Forecasting

Nadia Khan

Application Areas
•MEDICAL •MILITARY •TELECOM •SCM •MANAGEMENT •FINANCE •WEATHER •POLITICS •ASTRONOMY •DEMOGRAPHY •…

Validate the Forecasting Model 7.Gather Data 6.Time Horizon? • 1 month (short term) • 1 year (mid term) • > 1 year (long term) 4.Make the forecast 8.Select the forecasting Model 5.What items/Quantities to be forecasted? 3.Implement the results .Use or Objective? 2.8 Steps to Forecasting 1.

Forecasting Techniques Qualitative Models Delphi Method Jury of Executive Opinion Sales Force Composite Consumer Market Survey Causal Models Regression Analysis Multiple Regression Time Series Models Moving Averages (Simple & Weighted) Exponential Smoothing Trend Projections Decomposition Artificial Intelligence Artificial Neural Networks Support Vendor Machines Others Simulation Prediction Market Probabilistic or Ensemble Forecasting Reference Class Forecasting .

Qualitative Models Decision Making Group Delphi Method Staff Personal Respondents Surveys/Questionnaire Jury of Executive Opinion High Level Managers (Small Group) Statistical Models Group Estimate of Demand .

Qualitative Models Nationwide Level Forecast Overall Forecast Sales Force Composite all regions forecasts Forecast Regional Salesperson Customer Consumer Market Survey Future Purchases Forecasts Also helps in planning and improving product design .

e. a sum of errors   Mean Absolute Percent Error (MAPE) = ∑ error actual n 100% .Forecast Errors Measures of forecast accuracy include:   Mean Absolute Deviation (MAD) = ∑ |forecast errors| n   Mean Squared Error (MSE) = ∑ (errors) n 2 4th One is Bias i.

775 40243004.275 On average each forecast missed the actual value by 8.8 |Actual-Forecast| 982900 1288350 5024565 14571238.04 Million Erls Total Sum of Forecast Errors ------> n 8048600.5 18375950.8 .Forecast Accuracy Example of Mobilink Forecast Error Mean Absolute Deviation (MAD) Actual Value Forecast Value Forecast Error n Year 2005 2006 2007 2008 2009 Forecasted Traffic (Erl) 2045000 4294500 11165700 32380530 35618583 Actual Traffic (Erl) 3027900 5582850 16190265 46951768.5 53994533.

Forecast Accuracy.52463E+13 2.77869E+14 MSE n 1..8 (Error) 2 Sum of Squared Errors ------> 9.65985E+12 2.Contd Example of Mobilink Forecast Error Mean Squared Error (MSE) Actual Value (Error) n 2 Forecast Value Year 2005 2006 2007 2008 2009 Forecasted Traffic (Erl) 2045000 4294500 11165700 32380530 35618583 Actual Traffic (Erl) 3027900 5582850 16190265 46951768.12321E+14 3..15E+14 .66092E+11 1.5 53994533.37676E+14 5.

30X100 ..324614419234453 0.Forecast Accuracy.Contd Example of Mobilink Mean Absolute Percent Error (MAPE) (Error/actual) X 100 n Year 2005 2006 2007 2008 2009 Forecasted Traffic (Erl) 2045000 4294500 11165700 32380530 35618583 Actual Traffic (Erl) 3027900 5582850 16190265 46951768.51640314025856 MAPE = 30% Error n Sum of Squared Errors ------> 0..310344827586207 0.310344827586207 0.8 |(Error/actual)| 0.230769230769231 0.340329835082459 1.5 53994533.

Contd Example of Mobilink Bias (Error) n Bias --> not a good measure as negative errors can cancel out the positive errors Year 2005 2006 2007 2008 2009 Forecasted Traffic (Erl) 2045000 4294500 11165700 32380530 35618583 Actual Traffic (Erl) 3027900 5582850 16190265 46951768. +8048600 Sum of Squared Errors ------> n 8048600 .e.775 40243004..Forecast Accuracy.275 Bias = too high i.5 18375950.8 Error 982900 1288350 5024565 14571238.5 53994533..

Activity .

she is reevaluating her forecasting model. Smith forecasted total hospital inpatient days last year.Forecast Errors Ms. Now that the actual data are known. Month JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Forecast 250 320 275 260 250 275 300 325 320 350 365 380 Actual 243 315 286 256 241 298 292 333 326 378 382 396 . and MAPE for her forecast. Compute the MAD. MSE.

Forecast Errors Forecast JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC AVERAGE 250 320 275 260 250 275 300 325 320 350 365 380 Actual 243 315 286 256 241 298 292 333 326 378 382 396 |error| 7 5 11 4 9 23 8 8 6 28 17 16 MAD = 11.04 MAPE = .02 0.03 0.04 0.02 0.83 |error/actual| 0.04 0.04 0.83 error^2 49 25 121 16 81 529 64 64 36 784 289 256 MSE = 192.0368*100 = 3.08 0.68 .07 0.02 0.02 0.03 0.

Time Series Models .

all show marked seasonal variation. •In weekly or monthly data. the seasonal component.Composition of Time Series Trend (T): Gradual up or down movement over time Seasonality (S): •Pattern of fluctuations above or below trend line that occurs every year. •It describes any regular fluctuations with a period of less than one year. For example. often referred to as seasonality. . is the component of variation in a time series which is dependent on the time of year. the costs of various types of fruits and vegetables. unemployment figures and average daily rainfall.

the cyclical component describes any regular fluctuations. •It is a non-seasonal component which varies in a recognizable cycle Random variations (R): “blips”in the data caused by chance and unusual situations . •In weekly or monthly data.Composition of Time Series Cycles(C): •Patterns in data that occur every several years.

