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Forecasting Notes

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Forecasting Notes

Uploaded by

Wymar Joshua Ediong
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Forecasti

ng
LEAH BAUTISTA-BUADA
Forecasting

 Forecasts are a basic input in the decision


processes of operations management because
they provide information on future demand.

 Businesses make plans for future operations based


on anticipated future demand. Anticipated demand
is derived from two possible sources: actual
customer orders and forecasts.
Forecasting

 Two (2) aspects of forecasts are important:


o expected level of demand – can be a
function of some structural variation, such as a
trend or seasonal variation
o degree of accuracy that can be assigned to a
forecast –a function of the ability of forecasters
to correctly model demand, random variation,
and sometimes unforeseen events
Forecasting

Forecasts are made with reference to a specific time horizon.


The time horizon may be fairly short or somewhat longer.
 Short-term forecasts (e.g., an hour, day, week, or month)
pertain to ongoing operations.
 Long-term forecasts (e.g., the next six months, the next
year, the next five years, or the life of a product or
service) pertain to new products or services, new
equipment, new facilities, or something else that will
require a somewhat long lead time to develop, construct,
or otherwise implement.
Uses of Forecasts

1. To help managers plan the system

2. To help managers plan the use of


the system
Features Common to All
Forecasts
1. Forecasting techniques generally assume that the
same underlying causal system that existed in the
past will continue to exist in the future.
2. Forecasts are not perfect.
3. Forecasts for groups of items tend to be more
accurate than forecasts for individual items.
4. Forecast accuracy decreases as the time period
covered by the forecast – the time horizon –
increases.
Elements of a Good Forecast
1. Timely

2. Accurate

3. Reliable

4. Meaningful units

5. In writing

6. Simple to understand and use

7. Cost-effective
Steps in the Forecasting Process

Obtain,
Determine Select a
Establish a clean, and Monitor the
the purpose forecast- Make the
time analyse forecast
of the ting tech- forecast.
horizon. appro- errors.
forecast. nique.
priate data.
General Approaches to
Forecasting
 Qualitative methods consist mainly of
subjective inputs, which often defy precise
numerical description.
 Quantitative methods involve either the
projection of historical data or the
development of associative models that
attempt to utilize causal (explanatory)
variables to make a forecast.
Forecasting Techniques

 Judgmental forecasts use subjective


inputs such as opinions from consumer surveys,
sales staff, managers, executives, and experts.
 Time-series forecasts project patterns
identified in recent time-series observations.
 Associative model uses explanatory
variables to predict future demand.
Qualitative Forecasts

 Executive Opinions
 Used for long range planning
 Salesforce Opinions
 Consumer Surveys
 Other Approaches
 Delphi Method
Qualitative Forecasts
Forecasts Based on Time-Series
Data
 A time series is a time-ordered sequence of
observations taken at regular intervals (e.g.,
hourly, daily, weekly, monthly, quarterly, annually).
 Forecasting techniques based on time-series data
are made on the assumption that future values of
the series can be estimated from past values.
 Analysis of time-series data requires the analyst to
identify the underlying behavior of the series. This
can often be accomplished by merely plotting the
data and visually examining the plot.
Forecasts Based on Time-Series
Data
 Trend refers to a long-term upward or downward
movement in the data.
 Irregular variation is caused by unusual circumstances,
not reflective of typical behavior.
 Random variations are residual variations that remain
after all other behaviors have been accounted for.
 Seasonality refers to short-term regular variations related
to the calendar or time of day.
 Cycles are wavelike variations of more than one year’s
duration.
Forecasts Based on Time-Series
Data
NAÏVE FORECASTING
¨ Assumes demand in next
period is the same as demand
in most recent period
¨ e.g., If May sales were 48, then June
sales will be 48
¨ Sometimes cost effective &
efficient

© 1995 Corel Corp.


NAÏVE FORECASTING
 A naive forecast uses a single previous
value of a time series as the basis of a
forecast
 Can be used with a stable series
(variations around an average), with
seasonal variations, or with trend
Techniques for Averaging

 Averaging techniques smooth fluctuations


in a time series because the individual
highs and lows in the data offset each other
when they are combined into an average.
 A forecast based on an average thus tends
to exhibit less variability than the original
data.
Simple Moving Average

 Technique that averages a number of


recent actual values, updated as new
values become available.

MA   Demand in Previous n Periods


n
Moving Average Example
• The table below shows the historical supply of
palm civet coffee for the past 5 years:

Year Supply Determine the


projected supply for
2014 3,532 the next five (5) years
2015 4,356 using
2016 4,972 a. 5-year simple
moving average
2017 5,561 b. 3-year simple
2018 6,238 moving average
Moving Average Solution
 a. Using 5-year SMA

Projected
Year
Supply
(3,532+4,356+4,972+5,561+6,23
2019 4,932
8)/5
2020
2021
2022
2023
Moving Average Solution
 a. Using 5-year SMA

Year Supply
2014 3,532
2015 4,356
2016 4,972
2017 5,561
2018 6,238
2019 4,932
Moving Average Solution
Projected
Year
Supply
(3,532+4,356+4,972+5,561+6,23
2019 4,932
8)/5
(4,356+4,972+5,561+6,238+4,93
2020 5,212
2)/5
2021
2022
2023
Simple Moving Average
 a. Using 5-year SMA

Projected
Year
Supply
(3,532+4,356+4,972+5,561+6,238
2019 4,932
)/5
(4,356+4,972+5,561+6,238+4,932
2020 5,212
)/5
(4,972+5,561+6,238+4,932+5,212
2021 5,383
)/5
(5,561+6,238+4,932+5,212+5,383
2022 5,465
)/5
Simple Moving Average
 a. Using 3-year SMA

Projected
Year
Supply
2019 (4,972+5,561+6,238)/3 5,590
2020 (5,561+6,238+5,590)/3 5,796
2021 (6,238+5,590+5,796)/3 5,875
2022 (5,590+5,796+5,875)/3 5,754
2023 (5,796+5,875+5,754)/3 5,808
Weighted Moving Average

 Similar to a moving average, except that it assigns more weight to the


most recent values in a time series.
Weighted Moving Average
 Compute a weighted moving average for F6 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.
Weighted Moving Average
 Forecast for period 5 using a 3
Period Demand year weighted moving average
1 60  Forecast for period 6 using a 3
2 65
year weighted moving average if
2 55
period 5 is 64
4 58
5
 Weights: 50%, 30%, 20%
6
 F5 = 65(.20)+55(.30)+58(.50) =
58.5
 F6 = 55(.20)+58(.30)+64(.50) =
60.4
Exponential Smoothing Model
 is a forecasting model that uses a sophisticated weighted
average procedure to obtain a forecast
 Considerations when using Exponential Smoothing Model
 The current period’s forecast,
 The current period’s actual value
 The value of a smoothing coefficient, which varies
between 0 and 1
Exponential Smoothing Model
 The Hot Tamale Mexican restaurant uses
exponential smoothing to forecast monthly
usage of tabasco sauce. Its forecast for
September was 200 bottles, whereas actual
usage in September was 300 bottles. If the
restaurant’s managers use an of 0.70, what
is their forecast for October?
F=
F=
 F = (.70)(300)+(.30)(200)
 F = 270 bottles
Exponential Smoothing Model

Period Actual Forecast Compute of Period 5


1 60 using exponential
2 65
3 55
smoothing.
4 58
5
F3= .40(65)+(1-.40)(60) = 62
F4= .40(55)+(1-.40)(62) = 59. 2
F5= .40(58)+(1-40)(59.2) = 58.72
Forecast Accuracy
Forecast Accuracy

 Mean Absolute Deviation (MAD)


 Measure of forecast error that computes
error as the average of the sum of the
absolute errors.
 Mean Squared Error (MSE)
 Measure of forecast error that computes
error as the average of the squared error.
 Mean Absolute Percent Error (MAPE
 The average absolute percent error.

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