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It may involve taking historical data and projecting them into the future with some sort of mathematical model. It may be subjective or intuitive prediction. Or it may involve a combination of these— that is, a mathematical model adjusted by a manager’s good judgment.

Common features of forecasting: 1. All forecasting techniques assume that there is some degree of stability in the system, and “what happened in the past will continue to happen in the future”. 2. Forecasting is rarely perfect (deviation is expected). 3. Forecasting for a group of items is more accurate than the forecast for individuals. 4. Forecasting accuracy increases as time horizon increases. Elements of good forecast: 1. Timely: Forecasting horizon must cover the time necessary to implement possible changes. 2. Accurate: Degree of accuracy should be stated. 3. Reliable: It should work consistently. 4. Meaningful: Should be expressed in meaningful units. Financial planners should know how many dollars needed, production should know how many units to be produced, and schedulers need to know what machines and skills will be required. 5. Written: to guarantee use of the same information and to make easier comparison to actual results. 6. Easy to use: users should be comfortable working with forecast. Types of forecast by time: Short-range (days – weeks – months): Job scheduling, work assignments Time spans ranging from a few days to a few weeks. Cycles, seasonality, and trend may have little effect. Random fluctuation is main data component. Medium term (1-2 years): Sales, production Long range forecast (> 2years): change location Time spans usually greater than one year. Necessary to support strategic decisions about planning products, processes, and facilities. Types of Forecast Organizations use three major types of forecasts in planning future operations:

1. Economic Forecasts 2. Technological Forecasts 3. Demand Forecasts The Strategic Importance of Forecasting Human Resources Capacity Supply-Chain Management

Steps in forecast development: 1. Determine purpose of forecast. 2. Establish a time horizon: time limit, accuracy decreases with shorter durations. 3. Select forecasting technique. 4. Gather and analyze data. 5. Prepare the forecast 6. Monitor forecast.

then aggregated. are methods in which the forecast is made subjectively by the forecaster. Irregular variations: caused by irregular circumstances. Easily understandable. Virtually no cost. Quantitative (based on time series data): . 3. Simple to use. Associative Models incorporate the variables or factors that might influence the quantity being forecast. Cannot provide high accuracy. Cycle: Wavelike variation lasting more than one year. Random variations: residual variations after all other behaviors are accounted for. They are unknown to any one.Time series data: a time ordered sequence of observation taken at regular intervals over time. b. Delphi method: (a) Panel of experts queried. not reflective of typical behavior. 1. They fall in two categories 1. 4.Methods of Forecasting Qualitative methods: (based on judgment and opinion) -often called judgmental methods. d. Sales force composite: estimates from sales individuals are reviewed for reasonableness (may tend to make under estimates). c. 5. difficult to apply. we can put this in the following form: Ft+1 = Ai . (d) Coordinator summarizes results and redistributes them to participants along with appropriate new questions. (e) Summarize again and refine forecasts and develop new question. marketing. except for the coordinator. Naive forecast: The forecast for any period equals the previous period’s actual value. Mathematically. e. (b) Chosen experts to participate should be of a variety of knowledgeable people in different areas (finance. 3. production etc). Decomposition of a Time-Series a. (c) Through questionnaire the coordinator obtains estimates from all participants. 2. Jury of executives: opinions of high level executives 2. Naïve Approach Moving Averages Exponential Smoothing Trend Projection Linear Regression time-series models associative/casual models Time-Series Models predict on the assumption that the future is a function of the past. Trend: A long-term upward or downward movement in data. 4. Consumer market survey: Asking the customers may give best forecasts but it is higher in cost. -based on mathematics Five quantitative forecasting methods. Quick and easy to prepare (no data analysis required). Seasonality: Short-term regular variations related to calendar or time of day.

