Professional Documents
Culture Documents
FORECAST – a statement about the future value of a variable of interest. We make forecasts about such
things as weather, demand, and resource availability.It is important element in making informed
decisions.
1. Expected level of demand- The level of demand may be a function of some structural variation
such as trend or seasonal variation
2. Accuracy- Related to the potential size of forecast error
Forecasting Approaches
• Qualitative Forecasting
– Qualitative techniques permit the inclusion of sof information such as: Human factors,
Personal opinions. (These factors are difficult, or impossible, to quantify)
• Quantitative Forecasting
– Quantitative techniques involve either the projection of historical data or the
development of associative methods that attempt to use causal variables to make a
forecast. These techniques rely on hard data
CLASSIFICATION OF FORECASTING TECHNIQUES
1. JUDGMENTAL FORECASTS- Forecast that use subjective inputs such as opinions from consumer
surveys, sales staff, managers, executives and experts. Ex. Small group of upper level managers
meet collectively develop a forecast. This approach is often used as a part of a long-range
planning and new product development. It has the advantage of bringing together the
considerable knowledge and talents of various managers. There is the risk that the view of one
person will prevail.
2. TIME-SERIES FORECASTS- Forecasts that projects patterns identified in recent time-series
observations.
TIME SERIES is a time ordered sequence of observations taken at regular intervals. (Ex. Hourly, daily,
weekly, monthly, quarterly, annually) the data may be measurements of demand, earnings, profits,
shipments, accidents, output, precipitation, productivity or the consumer price index.
3. ASSOCIATIVE MODEL- Forecasting technique that uses explanatory variables to predict future
demand. Ex. Demand for paint might be related to variables such as the price per gallon and the
amount spent on advertising, as well as to specific characteristics of the paint. (drying time, ease
of cleanup)
Forecast Accuracy and Control
MAD
Actual t Forecast t MAD weights all errors evenly
n
MSE weights errors according to their squared values
Actual Forecast t
2
t
MSE
n 1
Actualt Forecast t
Actualt
100 MAPE weights errors according to relative error
MAPE
n