Scribd
Upload
14 views

DEMAND-FORECASTING-2

Demand forecasting is a systematic process that predicts future consumer demand for products and services, enabling organizations to manage inventory and production effectively. It involves various steps, including understanding the product type, selecting appropriate forecasting techniques, and measuring forecast accuracy using methods like MAD, MSE, and MAPE. Accurate demand forecasting is crucial for minimizing risks and making informed business decisions.

Uploaded by

Mark Teves
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
14 views

DEMAND-FORECASTING-2

Demand forecasting is a systematic process that predicts future consumer demand for products and services, enabling organizations to manage inventory and production effectively. It involves various steps, including understanding the product type, selecting appropriate forecasting techniques, and measuring forecast accuracy using methods like MAD, MSE, and MAPE. Accurate demand forecasting is crucial for minimizing risks and making informed business decisions.

Uploaded by

Mark Teves
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 19

DEMAND FORECASTING

WHAT IS FORECASTING?

 Forecasting is an attempt to predict the future by examining the past.


Business firms can estimate and minimize future risk and uncertainty
through forecasting and forward planning. Without forecasting, forward
planning will be directionless and meaningless.
WHAT IS DEMAND FORECASTING?

 Is a systematic process that involves anticipating the demand for the product and
services of an organization in the future under a set of uncontrollable and
competitive forces.
 Accurate demand forecasting is essential for a firm to enable it to produce the
required quantities at the right time and arrange well in advance for various inputs.
 Demand forecasting is the process of estimating and predicting consumer
demand for a product or service over a future time period. It allows companies to
make better inventory management, production, and marketing decisions.
ELEMENTS OF A GOOD FORECAST
PRINCIPLES OF FORECASTING
STEPS IN DEMAND FORECASTING

1. Economist first should be clear about the uses of forecast data


and how it is related to forward planning by the firm.
2. Forecasting of demand must examine carefully whether the
product is a consumer good or producer good, perishable or
durable.
3. Different determinants will assume a different degree of
importance in different demand functions, depending on the
nature of product and nature of forecasts.
4. In an analysis of statistical demand function, it is customary to
classify the explanatory factors into Trend , Cyclical , Seasonal ,
Random .
5. The economist has to choose a particular technique from among
various techniques of demand forecasting, depending upon the
nature of the product.
6. There are various methods for testing statistical accuracy in a
given forecast. Some of them are simple and inexpensive; others
TYPES OF FORECASTING MODELS
QUALITATIVE METHODS
QUANTITATIVE METHODS
MEASURING FORECAST ERROR

 Forecast Error is the difference between the observed


value of the time series and the forecast.

 MAD- measures how much forecast missed the target


 MSE – the square of how much the forecast missed the
target
 MAPE – the average percent error

 Ideal value = 0;
MFE > 0, model tends to under-forecast
MFE < 0, model tends to over-forecast
MEASURING FORECAST ERROR
 A common way to work out forecast error is to calculate the Mean Absolute Deviation (MAD). This
shows the deviation of forecasted demand from actual demand in units.
 The MAD calculation takes the absolute value of the forecast errors (the difference between actual
demand and the forecast) and averages them over the forecasted periods. ‘Absolute value’ means that
even when the difference between the actual demand and forecasted demand is a negative number, it
becomes a positive.
 Another fairly simple way to calculate forecast error is to find your forecast’s Mean Absolute Percent
Error (MAPE). Statistically, MAPE is defined as the average of percentage errors. The MAPE formula
consists of the mean – M and the absolute percentage error – APE. The formula for APE is the
difference between your actual and forecasted demand as a percentage.
 Since MAPE is a measure of error, high numbers are bad and low numbers are good.
MEASURING FORECAST ERROR

Error
Period Actual Forecast (A – F) │Error│ Error2 [│Error/Actual│] x
100

1 217 215 2 2 4 0.92


2 213 216 -3 3 9 1.41
3 216 215 1 1 1 0.46
4 210 214 -4 4 16 1.90
5 213 211 2 2 4 0.94
6 219 214 5 5 25 2.28
7 216 217 -1 1 1 0.46
8 212 216 -4 4 16 1.89
-2 22 76 10.26%
MEASURING FORECAST ERROR
MEASURING FORECAST ERROR
MEASURING FORECAST ERROR

Another Example:
A company is comparing the accuracy of two forecasting methods. Forecasts using both methods are
shown below along with the actual values for January through May. The company also uses a tracking
signal with ±4 limits to decide when a forecast should be reviewed.Which forecasting method is best?

METHOD A METHOD B
MONTH ACTUAL SALES
FORECAST FORECAST

January 30 28 27
February 26 25 25
March 32 32 29
April 29 30 27
May 31 30 29
ANSWER

• The difference between the tracking signals for schedule 1 and 2 is 1 and 2.2 respectively which indicates
that Schedule 1 forecast is more accurate and that the schedule 2 needs to be reexamined after actual data
analysis.
• MSE magnifies large errors, when the deviations are smaller then the MSE is lower and closer to the MAD. If MAD
and MSE are closer that is a good sign that our forecast could be accurate.
• MAPE tells us that on average our forecast satisfaction score was off from the actual score by 3.44% and 7.31%
respectively which means that the schedule 1 is a better forecast.Anything that is less than 5% MAPE is pretty good.
THANK YOU
SEATWORK

ACTUAL
MONTH FORECAST
DEMAND Compute for:
January 100 100 1. MAD
February 100 70 2. CFE
March 0 100
3. MSE
April 100 30
4. TS
May 100 120
June 450 500
5. MAPE
July 100 150
August 120 100
September 100 50
October 80 50

You might also like