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    Forecasting Fundamentals

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    SusiedeLeon
    This document discusses various types of forecasting methods. It defines a forecast as a prediction of future events or trends. There are qualitative and quantitative forecasting methods. Qualitative methods rely on judgment and experience, while quantitative methods use mathematical models. Some common quantitative models described are naive, simple average, simple moving average, weighted moving average, exponential smoothing, trend projection, and seasonal indexes. The document also discusses decomposing a time series into trends, seasonality, cycles, and random variations. It provides the equation for an exponential smoothing model and defines error measures like mean absolute deviation, mean squared error, and mean absolute percentage error.

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    Forecasting Fundamentals

    Uploaded by

    SusiedeLeon
    92 views5 pages
    This document discusses various types of forecasting methods. It defines a forecast as a prediction of future events or trends. There are qualitative and quantitative forecasting methods. Qualitative methods rely on judgment and experience, while quantitative methods use mathematical models. Some common quantitative models described are naive, simple average, simple moving average, weighted moving average, exponential smoothing, trend projection, and seasonal indexes. The document also discusses decomposing a time series into trends, seasonality, cycles, and random variations. It provides the equation for an exponential smoothing model and defines error measures like mean absolute deviation, mean squared error, and mean absolute percentage error.

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    This document discusses various types of forecasting methods. It defines a forecast as a prediction of future events or trends. There are qualitative and quantitative forecasting methods. Qualitative methods rely on judgment and experience, while quantitative methods use mathematical models. Some common quantitative models described are naive, simple average, simple moving average, weighted moving average, exponential smoothing, trend projection, and seasonal indexes. The document also discusses decomposing a time series into trends, seasonality, cycles, and random variations. It provides the equation for an exponential smoothing model and defines error measures like mean absolute deviation, mean squared error, and mean absolute percentage error.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    92 views5 pages

    Forecasting Fundamentals

    Uploaded by

    SusiedeLeon
    This document discusses various types of forecasting methods. It defines a forecast as a prediction of future events or trends. There are qualitative and quantitative forecasting methods. Qualitative methods rely on judgment and experience, while quantitative methods use mathematical models. Some common quantitative models described are naive, simple average, simple moving average, weighted moving average, exponential smoothing, trend projection, and seasonal indexes. The document also discusses decomposing a time series into trends, seasonality, cycles, and random variations. It provides the equation for an exponential smoothing model and defines error measures like mean absolute deviation, mean squared error, and mean absolute percentage error.

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    of 5

    FORECASTING FUNDAMENTALS

    Forecast: A prediction, projection, or estimate of some future activity, event, or


    occurrence.
    Types of Forecasts
    - Economic forecasts
    o Predict a variety of economic indicators, like money supply, inflation
    rates, interest rates, etc.
    - Technological forecasts
    o Predict rates of technological progress and innovation.
    - Demand forecasts
    o Predict the future demand for a companys products or services.
    Since virtually all the operations management decisions (in both the strategic
    category and the tactical category) require as input a good estimate of future
    demand, this is the type of forecasting that is emphasized in our textbook and in
    this course.
    TYPES OF FORECASTING METHODS
    Qualitative methods: These types of forecasting methods are based on judgments,
    opinions, intuition, emotions, or personal experiences and are subjective in nature.
    They do not rely on any rigorous mathematical computations.
    Quantitative methods: These types of forecasting methods are based on
    mathematical (quantitative) models, and are objective in nature. They rely heavily
    on mathematical computations.

    Model

    Description

    Nave

    Uses last periods actual value as a forecast

    Simple Mean (Average)

    Uses an average of all past data as a forecast

    Simple Moving Average

    Uses an average of a specified number of the most


    recent observations, with each observation receiving the
    same emphasis (weight)

    Weighted Moving Average

    Uses an average of a specified number of the most


    recent observations, with each observation receiving a
    different emphasis (weight)

    Exponential Smoothing

    A weighted average procedure with weights declining


    exponentially as data become older

    Trend Projection

    Technique that uses the least squares method to fit a


    straight line to the data

    Seasonal Indexes

    A mechanism for adjusting the forecast to accommodate


    any seasonal patterns inherent in the data

    DECOMPOSITION OF A TIME SERIES


    Patterns that may be present in a time series
    Trend: Data exhibit a steady growth or decline over time.
    Seasonality: Data exhibit upward and downward swings in a short to intermediate time frame
    (most notably during a year).
    Cycles: Data exhibit upward and downward swings in over a very long time frame.
    Random variations: Erratic and unpredictable variation in the data over time with no
    discernable pattern.

    EXPONENTIAL SMOOTHING METHOD


    Exponential smoothing method: The new forecast for next period (period t) will be calculated
    as follows:
    New forecast = Last periods forecast + (Last periods actual demand Last periods forecast)
    (this box contains all you need to know to apply exponential smoothing)
    Ft = Ft-1 + (At-1 Ft-1) (equation 1)
    Ft = At-1 + (1-)Ft-1

    (alternate equation 1 a bit more user friendly)

    Where is a smoothing coefficient whose value is between 0 and 1.


    The exponential smoothing method only requires that you dig up two pieces of data to apply it
    (the most recent actual demand and the most recent forecast).
    An attractive feature of this method is that forecasts made with this model will include a portion
    of every piece of historical demand. Furthermore, there will be different weights placed on these
    historical demand values, with older data receiving lower weights. At first glance this may not be
    obvious, however, this property is illustrated on the following page.
    Mean Absolute Deviation (MAD): To eliminate the problem of positive errors canceling
    negative errors, a simple measure is one that looks at the absolute value of the error (size of the
    deviation, regardless of sign). When we disregard the sign and only consider the size of the error,
    we refer to this deviation as the absolute deviation. If we accumulate these absolute deviations
    over time and find the average value of these absolute deviations, we refer to this measure as the
    mean absolute deviation (MAD). For our hypothetical two forecasting methods, the absolute
    deviations can be calculated for each year and an average can be obtained for these yearly
    absolute deviations, as follows
    Mean Squared Error (MSE): Another way to eliminate the problem of positive errors
    canceling negative errors is to square the forecast error. Regardless of whether the forecast error
    has a positive or negative sign, the squared error will always have a positive sign. If we
    accumulate these squared errors over time and find the average value of these squared errors, we
    refer to this measure as the mean squared error (MSE). For our hypothetical two forecasting
    methods, the squared errors can be calculated for each year and an average can be obtained for
    these yearly squared errors, as follows:

    Mean Absolute Percent Error (MAPE): A problem with both the MAD and MSE is that their
    values depend on the magnitude of the item being forecast. If the forecast item is measured in
    thousands or millions, the MAD and MSE values can be very large. To avoid this problem, we

    can use the MAPE. MAPE is computed as the average of the absolute difference between the
    forecasted and actual values, expressed as a percentage of the actual values. In essence, we look
    at how large the miss was relative to the size of the actual value. For our hypothetical two
    forecasting methods, the absolute percentage error can be calculated for each year and an
    average can be obtained for these yearly values, yielding the MAPE, as follows

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