Forecasting

Forecasting

 Predict the next number in the pattern:

a) 3.7, 3.7, 3.7, 3.7, 3.7, ?

b) 2.5, 4.5, 6.5, 8.5, 10.5, ?

c) 5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, 6.5, ?

Forecasting

 Predict the next number in the pattern:

a) 3.7, 3.7, 3.7, 3.7, 3.7, 3.7

b) 2.5, 4.5, 6.5, 8.5, 10.5, 12.5

c) 5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, 6.5, 9.0

Outline

 What is forecasting?
 Types of forecasts
 Time-Series forecasting
 Naïve
 Moving Average
 Exponential Smoothing
 Regression
 Good forecasts
What is Forecasting?

 Process of predicting a future

event based on historical data
 Educated Guessing
 Underlying basis of
all business decisions
 Production
 Inventory
 Personnel
 Facilities
 Why do we need to forecast?

In general, forecasts are almost always wrong.

So,
Throughout the day we forecast very different
things such as weather, traffic, stock market, state
of our company from different perspectives.

Virtually every business attempt is based on

forecasting. Not all of them are derived from
sophisticated methods. However, “Best" educated
guesses about future are more valuable for
purpose of Planning than no forecasts and hence
no planning.
Types of Forecasts by Time Horizon
Quantitativ
 Short-range forecast e
methods
 Usually < 3 months
 Job scheduling, worker assignments
Detailed
 Medium-range forecast use of
system
 3 months to 2 years
 Sales/production planning

 Long-range forecast
 > 2 years
Design
 New product planning
of system
Qualitative
Methods
Forecasting During the Life Cycle

Introduction Growth Maturity Decline

Qualitative models Quantitative models

- Executive judgment
- Time series analysis
- Market research
- Regression analysis
-Survey of sales force
-Delphi method
Sales

Time
Qualitative Forecasting Methods

Qualitative
Forecasting

Models
Sales Delphi
Executive Market
Force Method
Judgement Research/
Composite
Survey

Smoothing
 Qualitative Methods
Briefly, the qualitative methods are:

Executive Judgment: Opinion of a group of high level

experts or managers is pooled

Sales Force Composite: Each regional salesperson

provides his/her sales estimates. Those forecasts are then
reviewed to make sure they are realistic. All regional
forecasts are then pooled at the district and national levels
to obtain an overall forecast.

Market Research/Survey: Solicits input from customers

pertaining to their future purchasing plans. It involves the
use of questionnaires, consumer panels and tests of new
products and services.
 Qualitative Methods
Delphi Method: As opposed to regular panels where the individuals
involved are in direct communication, this method eliminates the
effects of group potential dominance of the most vocal members.
The group involves individuals from inside as well as outside the
organization.

Typically, the procedure consists of the following steps:

Each expert in the group makes his/her own forecasts in form of
statements
The coordinator collects all group statements and
summarizes them
The coordinator provides this summary and gives another
set of questions to each
group member including feedback as to the input of other
experts.
The above steps are repeated until a consensus is reached.

.
Quantitative Forecasting Methods

Quantitative
Forecasting

Time Series Regression

Models Models

2. Moving 3. Exponential
1. Naive
Average Smoothing
a) simple a) level
b) weighted b) trend
c) seasonality
Quantitative Forecasting Methods

Quantitative
Forecasting

Time Series Regression

Models Models

2. Moving 3. Exponential
1. Naive
Average Smoothing
a) simple a) level
b) weighted b) trend
c) seasonality
Time Series Models

 Try to predict the future based on past

data

 Assume that factors influencing the past will

continue to influence the future
Quantitative Forecasting Methods

Quantitative
Time Series
Models

Models

2. Moving 3. Exponential
1. Naive
Average Smoothing
a) simple a) level
b) weighted b) trend
c) seasonality
1. Naive Approach

 Demand in next period is the same as

demand in most recent period
 May sales = 48 → June forecast = 48

 Usually not good

2a. Simple Moving Average

 Assumes an average is a good estimator of

future behavior
 Used if little or no trend
 Used for smoothing
2b. Weighted Moving Average
 Gives more emphasis to recent data

FFtt11 == w
w11A
Att ++ w
w22A
Att-1-1 ++w
w33A
Att--22 ++...
...++w
wnnA
Att--nn11

 Weights
decrease for older data
sum to 1.0
Simple
Simple moving
moving
average
average models
models
weight
weight all
all previous
previous
periods
periods equally
equally
 FFt t 11 ==ww11AAt t ++ww22AAt -t1-1++ww33AAt -t2-2++......++wwnnAAt -tn-n11
2b. Weighted Moving Average: 3/6, 2/6, 1/6

Month Sales Weighted

(000) Moving
Average
1 4 NA
2 6 NA
3 5 NA
4 ? 31/6 = 5.167
5 ?
6 ?
3a. Exponential Smoothing

 Assumes the most recent observations have

the highest predictive value
 gives more weight to recent time periods

FFt+1
t+1
=
= F
Ftt
+
+ (A
(Att
-
- F
F t)
t)
et

Ft+1 = Forecast value for time t+1 Need

Needinitial
initial
At = Actual value at time t forecast
forecastFFt t

 = Smoothing constant to
tostart.
start.
 Regression Analysis as a Method for
Forecasting
Regression analysis takes advantage
of the relationship between two
variables. Demand is then
forecasted based on the
knowledge of this relationship and
for the given value of the related
variable.

Ex: Sale of Tires (Y), Sale of Autos (X)

are obviously related

If we analyze the past data of these

two variables and establish a
relationship between them, we may
use that relationship to forecast the
sales of tires given the sales of
automobiles.

The simplest form of the relationship

is, of course, linear, hence it is Sales of Autos (100,000)
referred to as a regression line.
 General Guiding Principles for
Forecasting

1. Forecasts are more accurate for larger groups of items.

2. Forecasts are more accurate for shorter periods of time.
3. Every forecast should include an estimate of error.
4. Before applying any forecasting method, the total system
should be understood.
5. Before applying any forecasting method, the method should
be tested and evaluated.
6. Be aware of people; they can prove you wrong very easily
in forecasting