Forecasting

Forecasting at Disney World

 Global portfolio includes parks in Hong
Kong, Paris, Tokyo, Orlando, and
Anaheim
 Revenues are derived from people – how
many visitors and how they spend their
money
 Daily management report contains only
the forecast and actual attendance at
each park

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Forecasting at Disney World
 Disney generates daily, weekly,
monthly, annual, and 5-year
forecasts
 Forecast used by labor
management, maintenance,
operations, finance, and park
scheduling
 Forecast used to adjust opening
times, rides, shows, staffing levels,
and guests admitted
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Forecasting at Disney World
 Inputs to the forecasting model
include airline specials,
vacation/holiday schedules for
3,000 school districts around the
world
 Average forecast error for the 5-
year forecast is 5%
 Average forecast error for annual
forecasts is between 0% and 3%

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 Learning outcomes
 What is forecasting
 Understand the three time horizons and
which models apply for each use
 The strategic importance of forecasting
 Explain when to use each of the four
qualitative models
 Apply the naive, moving average,
exponential smoothing, and trend methods
in quantitative forecasting

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 What is Forecasting?

 Process of predicting
a future event
 Underlying basis
of all business
??
decisions
 Production
 Inventory
 Personnel
 Facilities

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Forecasting Time Horizons

Mediu
m
range

Long range
forecast

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Influence of Product Life Cycle
Introduction – Growth – Maturity – Decline

 Introduction and growth require

longer forecasts than maturity and
decline
 As product passes through life cycle,
forecasts are useful in projecting
 Staffing levels
 Inventory levels
 Factory capacity

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Types of Forecasts

Economic
forecasts

Technological Demand
forecasts forecasts

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Strategic Importance of
Forecasting
 Human Resources – Hiring,
training, laying off workers
 Capacity – Capacity shortages
can result in undependable
delivery, loss of customers, loss
of market share
 Supply Chain Management –
Good supplier relations and
price advantages
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 Seven Steps in Forecasting

1. Determine the use of the

forecast
2. Select the items to be
forecasted
3. Determine the time horizon of
the forecast
4. Select the forecasting model(s)
5. Gather the data
6. Make the forecast
7. Validate and implement results
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 Forecasting approaches

Qualitative Quantitative

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 Qualitative Methods
 Used when situation is
vague and little data exist
 New products
 New technology

 Involves intuition,
experience, emotions and
value system
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Qualitative forecasting techniques
 Jury of executive opinion

 Delphi method

 Sales force composite

 Consumer market survey

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 Quantitative Methods
 Used when situation is ‘stable’
and historical data exist
 Existing products
 Current technology

 Involves mathematical techniques

 e.g., forecasting sales of LCDs

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 Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential Time-series
smoothing models
4. Trend projection

Associative
5. Linear regression model
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 Time Series Forecasting

 Set of evenly spaced numerical

data

 Forecast based only on past

values, no other variables
important

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Time Series Components

Trend Cyclical

Seasonal Random

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 Trend Component

 Persistent, overall upward or

downward pattern
 Changes due to population,
technology, age, culture, etc.
 Typically several years
duration

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 Seasonal Component
 Regular pattern of up and
down fluctuations
 Due to weather, customs, etc.
 Occurs within a single year
Number of
Period Length Seasons
Week Day 7
Month Week 4-4.5
Month Day 28-31
Year Quarter 4
Year Month 12
Year Week 52

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 Cyclical Component
 Repeating up and down movements
 Affected by business cycle, political,
and economic factors
 Multiple years duration

0 5 10 15 20
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 Random Component
 Erratic, unsystematic, ‘residual’
fluctuations
 Due to random variation or
unforeseen events
 Short duration
and nonrepeating

M T W T F
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 Components of Demand

Trend
component
Demand for product or service

Seasonal peaks

Actual demand
line

Average demand
over 4 years

Random variation
| | | |
1 2 3 4
Time (years)

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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

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 Moving Average Method
 MA is a series of arithmetic
means
 Used if little or no trend

 Used often for smoothing

 Provides overall impression of
data over time
∑ demand in previous n periods
Moving average = n

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Moving Average Example

Actual 3-Month
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3

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Graph of Moving Average
Moving
Average
30 –
28 –
Forecast
26 – Actual
24 – Sales
Shed Sales

22 –
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
 Used when some trend might be
present
 Older data usually less important
 Weights based on experience and
intuition

∑ (weight for period n)

Weighted x (demand in period n)
moving average = ∑ weights

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 Weights Applied Period
Weighted Moving Average
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights

Actual 3-Month Weighted

Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2

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 Potential Problems With
Moving Average
 Increasing n, smooth the
forecast but makes it less
sensitive to changes

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 Moving Average And
Weighted Moving Average
Weighted
moving
30 – average
25 –
Sales demand

20 – Actual
sales
15 –
Moving
10 – average

5 –
| | | | | | | | | | | |
J F M A M J J A S O N D
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 Exponential Smoothing
 Form of weighted moving
average
 Weights decline exponentially
 Most recent data weighted most
 Requires smoothing constant
()
 Ranges from 0 to 1
 Subjectively chosen
 Involves little record keeping of
past data
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 Exponential Smoothing

t = Last period’s forecast

+ a (Last period’s actual demand
– Last period’s forecast)

Ft = Ft – 1 + a(At – 1 - Ft – 1)

where Ft = new forecast

Ft – 1 = previous forecast
a = smoothing (or weighting)
constant (0 ≤ a ≤ 1)
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Exponential Smoothing Example

Predicted demand = 142 Ford Mustangs

Actual demand = 153
Smoothing constant a = .20

New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars

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 Choosing 

The objective is to obtain the most

accurate forecast no matter the
technique
We generally do this by selecting the
model that gives us the lowest forecast
error

Forecast error = Actual demand - Forecast value

= At - Ft
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