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    OPM Chapter 3 - Forecasting

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    Wynnie Pouh
    Forecasting is vital for business planning and decision making. There are qualitative and quantitative techniques for forecasting. Qualitative techniques rely on managerial judgment while quantitative techniques use mathematical models. The quantitative techniques include time series analysis, causal relationships, and simulation. Time series analysis predicts the future based on past demand data and can be short, medium, or long term. Choosing a forecasting model depends on the time horizon, data availability, required accuracy, budget, and available personnel. Common quantitative models are simple and weighted moving averages, exponential smoothing, and linear regression.

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    OPM Chapter 3 - Forecasting

    Uploaded by

    Wynnie Pouh
    351 views5 pages
    Forecasting is vital for business planning and decision making. There are qualitative and quantitative techniques for forecasting. Qualitative techniques rely on managerial judgment while quantitative techniques use mathematical models. The quantitative techniques include time series analysis, causal relationships, and simulation. Time series analysis predicts the future based on past demand data and can be short, medium, or long term. Choosing a forecasting model depends on the time horizon, data availability, required accuracy, budget, and available personnel. Common quantitative models are simple and weighted moving averages, exponential smoothing, and linear regression.

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    OPM Forecasting

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    Forecasting is vital for business planning and decision making. There are qualitative and quantitative techniques for forecasting. Qualitative techniques rely on managerial judgment while quantitative techniques use mathematical models. The quantitative techniques include time series analysis, causal relationships, and simulation. Time series analysis predicts the future based on past demand data and can be short, medium, or long term. Choosing a forecasting model depends on the time horizon, data availability, required accuracy, budget, and available personnel. Common quantitative models are simple and weighted moving averages, exponential smoothing, and linear regression.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    351 views5 pages

    OPM Chapter 3 - Forecasting

    Uploaded by

    Wynnie Pouh
    Forecasting is vital for business planning and decision making. There are qualitative and quantitative techniques for forecasting. Qualitative techniques rely on managerial judgment while quantitative techniques use mathematical models. The quantitative techniques include time series analysis, causal relationships, and simulation. Time series analysis predicts the future based on past demand data and can be short, medium, or long term. Choosing a forecasting model depends on the time horizon, data availability, required accuracy, budget, and available personnel. Common quantitative models are simple and weighted moving averages, exponential smoothing, and linear regression.

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    Chapter 3 - Forecasting

    Forecasting
    1. Are vital to every business organization and for every significant management decision basis of corporate long-run planning 2. Considering what kind of forecasts to use a. Strategic forecasts medium and long term forecasts that are used for decisions related to strategy and aggregate demand b. Tactical forecasts short-term forecasts used for making day-to-day decisions related to meeting demand 3. A perfect forecast is virtually impossible (there are too many factors that cannot be predicted with certainty) 4. Qualitative techniques managerial judgment 5. Quantitative techniques mathematical models

    Types of Forecasting
    1. There are four basic types of forecasting a. Qualitative subjective or judgmental and are based on estimates and opinions b. Time series analysis based on the idea that data relating to past demand can be used to predict future demand c. Causal relationships assumes that demand is related to some underlying factor or factors in the environment d. Simulation allow the forecaster to run through a range of assumptions about the condition of the forecast

    Components of Demand
    1. In most cases, demand for products or services can be broken down into six components a. Average demand for the period b. A trend c. Seasonal element d. Cyclical elements i. More difficult to determine because the time span may be unknown or the cause of the cycle may not be considered e. Random variables i. Caused by chance events when all the known causes for demand are subtracted from the total demand, unexplained portion remains and if it cannot be explained, purely random chance f. Autocorrelation i. Denotes the persistence of occurrence, the value expected at any point is highly correlated with its own past values

    Time Series Analysis


    1. Try to predict the future based on past data a. Short term refers to under three months

    b. Medium term refers to three months to two years c. Long term refers to greater than two years FORECASTING METHOD
    Simple moving average Weighted moving average and simple exponential smoothing Exponential smoothing with trend Linear regression Trend and seasonal methods

