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Forecasting: Management Science

This document discusses forecasting. It begins by defining forecasting as the statistical analysis of past and current time series data to obtain clues about future patterns. It then discusses common features of all forecasts, such as assuming past causal systems will continue and forecasts becoming less accurate over longer time horizons. The document outlines the forecasting process and identifies qualitative and quantitative approaches. It provides examples of several quantitative forecasting techniques, including naive forecasts, moving averages, weighted moving averages, and exponential smoothing. Formulas and examples are provided to illustrate how to calculate forecasts using these different techniques.

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46 views23 pages

Forecasting: Management Science

This document discusses forecasting. It begins by defining forecasting as the statistical analysis of past and current time series data to obtain clues about future patterns. It then discusses common features of all forecasts, such as assuming past causal systems will continue and forecasts becoming less accurate over longer time horizons. The document outlines the forecasting process and identifies qualitative and quantitative approaches. It provides examples of several quantitative forecasting techniques, including naive forecasts, moving averages, weighted moving averages, and exponential smoothing. Formulas and examples are provided to illustrate how to calculate forecasts using these different techniques.

Uploaded by

Meg shark
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 PPTX, PDF, TXT or read online on Scribd
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MODULE

13 ◦ Management Science
MODULE G ALS FLEX Course Material

Forecasting

College of Business and Accountancy


LESSON
#13
LEARNING

Forecasting
OUTC MES

Learn and understand the


concept of forecasting
Identify the different types
of quantitative forecasts.
◦ Forecasting
refers to the statistical analysis of the past and current movement in the given time series
so as to obtain clues about the future pattern of those movements.
◦What are the common features to all forecasts?
◦ Features Common to all forecasts
◦ 1. Forecasting technique generally assume that the same underlying causal system that
existed in the past will exist in the future.

◦ 2. Forecasts are rarely perfect; predicted values usually differ from the actual results.

◦ 3. Forecasts for group of items tend to be more accurate than forecast for individual items.

◦ 4. Forecast accuracy decreases as the time period covered by the forecast increases.
What are the steps in the forecasting process?
◦ Steps in the forecasting process
◦ 1. Determine the purpose of the forecast and when it will be needed.
◦ 2. Establish a time horizon that the forecast must cover.
◦ 3. Select a forecasting technique.
◦ 4. Gather and analyze the appropriate data and then prepare the forecast.
◦ 5. Monitor the forecast.
◦ What are the approaches to forecasting?
◦ QUALITATIVE FORECAST
◦ Forecasts based on judgment and opinion.
◦ Rely on analysis of subjective inputs obtained from various sources such as consumer survey,
sales staff, managers, executive and panels of experts.

◦ QUANTITATIVE FORECAST
◦ Forecasts based on historical data.
◦ What are the types of QUANTITATIVE forecast?
◦ Naive Forecast
◦ a forecast that uses the actual demand for the past period as forecasted demand for the
next period.
◦ Example: Use Naive method to determine the forecast demand.
Period (2019) Demand Forecast
Jan 35
Feb 40 35
Mar 55 40
April 65 55
May 60 65
June 65 60
Moving Average
uses the most recent n data values in the time series forecast for the next
period. Formula: Moving Average = ∑(most recent n data values) ÷ n
Illustrative example 1:
Period Actual Demand Forecast
Jan 21
Feb 25
Mar 29
April 21 (21+25+29) ÷ 3 = 25
May 25 (25+29+21) ÷ 3 = 25
June 21 (29+21+25) ÷ 3 = 25
July 18 (21+25+21) ÷ 22.33 = 22

Calculate for a 3 -month moving average using the data in the given table
Moving Average
uses the most recent n data values in the time series forecast for the next
period. Formula: Moving Average = ∑(most recent n data values) ÷ n
Illustrative example 2:
Period Actual Demand Forecast
Jan 21
Feb 25
Mar 29
April 21
May 25 (21+25+29+21) ÷ 4 = 24
June 21 (25+29+21+25) ÷ 4 = 25
July 18 (29+21+25+21) ÷ 4 = 24

Calculate for a 4-month moving average using the data in the given table
Weighted Moving Average
is a smoothing method that uses a weighted average of the recent n data as the forecast.
Formula: WMA = ∑ (weight for period n)(demand in period n) ÷ ∑ weights
Month Demand Forecast
Jan 21
Feb 25
March 29
April 21 WMA = (1(21)+2(25)+3(29) ) ÷ 6 = (21+50+87) ÷6 = 26.33 or 26
May 25 WMA = (1(25)+2(29)+3(21) ) ÷ 6 = (25+58+63) ÷6 = 24.33 or 24
June 20 WMA = (1(29)+2(21)+3(25) ) ÷ 6 = (29+42+75) ÷6 = 24.33 or 24
July 18 WMA = (1(21)+2(25)+3(20) ) ÷ 6 = (21+50+60) ÷6 = 21.83 or 22
August 21 WMA = (1(25)+2(20)+3(18) ) ÷ 6 = (25+40+54) ÷6 = 9.83 or 20
September 20 WMA = (1(21)+2(25)+3(29) ) ÷ 6 = (21+50+87) ÷6 = 19.83 or 20

