = 18 hours
No Learning
Batches Total Time CAT
1 50.00 50.00
2 100.00 50.00
4 200.00 50.00
8 400.00 50.00
… … …
128 6,400.00 50.00
Learning
Curves
No Learning
Batches Total Time Labour Cost
1 50.00 50.00
2 100.00 100.00
4 200.00 200.00
8 400.00 400.00
… … …
128 6,400.00 6,400.00
Learning
Curves
Average Cost/unit
Units 80% Learning No Learning
5 10.00 10.00
10 16.00 20.00
20 25.60 40.00
40 40.96 80.00
… - -
640 268.44 1,280.00
Learning
Curves
Learning curve: 80%
60.000
50.000
40.000
CAT
30.000
20.000
10.000
0.000
0 100 200 300 400 500 600
Batch Number
Learning
Curves
Learning curve: 90%
60.000
50.000
40.000
CAT
30.000
20.000
10.000
0.000
0 100 200 300 400 500 600
Batch Number
Learning
Curves
Learning curve: 60%
60.000
50.000
40.000
CAT
30.000
20.000
10.000
0.000
0 100 200 300 400 500 600
Batch Number
Learning
Curves
Learning
Curves
:formulae
eg a = 50 hours
X = 128 batches
learning rate = 80%
Learning
Curves
:
formulae
eg a = 100 hours
X = 64 batches
learning rate = 80%
Learning
Curves
:
solu0on
eg a = 60 hours
X = 32 batches
learning rate = 90%
Learning
Curves
:
solu0on
3-‐57
Forecast
Varia0ons
Irregular
varia(on
Trend
Cycles
90
89
88
Seasonal
varia(ons
3-‐58
1) Trend-
a gradual shifting to a higher or
lower level
example: long-term sales growth.
n Equa0on
∑
Demand in Previous n Periods
MA =
n
Moving
Average
Example
You’re
manager
of
a
museum
store
that
sells
historical
replicas.
You
want
to
forecast
sales
of
item
(123)
for
2011
using
a
3-‐period
moving
average.
2006
4
2007
6
2008
5
2009
3
2010
7
Moving
Average
Solu0on
Time Response Moving Moving
Yi Total Average
(n=3) (n=3)
1995 4 NA NA
1996 6 NA NA
1997 5 NA NA
1998 3 4+6+5=15 15/3 = 5
1999 7
2000 NA
Moving
Average
Solu0on
n Equa0on
• Advantages:
– Beuer
than
simple
naïve
approach
– Using
more
weeks
“dampens”
out
any
‘random
varia0ons’
that
took
place
• Disadvantages:
– Need
to
con0nually
store/update
historical
data
– Gives
equal
weight
to
each
observa0on
(ie,
past
monthly
room
sales,
or
#
of
covers)
Weighted
Moving
Average
Exponen(al
Smoothing
Accounts
for
forecas(ng
errors
and
requires
less
data
New
forecast
=
(Last
period’s
Actual
*
Smoothing
factor)
+(1-‐
α)
*Last
period’s
forecast)
Project A
Project A
108
Sensi(vity
Analysis
Sensitivity analysis is a variety of techniques used
to determine how an amount will change if one
variable in the analysis is changed.