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Forecasting Methods

The document discusses various forecasting methods including extrapolative methods that analyze past demand trends, causal methods that consider factors influencing demand, and qualitative judgmental methods that rely on expert opinions. It provides details on specific extrapolative techniques like simple and weighted moving averages as well as qualitative methods like the Delphi method and nominal group technique. Econometric models and judgmental forecasts are also summarized as additional forecasting approaches.

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Khushboo Raina
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186 views

Forecasting Methods

The document discusses various forecasting methods including extrapolative methods that analyze past demand trends, causal methods that consider factors influencing demand, and qualitative judgmental methods that rely on expert opinions. It provides details on specific extrapolative techniques like simple and weighted moving averages as well as qualitative methods like the Delphi method and nominal group technique. Econometric models and judgmental forecasts are also summarized as additional forecasting approaches.

Uploaded by

Khushboo Raina
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Forecasting Methods

Forecasting Methods
Forecasting methods can be divided into three main categories: (1) Extrapolative or Time series or Nave or Quantitative methods (2) Causal Quantitative or explanatory methods (3) Qualitative or judgmental methods

Extrapolative Methods
Use the past history of demand in making a forecast for the future. Objective of these methods is to identify the pattern in historic data & extrapolate (draw from specific cases for more general cases) this pattern for the future. This process might seem like driving while looking only through a rear view mirror.

Extrapolative Methods
If the time horizon for which the forecast is made is short, extrapolative methods perform quite well.

Causal Methods
Assume that the demand for an item depends on one or more independent factors (ex: price, advertising, competitors price, etc.). These methods seek to establish a relationship between the variable to be forecasted & independent variables. Once this relationship is established, future values can be forecasted by simply plugging in the appropriate values for the independent variables.

Rely on experts (or managers) opinion in making a prediction for the future. These methods are useful for medium to longrange forecasting tasks. The use of judgment in forecasting, at first sound unscientific. When past data are unavailable or not representative of future, there are few alternative other than using the informed opinion of knowledgeable people.

Judgmental Methods

Forecasting Methods
(1) Qualitative or Judgmental Methods: Delphi Method Nominal Group Technique (2) Time Series Methods: Simple Average Simple Moving Average Weighted Moving Average

Forecasting Methods
(3) Causal Quantitative Models: Exponential Smoothing Linear Regression

Delphi Method
A qualitative forecasting technique in which a panel of experts working separately & not meeting arrive at a consensus (agreement) through the summarizing of ideas by a skilled coordinator. Group process intended to achieve a consensus forecast. A panel of experts from either within or without the organization provides written comments on the point in question.

Delphi Method
A coordinator poses a question, in writing, to each expert on a panel. Each expert writes a brief prediction. The coordinator brings the written predictions together, edits them & summarizes them. On the basis of the summary, the coordinator writes a new set of questions & gives them to the experts.

Delphi Method
These are answered in writing. Again, the coordinator edits & summarizes the answers, repeating the process until the coordinator is satisfied with the overall prediction synthesized from the experts. The key to the Delphi technique lies in the coordinator & experts. The experts frequently have diverse backgrounds.

Delphi Method
Two physicists, a chemist, an electrical engineer & an economist might make up a panel. The coordinator must be talented enough to synthesize diverse & wide-ranging statements & arrive at both a structured set of questions & a forecast. The advantage of this method is that direct interpersonal relations are avoided.

Delphi Method
Hence personalities do not conflict, nor can one strong-willed member dominate the group. This method has worked successfully for technological forecasting.

Nominal Group Technique


A qualitative forecasting technique in which a panel of experts working together in a meeting, arrive at a consensus through discussion & ranking of ideas. Like the Delphi method, the nominal group technique involves a panel of experts. Unlike Delphi method, the nominal group technique affords opportunity for discussion among the experts.

Nominal Group Technique


Seven to ten experts are asked to sit around a table in full view of one another, but they are asked not to speak to one another. A group facilitator hands out copies of the question needing a forecast. Each expert is asked to wrote down a list of ideas about the question. After few minutes, the group facilitator asks each expert in turn to share one idea from his or her list.

Nominal Group Technique


A recorder writes each idea on a flip chart so that everyone can see it. The experts continue to give their ideas in around-robin manner until all the ideas have been written on the flip chart. No discussion takes place in this phase of the meeting.

Nominal Group Technique


Usually between 15 to 25 ideas result from the round-robin. During the next phase of the meeting, the experts discuss the ideas that have been presented. The facilitator makes sure that all ideas are discussed. Often similar ideas are combined, reducing the total number of ideas.

Nominal Group Technique


When all discussion has ended, the experts are asked to rank the ideas, in writing, according to priority. The group consensus is the mathematically derived outcome of the individual rankings. The keys to the nominal group process are clearly identifying the question. Allowing creativity, encouraging discussion & ultimately, ruling for consensus.

Simple Average Method


A simple average (SA) is the average of the demands occurring in all previous periods. The demands of all periods are equally weighted. SA = (Sum of demands for all periods)/number of periods

Simple Moving Average Method


A simple moving average (MA) combines the demand data from several of the most recent periods, their average being the forecast for the next period. Once the number of past periods to be used in the calculations has been selected, it is held constant. The demands for all periods are equally weighted.

Simple Moving Average Method


The average moves over time, in that, after each period elapses, the demand for the oldest period is discarded & the demand for the newer period is added for the next calculation, overcoming the major shortcoming of the simple averaging model. MA = (sum of demands for periods)/(chosen number of periods)

Weighted Moving Average


Sometimes the forecaster wants to use a moving average but does not want all n periods equally weighted. A weighted moving average (WMA) allows for varying, not equal, weighting of old demands. WMA = Each periods demand times a weight, summed over all periods in the moving average.

Weighted Moving Average


WMA = (n=1 to t) Ct Dt where, Ct = weight for the period t Dt = demand for the period t An advantage of this model is that it allows to compensate for some trend or seasonality by carefully fitting the coefficients, Ct .

Exponential smoothing
An averaging methods that exponentially decreases the weighing of old demands First order exponential smoothing & double exponential smoothing

Regression
A causal forecasting model in which , from historical data a functional relationship is established between variables and then used to forecast dependent variable values.

Techniques for Trend


Develop an equation that will suitably describe trend, when trend is present. The trend component may be linear or nonlinear
We focus on linear trends

Common Nonlinear Trends

Parabolic

Exponential

Growth

Linear Trend Equation


Ft

Ft = a + bt
Ft = Forecast for period t 0 1 2 3 4 5 t = Specified number of time periods a = Value of Ft at t = 0 b = Slope of the line
t

Example: Ft =10+2t. Interpret 10 and 2. Plot F

Econometric model
The Main difference between time series and econometric model is Time Series Only time was taken as an independent variable Econometric model All economic and demographic variables which influence forecasting variables are taken as independent variables.

3 Stages of Econometric Model


1. Identification of variables and the functional form. 2. Estimation of Parameter. 3. Finding the forecast values

Classification of Econometric Models


1. Single Equation models Only one equation is used 2. Simultaneous models Set of equations are used A. Endogenous Variable Values are determined by the model. B. Exogenous Variables Values originate from outside the system

Simultaneous models
When variables are dependent and independent at the same time , this model is used. S Set of equations are used where variable affect another variable and in turn is also affected by the other variable. This method is more complex. It is also known as COMPLETE SYSTEM APPROACH

Judgmental Forecasts
Executive opinions
Sales force opinions Consumer surveys Outside opinion

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