Compute for the a three- month moving average of the given table
Illustrative example 4:
Formula: WMA = ∑ (weight for period n)(demand in period n) ÷ ∑ weights

Month Demand Forecast


Jan 21
Feb 25
March 29
April 21
May 25 WMA = (1(21)+2(25)+3(29)+4(21)) ÷ 10 = (21+50+87+84) ÷ 10 = 24.2 or 24
June 20 WMA = (1(25)+2(29)+3(21)+4(25)) ÷ 10 = (25+58+63+100) ÷10 = 24.6 or 25
July 18 WMA = (1(29)+2(21)+3(25)+4(20)) ÷ 10 = (29+42+75+80) ÷ 10 = 22.6 or 23
August 21 WMA = (1(21)+2(25)+3(20)+4(18)) ÷ 10 = (21+50+60+72) ÷ 10 = 20.3 or 20
September 20 WMA = (1(25)+2(20)+3(18)+4(21)) ÷ 10 = (25+40+54+84) ÷ 10= 20.3 or 20

Compute for the a four - month moving average of the given table
◦ Exponential Smoothing
◦ is a time series forecasting method for univariate data that can be extended to support data
with a systematic trend or seasonal component.

◦ Univariate is a term commonly used in statistics to describe a type of data which


◦ consists of observations on only a single characteristic or attribute.

◦ A simple example of univariate data:


◦  a. Salaries of workers in industry.
◦ b. Demand for a particular product.
◦ c. Sales of a certain company.
◦ Exponential smoothing formula:
◦ Forecast for the current period = Forecast in the Last Period + ∞ (Actual value of demand or sales – Forecast in the
last period)
◦ Ft + 1 = F t + ∞ [ A t – F t ]
◦ Where:
◦ Ft + 1 = forecast for the current period
◦ Ft = the forecast in the last period
◦ .: ∞ = smoothing constant
◦ A t = the actual value of demand or sales forecast.
Note: Smoothing constant ∞  is a variable used in time series analysis based on exponential smoothing. This constant
determines how the historical time series values are weighted. The smoothing constant must have a value between 0
and 1.
Illustrative example 1:
◦ A car dealer predicted a January demand for 550 units of Toyota Vios cars. Actual January
demand was 680 units of Toyota Vios cars and ∞ = 10% or 0.10. Forecast the demand for January
using exponential smoothing model.
◦ Given: Alternative Solution:
◦ Ft = 550 cars Ft + 1 = ∞ At +(1– ∞ ) Ft
◦ .: ∞ = 0.10 = 0.10(680) + 0.90(550)
◦ A t = 680 cars = 68 + 495 = 563 cars
◦ Required: Ft + 1 = forecast for the current period
◦ Solution:
◦ New forecast = Last Period’s Forecast + ∞ (Last period’s actual demand – Last period’s forecast)
◦ Ft + 1 = Ft + ∞ [ A t – Ft ] Ft= 550 + 0.10 (130) Ft= 563 cars
◦ = 550 + 0.10 [ 680 – 550 ] Ft= 550 + 13
◦ Illustrative example 2:
◦ Use exponential smoothing model to develop a series of forecast for the following data and compute. Use a smoothing
Month Sales (At ) Forecast (Ft ) Error
factor of ∞ = 0.20.
1 39
◦ Compute the error for each period using the formula
2 44
◦ Error for each period = [ Actual – Forecast ] 3 40
Formula: Ft + 1 = Ft + ∞ [ A t – Ft ] 4 45

The above formula can be re written as 5 38


6 43
Ft + 1 = Ft + ∞ [ A t – Ft ] distributive property
Ft + 1 = Ft + ∞ A t – ∞Ft
Ft + 1 = ∞ A t + ( Ft – ∞Ft ) factor out the GCF = Ft
Ft + 1 = ∞ A t + F t ( 1 – ∞ ) or Alternative formula:

Ft + 1 = ∞ At +(1– ∞ ) Ft
Solution: Ft + 1 = ∞ At +(1– ∞ ) Ft
Given: ∞ = 0.20 and (1 – ∞) = 0.80 Mean Square Error
Month Sales (At ) Forecast (Ft ) Error (Error)2 MSE = (25 + 0 + 25 + 6.76) ÷
5 1 39 At = Ft 39

Ft + 1 = ∞ A t + ( 1 – ∞ ) Ft MSE = 56.76 ÷ 5
= 0.20 (39) + 0.80 (39) = 7.8 +31.2 = 39 5 25
2 44 MSE = 11.35

Ft + 1 = ∞ A t + ( 1 – ∞ ) Ft
3 40 = 0.20 (44) + 0.80 (39) = 8.8 +31.2 = 40 0 0 Note: Error = At – Ft

Ft + 1 = ∞ A t + ( 1 – ∞ ) Ft
4 45 = 0.20 (40) + 0.80 (40) = 7.8 +31.2 = 40 5 25

Ft + 1 = ∞ A t + ( 1 – ∞ ) Ft
5 38 = 0.20 (45) + 0.80 (40) = 9 +32 = 41 3 9

Ft + 1 = ∞ A t + ( 1 – ∞ ) Ft
6 43 = 0.20 (38) + 0.80 (41) = 7.6 +32.8 = 40.4 2.6 6.76
KEEP SAFE EVERYONE
END

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