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01 Forecasting

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15 views10 pages

01 Forecasting

Uploaded by

mohamedggharib02
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Forecasting

What is Forecasting?

► Process of predicting a future event


► Underlying basis
of all business decisions
► Production
► Inventory
► Personnel
► Facilities

Forecasting Time Horizons

1. Short-range forecast
► Up to 1 year, generally less than 3 months
► Purchasing, job scheduling, workforce levels, job assignments, production levels
2. Medium-range forecast
► 3 months to 3 years
► Sales and production planning, budgeting
3. Long-range forecast
► 3+ years
► New product planning, facility location, research and development

Influence of Product Life Cycle

► 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
The Realities!

► Forecasts are seldom perfect, unpredictable outside factors may impact the forecast
► Most techniques assume an underlying stability in the system
► Product family and aggregated forecasts are more accurate than individual product forecasts

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 needed to make the forecast
6. Make the forecast
7. Validate and implement results

Forecasting Approaches

Qualitative Methods

► Used when situation is vague and little data exist


► New products
► New technology
► Involves intuition, experience
► e.g., forecasting sales on Internet

Quantitative Methods

► Used when situation is ‘stable’ and historical data exist


► Existing products
► Current technology
► Involves mathematical techniques
► e.g., forecasting sales of color televisions
Overview of Qualitative Methods

1. Jury of executive opinion


► Pool opinions of high-level experts, sometimes augment by statistical models

2. Delphi method
► Panel of experts, queried iteratively

3. Sales force composite


► Estimates from individual salespersons are reviewed for reasonableness, then aggregated

4. Market Survey
► Ask the customer

Overview of Quantitative Approaches

Time-series models

► Set of evenly spaced numerical data


► Obtained by observing response variable at regular time periods
► Forecast based only on past values, no other variables important
► Assumes that factors influencing past and present will continue influence in future

1. Naive approach
• Assumes demand in next period is the same as demand in most recent period
2. Moving averages
• Used if little or no trend

3. Weighted Moving Average


• Used when some trend might be present, Older data usually less important
4. Exponential smoothing
• Form of weighted moving average
• Weights decline exponentially
• Most recent data weighted most
• Requires smoothing constant (a)
• Ranges from 0 to 1
• Subjectively chosen
• Involves little record keeping of past data

Impact of Different α

► Chose high values of α when underlying average is likely to change


► Choose low values of α when underlying average is stable
Choosing α
We generally do this by selecting the model that gives us the lowest forecast error
Common Measures of Error:
Mean Absolute Deviation (MAD)

MAD =
∑ Actual - Forecast
n
Mean Squared Error (MSE)

∑ ( Forecast errors )
2

MSE =
n
Forecast error = Actual demand – Forecast value
= At – Ft
Exponential Smoothing Example

Determining the MAD

Determining the MSE

∑ ( Forecast=
errors )
2

=
MSE =
1,526.52 / 8 190.8
n
5. Exponential Smoothing with Trend Adjustment

When a trend is present, exponential smoothing must be modified

Where, Ft = exponentially smoothed forecast average


Tt = exponentially smoothed trend
At = actual demand
a = smoothing constant for average (0 ≤ a ≤ 1)
b = smoothing constant for trend (0 ≤ b ≤ 1)
6. Trend projection

Trend Component

► Persistent, overall upward or downward pattern


► Changes due to population, technology, age, culture, etc.
► Typically several years duration

Seasonal Component

► Regular pattern of up and down fluctuations


► Due to weather, customs, etc.
► Occurs within a single year

Cyclical Component

► Repeating up and down movements


► Affected by business cycle, political, and economic factors
► Multiple years duration
► Often causal or associative relationships

Random Component

► Erratic, unsystematic, ‘residual’ fluctuations


► Due to random variation or unforeseen events
► Short duration and nonrepeating

1. Equations to calculate the regression variables

Least Squares Method

ŷ= a + bx
2. Seasonal Variations In Data

Steps in the process for monthly seasons:

1. Find average historical demand for each month


2. Compute the average demand over all months
3. Compute a seasonal index for each month
4. Estimate next year’s total demand
5. Divide this estimate of total demand by the number of months, then multiply it by the seasonal
index for that month

= Index × yˆ trend forecast


yˆseasonal
Associative model
7. Linear regression

Used when changes in one or more independent variables can be used to predict the changes in the
dependent variable

Forecasting an outcome based on predictor variables using the least squares technique

Where, y = value of the dependent variable (in our example, sales)


a = y-axis intercept
b = slope of the regression line
x = the independent variable

Standard Error of the Estimate

► A forecast is just a point estimate of a future value


► This point is actually the mean of a probability distribution
► We use the standard error to set up prediction intervals around the point estimate

S y,x =
∑(y − y ) c
2

n−2
Where, y = y-value of each data point
yc = computed value of the dependent variable, from the regression equation
n = number of data points

Computationally, this equation is considerably easier to use

S y,x =
∑y 2
− a ∑ y − b∑ xy
n−2
Correlation

► How strong is the linear relationship between the variables?


► Correlation does not necessarily imply causality!
► Coefficient of correlation, r, measures degree of association
► Values range from -1 to +1

n∑ xy − ∑ x ∑ y
r=
 n x 2 − ( x )2   n y 2 − ( y )2 
 ∑ ∑   ∑ ∑ 

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