Production Planning & Control

Chapter 2: Forecasting Fundamentals

HADI MOSADEGH
 Chapter Headlines

 Fundamental Principles of Forecasting

 Major Categories of Forecasts
 Forecast Errors
 Computer Assistance
FUNDAMENTAL PRINCIPLES Of FORECASTING

 Definition:
Forecasting is a technique for using past experiences to project expectations for the
future.

In the above definition, forecasting is not

really a prediction, but a structured
projection of past knowledge.
Forecasting rules & characteristics

 Forecasts are almost always wrong.

 Forecasts are more accurate for groups or families of items. Forecasting rules
 Forecasts are more accurate for shorter time periods.

 Every forecast should include an estimate of error.

 Forecasts are no substitute for calculated demand
MAJOR CATEGORIES Of FORECASTS

Forecast
Methods

Qualitative Quantitative
Methods Methods

Causal Time Series

Qualitative Forecasting

• These forecasts are generated Delphi or

Market
from information that does not surveys
panel
have a well-defined analytic consensus
structure.

• They can be especially useful

Life cycle Informed
when no past data is available, analogy judgment
such as when a product is new
and has no sales history.
Qualitative Forecast
Quantitative Forecasting-Causal

This method is based on the concept of

relationship between variables, or the
assumption that one measurable variable
"causes" the other to change in a predictable
Input-output Econometric fashion.
models models

Demand
Simulation
Regression
models

Price
Quantitative Forecasting-Time Series

 Time-series forecasts are among the most commonly used for forecasting
packages linked to product demand forecasts.
 They all essentially have one common assumption: past demand follows
some pattern, and that if that pattern can be analyzed it can be used to
develop projections for future demand, assuming the pattern continues in
roughly the same manner.
 Ultimately that implies the assumption that the only real independent
variable in the time series forecast is time.
Demand Patterns: Random

 the customers who demand goods and services from a company do not
demand those goods and services in a completely uniform and
predictable manner.
Demand Patterns: Trend

The trends can either be

increasing or decreasing,
and they can be either
linear or nonlinear in nature.
 Demand Patterns: Seasonal or Cyclic

• Cyclical patterns are

demand patterns that
follow some cycle of
rising and falling
demand.

• These patterns are

actually cyclical
patterns, which mayor
may not be linked to
the yearly seasons.
Demand Patterns: Seasonal, Trend and
Random

If we put a random pattern

together with a trend and a
seasonal pattern, we could
obtain a demand pattern that
would look similar to the pattern
experienced by many
companies for their products or
services.
Simple Moving Average

 Ft : the forecast for time t

 At : the actual demand in period t, and
 n: the number of periods being used.
Weighted Moving Average

Weights of 0.5, 0.3, and 0.2 (with the 0.5 weight

applied to the most recent demand data)
Simple Exponential Smoothing
Simple Exponential Smoothing
 Properties of Average Methods

• The forecast line is smoother than the

demand line, showing the impact of
taking an average. The more periods used
in computing the moving average, the
smoother this effect will be.

• The forecast will always lag behind any

actual demand.
Regression

b = 18.8; a = 268.3

Ft = 268.3 + 18.8xt
Calculating Seasonal Multipliers
Seasonality Adjusted Regression

F9 = 437.5 x 0.86 = 376.3

Forecast Errors

Mean Forecast Error

Forecast Errors

Mean Absolute Error

 Controlling Forecast: Tracking Signal

Tracking Signal
A rule of thumb for use of the tracking signal is
that if the value of the tracking signal is larger
than 4 or less than -4, the forecasting method
may not be effective for tracking demand over
the time period in question.

Time