    AMOUNT OF HISTORICAL DATA


    6 to 12 months, weekly data are often used 5 to 10 observations needed to start 5 to 10 observations needed to start 10 to 20 observations 2 to 3 observations per season

    DATA PATTERN
    Stationary only (i.e. no trend or seasonality) Stationary only Stationary and trend Stationary, trend and seasonality Stationary, trend, seasonality

    FORECAST HORIZON
    Short Short Short Short to medium Short to medium

    d. Which forecasting model a firm should choose depends on: i. Time horizon to forecast ii. Data availability iii. Accuracy required iv. Size of forecasting budget v. Availability of qualified personnel 2. Simple Moving Average a. Moving average a forecast based on average past demand i. Used when demand for a product is neither growing nor declining rapidly and if it does not have seasonal characteristics b. The formula is

    Ft = forecast for the coming period n = number of periods to be averaged At-1 = actual occurrence in the past period At-2, At-3, and At-n, = actual occurrences two periods ago, three periods ago and so on, up to n periods ago c. The main disadvantage in calculating a moving average is that all individual elements must be carried as data because a new forecast period involves adding new data and dropping the earliest data 3. Weighted Moving Average a. Allows any weights to be placed on each element, provided, that the sum of all weights equals one i. A forecast made with past data where more recent data is given more significance than older data b. Choosing weights as a general rule the most recent past is the most important indicator of what to expect in the future and therefore should receive higher weighting 4. Exponential Smoothing a. A time series forecasting technique using weights that decrease exponentially (1-) for each past period

    b. Is used most out of all of the forecasting techniques i. Exponential models are surprisingly accurate ii. Formulating an exponential model is relatively easy iii. The user can understand how the model works iv. Little computation is required to use the model v. Computer storage requirements are small because of the limited use of historical data vi. Tests for accuracy as to how well the model is performing re easy to compute c. Only three pieces of data are needed to forecast the future i. The most recent forecast ii. The actual demand that occurred for that forecast period iii. Smoothing constant alpha, 1. The parameter in the exponential smoothing equation that controls the speed of reaction to differences between forecasts and actual demand d. Trend Effects in Exponential Smoothing i. An upward or downward trend in data collected over a sequence of time periods causes the exponential forecast to always lag behind the actual occurrence 1. Smoothing constant delta a. An additional parameter used in an exponential smoothing equation that includes adjustment for trend 5. Linear Regression Analysis a. Regression can be defined as a functional relationship between two or more correlated variables. It is used to predict one variable given the other b. Linear regression refers to the special class of regression where the relationship between variables forms a straight line c. Linear regression forecasting a forecasting technique that fits a straight line to past demand data i. Formula is Y = a + bt 1. Y = value of dependent variable that we are solving for 2. a = y intercept 3. b = slope 4. t = index for the time period d. Restriction using linear regression forecasting assumes that past data and future projections fall on a straight line e. Can be used for both time series forecasting and for causal relationship forecasting 6. Decomposition of a Time Series a. Time series chronologically ordered data that may contain one or more components of demand: trend, seasonal, cyclical, autocorrelation and random b. Decomposition the process of identifying and separating time series data into fundamental components such as trend and seasonality

    c. It is relatively easy to identify the trend and the seasonal component; it is harder to identify the cycles, the autocorrelation and the random components i. Additive Seasonal Variation simply assume that the seasonal amount is a constant no matter what the trend or average amount is 1. Forecast including trend and seasonal = Trend + Seasonal ii. Multiplicative Seasonal Variation the trend is multiplied by the seasonal factors 1. Forecast including trend and seasonal = Trend x Seasonal Factor iii. Seasonal Factor or Index the amount of correction needed in a time series to adjust for the season of the year iv. Decomposition Using the Least Squares Regression (pg 66) 7. Forecast Errors a. The difference between what actually occurred and what was forecast b. Sources of Error i. Bias errors occur when a consistent mistake is made 1. Include: failure to include the right variables, the use of wrong relationships among variables, employing of the wrong trend line, a mistaken shift ii. Random errors defined as those that cannot be explained by the forecast model being used

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