Mathematical tools have been around for thousands of years and are used to help solve

problems. Quantitative techniques to decision making formal study and its application is

largely a product of the twentieth century. These techniques have been applied successfully

and are widely used in increasingly wide variety of complex problems in businesses,

government sector, health care, education, and many other areas.

But what is Quantitative Analysis? Quantitative Analysis is the scientific approach to

managerial decision making. This approach starts with data – data which are processed into

meaningful information that are valuable to decision making. Computers

are considered to have been instrumental in the increasing use of

quantitative analysis.

Mr. Frederick W. Taylor, in the early 1900s, pioneered the

principles of scientific approach to management. Many new scientific and

quantitative techniques were developed during World War II to assist the

military.

The approach to quantitative analysis consists of defining a

problem, developing a model, acquiring input data, developing a solution,

testing the solution, analyzing the results, and implementing the results.

The first step in the quantitative approach is to develop a clear, concise statement of the

problem. This statement will give direction and meaning to the following steps. Once problem

selected was analyzed, the next step is to develop a model. It is simply a representation of a

situation, which usually is mathematical. Once a model was developed, data used in the model

must be obtained. Obtaining accurate data for the model is essential; even if the model is a

perfect representation of reality, improper data will result in misleading truth. This situation is

called Garbage in, Garbage out. Next step is developing a solution. Developing a solution
involves manipulating the model to arrive at the best solution to the problem. Before a solution

can be analyzed and implemented, it needs to be tested completely. Testing the input data and

the model includes determining the accuracy and completeness of the data used by the model.

Analyzing the results starts with determining the implications of the solution. A solution to a

problem will result in action or change in the way an organization is operating. The final step

is to implement the results. It is to incorporate the solution into the company.

The focus of this study is forecasting, which is one of the techniques in quantitative

analysis. Managers make decisions without knowing what will happen in the future. Inventory

is ordered though no one knows what sales will be, new equipment is purchased though no one

knows the demand for products, and investments are made though no one knows what profits

will be. Managers are always trying to reduce this uncertainty and to make better estimates of

what will happen in the future. Accomplishing this is the main purpose of forecasting.

There are 8 steps to forecasting, namely;

1. Determine the use of the forecast—what objective are we trying to obtain?

2. Select the items or quantities that are to be forecasted.

3. Determine the time horizon of the forecast—is it 1 to 30 days (short term), 1 month to

1 year (medium term), or more than 1 year (long term)?

4. Select the forecasting model or models.

5. Gather the data or information needed to make the forecast.

6. Validate the forecasting model.

7. Make the forecast.

8. Implement the results.

These steps present a systematic way of initiating, designing, and implementing a

forecasting system. When the forecasting system is to be used to generate forecasts regularly
over time, data must be collected routinely, and the actual computations or procedures used to

make the forecast can be done automatically.

TYPES OF FORECAST

TIME SERIES MODELS

Time-series models attempt to predict the future by using historical data. These models

assume that what happens in the future is a function of what has happened in the past. In other

words, time-series models look at what has happened over a period and use a series of past data

to make a forecast.

SCATTER DIAGRAMS

Scatter diagrams are very helpful when forecasting time series. A scatter diagram for a

time series may be plotted on a two-dimensional graph with the horizontal axis

representing the time period.

COMPONENTS OF A TIME SERIES

Analyzing time series means breaking down past data into components and then

projecting them forward. A time series typically has four components:

 1. Trend (T) is the gradual upward or downward movement of the data over

time.

2. Seasonality (S) is a pattern of the demand fluctuation above or below the

trend line that repeats at regular intervals.

3. Cycles (C) are patterns in annual data that occur every several years. They

are usually tied into the business cycle.

4. Random variations (R) are “blips” in the data caused by chance and unusual

situations; they follow no discernible pattern.

CAUSAL MODELS

Causal models incorporate the variables or factors that might influence the quantity

being forecasted into the forecasting model. A causal model would attempt to include factors

for temperature, humidity, season, day of the week, and so on. Causal models may also include

past sales data as timeseries models do, but they include other factors as well.

QUALITATIVE MODELS

Whereas time-series and causal models rely on quantitative data, qualitative models

attempt to incorporate judgmental or subjective factors into the forecasting model. Opinions

by experts, individual experiences and judgments, and other subjective factors may be

considered. Qualitative models are especially useful when subjective factors are expected to be

very important or when accurate quantitative data are difficult to obtain.

The following are the four different qualitative forecasting techniques:

1. Delphi method. This iterative group process allows experts, who may be in

different places, to make forecasts. There are three different types of participants in

the Delphi process: decision makers, staff personnel, and respondents. The
 decision-making group usually consists of 5 to 10 experts who will be making the

actual forecast. The staff personnel assist the decision makers by preparing,

distributing, collecting, and summarizing a series of questionnaires and survey

results. The respondents are a group of people whose judgments are valued and are

being sought. This group provides inputs to the decision makers before the forecast

is made. In the Delphi method, when the results of the first questionnaire are

obtained, the results are summarized, and the questionnaire is modified. Both the

summary of the results and the new questionnaire are then sent to the same

respondents for a new round of responses. The respondents, upon seeing the results

from the first questionnaire, may view things differently and may modify their

original responses. This process is repeated with the hope that a consensus is

reached.

2. Jury of executive opinion. This method takes the opinions of a small group of

high-level managers, often in combination with statistical models, and results in a

group estimate of demand.

3. Sales force composite. In this approach, each salesperson estimates what sales will

be in his or her region; these forecasts are reviewed to ensure that they are realistic

and are then combined at the district and national levels to reach an overall forecast.

4. Consumer market survey. This method solicits input from customers or potential

customers regarding their future purchasing plans. It can help not only in preparing

a forecast but also in improving product design and planning for new products.
MEASURES OF FORECAST ACCURACY

To see how well one model works, or to compare that model with other models, the

forecasted values are compared with the actual or observed values. The forecast error (or

deviation) is defined as follows:

One measure of accuracy is the mean absolute deviation (MAD). This is computed by

taking the sum of the absolute values of the individual forecast errors and dividing by the

numbers of errors (n):

Other measures of the accuracy of historical errors in forecasting are sometimes used

besides the MAD. One of the most common is the mean squared error (MSE), which is the

average of the squared errors:

Besides the MAD and MSE, the mean absolute percent error (MAPE) is sometimes

used. The MAPE is the average of the absolute values of the errors expressed as percentages

of the actual values. This is computed as follows:

 There is another common term associated with error in forecasting. Bias is the average

error and tells whether the forecast tends to be too high or too low and by how much. Thus,

bias may be negative or positive. It is not a good measure of the actual size of the errors because

the negative errors can cancel out the positive errors.

MONITORING AND CONTROLLING FORECASTS

After a forecast has been completed, it is important that it not be forgotten. One way to

monitor forecasts to ensure that they are performing well is to employ a tracking signal. A

tracking signal is a measurement of how well the forecast is predicting actual values. As

forecasts are updated every week, month, or quarter, the newly available demand data are

compared to the forecast values. The tracking signal is computed as the running sum of the

forecast errors (RSFE) divided by the mean absolute deviation:

A lot of research has been published about adaptive forecasting. This refers to computer

monitoring of tracking signals and self-adjustment if a signal passes its preset limit. In

exponential smoothing, the and coefficients are first selected based on values that minimize
error forecasts and are then adjusted accordingly whenever the computer notes an errant

tracking signal. This is called adaptive smoothing.