Chapter 5

Forecasting
Forecast

It is a statement about
the future value of a
variable of interest.
Approaches to Forecasting
Qualitative Forecasting
• Qualitative techniques permit the inclusion of soft information such as:
Human factors
Personal opinions
Hunches
• 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
Forecasting Techniques
I. Judgmental Forecasts
Forecasts that use subjective inputs such as opinions from consumer
surveys, sales staff, managers, executives, and experts.
II. Time-series Forecasts
Forecasts that project patterns identified in recent time-series
observations.
III. Associative Model
Forecasting technique that uses explanatory variables to predict future
demand.
I. Judgmental Forecasts

Executive opinions
Sales-force opinions
Consumer surveys
An interactive process in which managers
Delphi method and staff complete a series of
questionnaires, each developed from the
previous one, to achieve a consensus
II. Time-Series Forecasting - Naïve Forecast

I. Naïve Forecast - The forecast for a time period is

equal to the previous time period’s value
Forecast for any period = previous period’s actual
value
Ft = At-1

F: forecast A: Actual t: time period

Naïve Forecast
Example Week Sales (actual) Sales (forecast) Error
t A F A-F
1 20 -
2 25 20 5
3 15 25 -10
4 30 15 15
5 27 30 -3
II. Time-Series Forecasting

Averaging - They can handle step changes or gradual changes in

the level of a series.

Techniques
1. Moving average
2. Weighted moving average
3. Exponential smoothing
II. Time-Series Forecasting – Moving Average

Averages a number of
n

A t −i
Ft = MA n = i =1
recent actual values, n
updated as new values where
Ft = Forecast for time period t
become available. MA n = n period moving average
At −1 = Actual value in period t − 1
n = Number of periods in the moving average
II. Time-Series Forecasting – Moving Average
Compute a three-period moving average
forecast given demand for shopping carts
for the last five periods.

Period Actual Demand

1 42
2 40
3 43
4 40
5 41
II. Time-Series Forecasting – Moving Average
F6= (43 + 40 + 41)/3
= 41.33

If actual demand in period 6 turns out to

be 38, what is the moving average forecast
for period 7?
II. Time-Series Forecasting – Moving Average

Period Actual Demand

1 42
2 40
3 43
4 40
5 41
6 38

F7= (40 + 41 + 38)/3

= 39.67
II. Time-Series Forecasting – Weighted Moving Average

More recent values in a series are given more weight in computing a forecast.

Ft = wt ( At ) + wt −1 ( At −1 ) + ... + wt − n ( At − n )
where
wt = weight for period t , wt −1 = weight for period t − 1, etc.
At = the actual value for period t , At −1 = the actual value for period t − 1, etc.
II. Time-Series Forecasting – Weighted Moving Average

a. Compute a weighted average forecast using a weight of .40 for the most recent
period, .30 for the next most recent, .20 for the next, and .10 for the next.
b. If the actual demand for period 6 is 38, forecast demand for period 7 using the
same weights as in part a.
Period Actual Actual
F6 = .10(40) + .20(43) + .30(40) + .40(41) = 41.0
Demand Demand
F7 = .10(43) + .20(40) + .30(41) + .40(38) = 39.8 1 42 42
2 40x.10 40
3 43x.20 43x.10
4 40x.30 40x.20
5 41x.40 41x.30
6 38x.40
II. Time-Series Forecasting – Exponential Smoothing
Based on previous forecast plus a percentage of the forecast error.

Ft = Ft −1 +  ( At −1 − Ft −1 )
where
Ft = Forecast for period t
Ft −1 = Forecast for the previous period
 = Smoothing constant
At −1 = Actual demand or sales from the previous period
II. Time-Series Forecasting – Exponential Smoothing
Compute exponential smoothing using smoothing constant of .10

Period Actual Demand

1 42
2 40
3 42
4 40
5 41
Exponential Smoothing,
Compute for F6
Ft= Ft-1 + α* (At-1 - Ft-1) α= 0.1

Period (t) Actual Demand Forecast Error (A-F)

1 42 - -
2 40 42 -2
3 43 41.8 1.2
4 40 41.92 -1.92
5 41 41.728 -0.728
6 41.6552

Exponential Smoothing Computation

F3 42+.1*(40-42) 41.8
F4 41.8+.1*(43-41.8) 41.92
F5 41.92+.1*(40-41.92) 41.728
F6 41.728+.1*(41-41.728) 41.6552
Linear Trend Equation

Ft =a+bt
where
Ft = Forecast for period t
a = Value of Ft at t = 0, which is the y intercept b =
Slope of the line
t = Specified number of time periods from t = 0
Linear Trend Equation

The coefficients of the line,

a and b, are based on the
following two equations:
Simple Linear Regression

y =a+bx
where
y = Predicted (dependent) variable fcst
X = Predictor (independent) variable time
b = Slope of the line
a = Value of yc when x = 0
Simple Linear
Regression

The coefficients a and b

of the line are based on
the following two
equations: