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Quantitative forecasting methods in management

Prof. Dr. Algirdas Budrevicius Vilnius University, Faculty of Communication


Course website: http://www.kf.vu.lt/~albud/progn/Portugal

Famous forecasting quates


--William Shakespeare:

"If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me. "

Quantitative forecasting methods in management

"It is far better to foresee even without certainty than not to foresee at all. " --Henri Poincare in The Foundations of Science, page 129.

Quantitative forecasting methods in management

Course materials
Course description: Website http://www.kf.vu.lt/~albud/progn/Portugal Demonstrations: PowerPoint presentations Time-series data, forecasting examples (Excel workbooks), assignments

Quantitative forecasting methods in management

Course plan
Look: http://www.kf.vu.lt/~albud/progn/Portugal# Lectures

Quantitative forecasting methods in management

Part 1. Forecasting methods in general

History: development of the forecasting technique


Non scientiffic forecasting: e.g. Astrology, Book of Changes. 19-20 century. Demographic forecasts Development of the quantitative methods: middle-to-second part of the 20th century. New developments: Neural network based methods
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Current situation in forecasting


Forecasting is widely used in management now There exist a well defined set of quantitative forecasting methods There exists computer software that may be quite simply applied in forecasting Excel program allows to solve simple forecasting tasks
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Forecasting in management
Forecasting is used in various domains of management: Personnel management Resource management Finance management Organizational management
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Taxonomy of forecasting methods


Methods: quantitative and qualitative Qualitative: judgmental (based on expert opinions) and technological (used for long term forecasting) Quantitative: time series methods and reasoning Note: only time series methods will be considered in this course.
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Naive forecasting techniques


Naive forecasts: a folk forecasting technique In every day life situations we forecast using very simple technique This technique is close to linear trend model

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Naive forecasts NF1 and NF2


NF1. (The value tomorow will be the same as today). Example: Number of visitors today was 120. Forecast NF1 for tomorow: 120. NF2. (The value tomorow will be less (greater) by 10% ). Example: Average temperature this month is 20 degrees. Forecast NF2 for the next month: Temperature will be 25 degrees (increase of 25%).
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Quantitative time-series based forecasting: a rationale

Time-series methods of forecasting


Time-series analysis relies on historical data and attempts to project historical patterns into the future Note: only time series methods will further be considered

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Example of time-series data


Number of visitors (in th.) Year 1998 1999 2000
450 440

2001
460

2002
470

2003
465

Number 420

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Example of time-series data


EVOLUO DA CAPACIDADE DOS ESTABELECIMENTOS HOTELEIROS EM PORTUGAL (a) (Camas) Anos Total Geral Hotis Pousadas e Estalagens Penses Hotis Apartamentos Motis 1992 151063 76427 4035 44845 24344 1412 1993 155356 77199 4452 46372 26079 1254 1994 161729 82353 4767 43327 30025 1257 1995 162954 83372 4873 43306 30166 1237 1996 166030 86598 5081 42732 30383 1236 1997 164066 88601 5716 41979 26308 1462 1998 168396 93357 6186 40310 27013 1530 1999 170863 94217 6446 40537 28076 1587 2000 177328 98434 6826 40721 29764 1583 2001 183919 101684 7112 41588 31757 1778 2002 187265 104727 7460 40594 32725 1759 2003 192480 109528 7442 41930 31755 1825
Fonte: INE (a) No inclui Aldeamentos nem Apartamentos Tursticos Nota: Dados de 2001, 2002 e no comparveis com as sries anteriores, face nova metodologia utilizada pelo INE. http://www.dgturismo.pt/WebAttachment%5CCapacidade%20de%20Alojamento%201993-2003.pdf

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Definition of a forecasting situation


Data (time series, or historical data) Forecasting method (e.g. Moving average, Trend analysis) Forecast Error of forecast

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Basic steps of a forecasting task


Defining the problem Choosing time-series data Analysing visually data paterns Choosing a model Calculating a forecast Evaluating the forecasting accuracy, caculating errors

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Recomended form to present data and forecasts: an example


Year Number of visitors Forecast Error

1995 1996
... 2006 (forecast)
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Example of data
Nework of Municipal Public Libraries in Lithuania in 1991-2002 Year Number of libraries 1991 1662 1992 1569 1993 1521 1994 1514 1995 1506 1996 1484 1997 1473 1998 1459 1999 1447 2000 1448 2001 1427 2002 1400
Source: Statistics of Lithuanian Libraries.

Municipal public libraries in Lithuania in 1991-2002 1700 1600 1500 1400 1300

Number of libraries

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2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
Year

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Patterns of the time-series data


A forecasting method should comply with the data pattern.

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Example of forecasting
Forecasting using linear trend. Demonstration
Week Number of library visitors

1 2 3 4 5 6

1063 2369 3159 3964 5001 (by inserting number of the week x=6 into the equation) 5. Evaluation (using RSQ) 0,99 Very good fitting Number of library visitors 8000

1. Calculating correlation: Signifficant correlation 2. Plotting a chart (XY scatter) 3. Adding a linear trend line Options: display equation 4. Calculating the forecast

0,995741

Visitors

6000 4000 2000 0 0 1

y = 947,1x + 269,9 R2 = 0,9915

2 Week

Forecasted number of visitors:

5953

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Forecast accuracy
Forecast accuracy can be determined only when actual (future) data are available. Error of a forecast is measured as a difference between the actual and forecasted values

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End

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