Example: Inventory Requirements for a local shoe store or the local grocery store Predict Annual Sales of the Video Games .Time Series & Forecasting Q: What is Time Series? A: Data collected at regular intervals of “time”. Q: What is Time Series & Forecasting? A: Using Time Series to detect patterns in data collected over time to cope with uncertainty about the future. Q: Why we use Time Series & Forecasting? A: To cope with uncertainty about the future.

Composition of Time Series Actual Time Series Secular Trend Seasonal Variation Cyclical Fluctuation Trend Line Irregular Variation .

Composition of Time Series .

some type of averaging or smoothing model would be appropriate. . with no trend. or cyclical component. seasonal.Moving Averages If all variations in a time series are due to random variations.

Moving Averages Moving average methods consist of computing an average of the most recent n data values for the time series and using this average for the forecast of the next period. Month Actual Shed Sales 10 12 13 16 19 23 26 (10+12+13)/3 = 11 2/3 (12+13+16)/3 = 13 2/3 (13+16+19)/3 = 16 (16+19+23)/3 = 19 1/3 Three-Month Moving Average January February Simple moving average = ∑ demand in previous n periods n March April May June July .

Month Actual Three-Month Weighted d n) in Shed Sales January February March April May June July 10 12 13 16 19 23 26 pe rio ∑ dn w )( ei de gh m ts an d pe Moving Average Weights Applied 3 2 1 Period Last month Two months ago Three months ago fo r gh t [3*13+2*12+1*10]/6 = 12 1/6 [3*16+2*13+1*12]/6 =14 1/3 [3*19+2*16+1*13]/6 = 17 [3*23+2*19+1*16]/6 = 20 1/2  (w 3*Sales last month + 2*Sales two months ago + 1*Sales three months ago 6 Sum of weights ∑ ei .Weighted Moving Averages rio Weighted moving averages use weights to put more emphasis on certain recent periods.

00+0.18+0.10(180-178.10(168-175.75+0.02) 178 =178.10 1 175 176= 175.10(190-173.22+0.10(205-175.50) 173 =174.02+0.50+0.02+0.36+0.18) 175 =173.10(180-175) 175 =175.36) 178 =175.75) 173 =173. New forecast = previous forecast + α(previous actual –previous forecast) Mathematically this is expressed as: Qtr Actual Tonnage Unloaded 180 168 159 175 190 205 180 182 Rounded Forecast using α =0.02) 179= 178. the greater the weight given to the most recent value 2 3 4 5 6 7 8 9 ? .10(182-178.10(159-174.10(175-173.22) Ft = Ft-1 + α(Yt-1 .Ft-1) Ft = new forecast Ft-1 = previous forecast α = smoothing constant Yt-1 = previous period actual the larger the smoothing parameter .Exponential Smoothing Exponential smoothing is a type of moving average technique that involves little record keeping of past data.

22+0.36) 178 =175.75+0.50(168-177.22+0.10(159-174.10 1 2 3 4 5 6 7 8 175 178 =175.50+0.75) 173 =173.61) 184 =186.02+0.30) 1 2 3 4 5 6 7 8 175 176= 175.22) 186 =192.18+0.10(180-175) 175 =175.00+0.36+0.61+0.50(180-192.Exponential Smoothing Qtr Actual Tonnage Unloaded 180 168 159 175 190 205 180 182 Rounded Forecast using α =0.44) 193 =180.10(182-178.00+0.10(168-175.02+0.50(159-172.02) 179= 178.10(190-173.88+0.44+0.22) 9 ? 9 ? .88) 180 =170.50) 173 =174.50(205-180.10(175-173.50(180-175) 173 =177.75) 170 =165.75+0.10(180-178.50(175-165.50) 166 =172.30+0.10(205-175.50(190-170.50+0.18) 175 =173.02) 178 =178.50(182-186.50 Qtr Actual Tonnage Unloaded 180 168 159 175 190 205 180 182 Rounded Forecast using α =0.

50 175 178 173 166 170 180 193 186 Absolute Deviations 5 10 14 9 20 25 13 4 The lowest MAD results from α = 0. Actual 180 168 159 175 190 205 180 182 Forecast with a = 0.Exponential Smoothing To select the best smoothing constant.10 175 176 175 173 173 175 178 178 Absolute Deviations 5 8 16 2 17 30 2 4 Forecast with a = 0.0 12 . evaluate the accuracy of each forecasting model.10 MAD 10.

Activity .

Class Example   PM Computer assembles customized personal computers from generic parts.   The owners purchase generic computer parts in volume at a discount from a variety of sources whenever they see a good deal.7 Using MAD. what forecast is most accurate? . Period 1 2 3 4 5 6 7 8 9 month Jan Feb Mar Apr May June July Aug Sept actual demand 37 40 41 37 45 50 43 47 56         Compute a 2-month moving average Compute a 3-month weighted average using weights of 4.2.   It is important that they develop a good forecast of demand for their computers so they can purchase component parts efficiently.1 for the past three months of data Compute an exponential smoothing forecast using α = 0.

.Class Example Solution MAD Exponential smoothing resulted in the lowest MAD.

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