Topic 3: Basic Probability Sadegh Kazemi

Data Analytics

Topic 3
“Demand Estimation and Forecasting”

Objectives
• To explain the difference between qualitative and quantitative
forecasting methods
• To use quantitative forecasting approaches

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Topic 3: Basic Probability Sadegh Kazemi

What is Forecasting?
Process of predicting a future event.
Underlying basis of all business decisions:
• Pricing
• Production
• Inventory
• Personnel

Forecasting Time Horizons:

• Short-range forecast
• Up to 1 year, generally less than 3 months
Ex. staff scheduling, workforce levels, job assignments
• Medium-range forecast
• 3 months to 3 years
Ex. Sales and production planning, budgeting
• Long-range forecast
• 3+ years

Forecasting Methods
• Qualitative Methods (Subjective forecasting)

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Topic 3: Basic Probability Sadegh Kazemi

• Refers to methods that measure either individual or

group opinion.
• Used when situation is vague and little data exist
• Involves intuition, experience

• Quantitative Methods (Objective forecasting)

• Using objective forecasting methods, one makes
forecasts based on past history.
• Used when situation is “stable” and historical data exist
• Involves mathematical techniques

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Topic 3: Basic Probability Sadegh Kazemi

1. Jury of executive opinion

2. Pool opinions of high-level experts, sometimes augmented by
statistical models

2. Delphi method
Panel of experts, queried iteratively

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Topic 3: Basic Probability Sadegh Kazemi

❖ Example: Three experts are planning to forecast the price of a

cryptocurrency at the end of the week.
Jan
Week 1

Jan
Week 2

Jan
Week 3

3. Sales force composite

Estimates from individual salespersons are reviewed for
reasonableness, then aggregated
• Advantages:
• The knowledge and experience of the sales force can be
used efficiently
• Sales agents put more efforts to achieve business goals
• Disadvantages:
• Sales agents are not the experts in forecasting
• Sales agent may intentionally give fewer/inflate sales
forecast

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Topic 3: Basic Probability Sadegh Kazemi

4. Market Survey
Ask the customer
• Advantages:
• helps in gathering the original or primary data
• Disadvantages:
• collection of primary data could be time-consuming as
well as expensive

Quantitative Techniques
Using objective forecasting methods, one makes forecasts based
on past history.
1. Naive Approach:
Assumes demand in next period is the same as demand in most
recent period
𝐹𝑡+1 = 𝐴𝑡 , 𝑡 = 1, 2, …
❖ Example: If January sales were 68 units, then February sales
will be equal to …

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Topic 3: Basic Probability Sadegh Kazemi

❖ Example: You are the manager of a museum store that sells

historical replicas. You want to forecast sales (in thousands) for
June using a 3-period moving average.

𝑡 𝑨𝒕 𝑭𝒕
(Month) (Actual Demand) (Naive Approach)
January 10

February 13

March 15

April 19

May 22

June

2. Moving Average Method

• Provides overall impression of data over time
• A series of arithmetic means
• Smooths random fluctuations
• Used if little or no trend

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Topic 3: Basic Probability Sadegh Kazemi

❖ Example: You are the manager of a museum store that sells

historical replicas. You want to forecast sales (in thousands) for
June using a 3-period moving average.

Actual Forecast
Month
Demand MA(3)

January 10

February 13

March 15

April 19

May 22

June ?

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Topic 3: Basic Probability Sadegh Kazemi

3. Linear Regression
• Linear Regression Using Excel

𝑦ො = 𝑎 + 𝑏𝑥
| | | | | | |

1 2 3 4 5 6 7

Time period

= SLOPE(known y's, known x's)

= INTERCEPT(known y's, known x's)
= FORECAST(x, known y's, known x's)

❖ Example: You are the manager of a museum store that sells

historical replicas. You want to forecast sales (in thousands) for
June using a Linear Regression method.

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Topic 3: Basic Probability Sadegh Kazemi

Actual
Month
Demand

January 10

February 13

March 15

April 19

May 22

June ?

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Topic 3: Basic Probability Sadegh Kazemi

❖ Example: Demand for flour at the Common Bond bakery for

the last 6 weeks was 12, 15, 14, 18, 22, and 21 pallets. Forecast
the demand for the next week using:
I. Naive approach
II. MA(2)
III. MA(3)
IV. Linear regression

Naïve Linear
Week 𝐴𝑡 MA(2) MA(3)
Approach Regression

1 12

2 15

3 14

4 18

5 22

6 21

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