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BM2 Chapter 5 Forecasting

Chapter 5 discusses forecasting, emphasizing that forecasts are predictions about future values based on past data and can be categorized into qualitative and quantitative approaches. It outlines key features of good forecasts, various forecasting techniques such as judgmental, time-series, and associative models, and specific methods like moving averages and exponential smoothing. The chapter also introduces linear trend equations and simple linear regression for more complex forecasting scenarios.

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23 views24 pages

BM2 Chapter 5 Forecasting

Chapter 5 discusses forecasting, emphasizing that forecasts are predictions about future values based on past data and can be categorized into qualitative and quantitative approaches. It outlines key features of good forecasts, various forecasting techniques such as judgmental, time-series, and associative models, and specific methods like moving averages and exponential smoothing. The chapter also introduces linear trend equations and simple linear regression for more complex forecasting scenarios.

Uploaded by

anonymousehedgehog
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 5

Forecasting
Forecast

It is a statement about
the future value of a
variable of interest.
Features Common to All
Forecasts

1. Techniques assume some underlying


causal system that what existed in the
past will persist into the future
2. Forecasts are not perfect
3. Forecasts for groups of items are more
accurate than those for individual items
4. Forecast accuracy decreases as the
forecasting horizon increases
Elements of a Good The forecast:
Forecast
should be timely
should be accurate
should be reliable
should be expressed in
meaningful units
should be in writing
technique should be simple to
understand and use
should be cost effective
Approaches to Forecasting
Qualitative Forecas ting
• Qualitative techniques permit the inclusion of soft information such as:
Human factors
Personal opinions
Hunches
• These factors are difficult, or impossible, to quantify

Quantitative Forecas ting


• Quantitative techniques involve either the projection of historical data or the development of associative
methods that attempt to use causal variables to make a forecast
• These techniques rely on hard data
Forecasting Techniques
I. Judgmental Forecasts
Forecasts that use subjective inputs such as opinions from consumer
surveys, sales staff, managers, executives, and experts.
II. Time-series Forecasts
Forecasts that project patterns identified in recent time-series
observations.
III. Associative Model
Forecasting technique that uses explanatory variables to predict
future demand.
I. Judgmental Forecasts

Executive opinions
Sales-force opinions
Consumer surveys
An interactive process in which managers and
Delphi method staff complete a series of questionnaires, each
developed from the previous one, to achieve a
consensus forecast.
II. Time-Series Forecasting - Naïve Forecast

I. Naïve Forecast - The forecast for a time period is


equal to the previous time period’s value
Forecast for any period = previous period’s actual
value
Ft = At-1

F: forecast A: Actual t: time period


Naïve Forecast
Example
WEEK SALES (ACTUAL) SALES (FORECAST) ERROR

t A F A-F

1 20 - -

2 25 20 5

3 15 25 -10

4 30 15 15

5 27 30 -3
II. Time-Series Forecasting
Averaging - They can handle step changes or gradual changes in
the level of a series.

Techniques:

1. Moving average
2. Weighted moving average
3. Exponential smoothing
II. Time-Series Forecasting – Moving Average

It averages the number of


n

A t −i
Ft = MA n = i =1
recent actual values, n
updated as new values where
Ft = Forecast for time period t
become available. MA n = n period moving average
At −1 = Actual value in period t − 1
n = Number of periods in the moving average
II. Time-Series Forecasting – Moving Average
Compute a three-period moving average forecast
given demand for shopping carts for the last five
periods.
Period Actual Demand
1 42
2 40
3 43
4 40
5 41
II. Time-Series Forecasting – Moving Average
F6= (43 + 40 + 41)/3
= 41.33

If actual demand in period 6 turns out to be 38, what is the


moving average forecast for period 7?
II. Time-Series Forecasting – Moving Average

Period Actual Demand


1 42
2 40
3 43
4 40
5 41
6 38

F7= (40 + 41 + 38)/3


= 39.67
II. Time-Series Forecasting – Weighted Moving Average

More recent values in a series are given more weight in


computing a forecast.

Ft = wt ( At ) + wt −1 ( At −1 ) + ... + wt − n ( At − n )
where
wt = weight for period t , wt −1 = weight for period t − 1, etc.
At = the actual value for period t , At −1 = the actual value for period t − 1, etc.
II. Time-Series Forecasting – Weighted Moving Average

a. Compute a weighted average forecast using a weight of


.40 for the most recent period, .30 for the next most recent,
.20 for the next, and .10 for the next.
b. If the actual demand for period 6 is 38, forecast demand
for period 7 using the same weights as in part a. Period Actual Actual
Demand Demand
F6 = .10(40) + .20(43) + .30(40) + .40(41) = 41.0
1 42 42
F7 = .10(43) + .20(40) + .30(41) + .40(38) = 39.8 2 40x.10 40
3 43x.20 43x.10
4 40x.30 40x.20
5 41x.40 41x.30
6 38x.40
II. Time-Series Forecasting – Exponential
Smoothing
Based on previous forecast plus a percentage of the forecast
error.
Ft = Ft −1 +  ( At −1 − Ft −1 )
where
Ft = Forecast for period t
Ft −1 = Forecast for the previous period
 = Smoothing constant
At −1 = Actual demand or sales from the previous period
II. Time-Series Forecasting – Exponential
Smoothing
Compute exponential smoothing using smoothing
constant of .10
Period Actual Demand Forecast
1 42
2 40 42
3 42
4 40
5 41
Linear Trend Equation

Ft =a+bt
where
Ft = Forecast for period t
a = Value of Ft at t = 0, which is the y intercept b =
Slope of the line
t = Specified number of time periods from t = 0
Linear Trend
Equation

The coefficients of the line,


a and b, are based on the
following two equations:
Period (t) Demand (y)
1 44
2 52
3 50
4 54
5 55
6 55
7 60
8 56
9 62
Simple Linear Regression

yc =a+bx

Where:
yc = Predicted (dependent) variable
x = Predictor (independent) variable
b = Slope of the line
a = Value of yc when x = 0
Simple Linear
Regression

The coefficients a and b


of the line are based on
the following two
equations:

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