of periods or data points to be averaged Moving Average Technique that averages a number of recent actual values. 3. seasonal.where: Ft+1 = forecast of demand for the next period Ai = actual value of the current period t = current time period Can be applied in stable demand (moving around average). (Seasonal) 2. Highway traffic next Tuesday will be the same as last Tuesday (stable. If the last 2 actual values were 50 and 53. moving around average). and trend Examples: 1. where: Ft+1 = forecast of demand for the next period Ai = actual value of the current period n = no. Sales of air conditioning units next July. the next will be 56 (trend). updated as new values become available. Techniques for Averaging Simple Mean or Average One of the simplest averaging models Here the forecast is made by simply taking an average of all data. will be the same as the sales in last July. It can be calculated using the following equation: Ft+1 = Σ Ai/ n Ft+1 = Σ Ai/ n .

30(41) + 0.40(39) + 0. next most recent weight = 0.period moving average each the same weight of -/-.10(43) = 40. next = 0. Disadvantage: values in the average are weighted equally.20(40) + 0. Calculate three period moving average for: Period 1 2 3 4 5 Demand 42 40 43 40 41 F6 = (43+40+41)/3 = 41.10 Total weights always = 1 In the last example: forecast of period 6 will be: F6 = 0. For example.40. of periods or data points to be averaged Example: MA2 refers to a three-period moving average forecast. in a ten.30(40) + 0.2 Ft+1 = Σ CiAi . so F7 = (40+41+39)/3 =40 (Note that: the forecast is updated by adding the newest actual value and dropping the oldest) Advantage of moving average: Easy to use and to compute.where: Ft+1 = forecast of demand for the next period Ai = actual value of the current period n = no.20. and next= 0. Forecast of period 7 will be: F7 = 0.33 If actual demand in period 6 turns out to be 39. where: Ft+1 = forecast of demand for the next period Ci = weight placed on the actual value in period Ai = actual value of the current period Example: The weight of most recent value = 0.30. Weighted moving average: More recent values in a series are given more weight in computing a forecast. the oldest has an equal value to the most recent.40(41) + 0.10(40) = 41 If actual demand of period 6 is 39..20(43) + 0. and MA0 would refer to a five period moving average forecast.

α) F1 where: Ft = Forecast for period t F1 = Forecast for previous period α = Smoothing constant A1 = Actual demand or sales for the previous period.10.25 5.15 41.73 -0. actual demand was 40 units.10 Forecast Error 42 -2 41. the next forecast would be: Ft = 41. and α = 0.85 2.92 Period 1 2 3 4 5 6 7 8 9 Annual Demand 42 40 43 40 41 39 46 44 45 α = 0. Exponential Smoothing: Weighted averaging method based on previous forecast plus a percentage (α) of the forecast error.45 43.2 1.92 -1.39 4.8 Then if the actual demand turns out to be 43.10 (43-41.07 2. the slower the forecast will respond to error more smoothing .Advantage: more reflective of the most recent occurrences.13 1.8 41.92 41.8 1.92 -1.09 -2. The closer the value of α to zero.2 41.93 α = 0.87 Relation between the smoothing constant and response to error: Exponential smoothing is one of the most widely used techniques in forecasting. α is a percentage of the error.10 (40-42) = 41.09 40.55 1.8) = 41.40 Forecast Error 42 -2 41.92 41.75 42.73 41.61 41.15 42.66 41. Or Ft+1 = α A1 + α (1.15 -0.66 -2. The new forecast would be: Ft = 42 +0. Ft = Ft-1 + α (At-1 – Ft-1) where: Ft = Forecast for period t Ft-1 = Forecast for previous period α = Smoothing constant At-1 = Actual demand or sales for the previous period. Next forecast = Previous forecast + α ( Actual – Previous forecast) Where (Actual – Previous forecast) = forecast error. Example: If the previous forecast was 42 units.8 + 0. The quickness of the forecast adjustment to error is determined by the smoothing constant α.

.The closer the value of α to -... the greater the forecast will respond to error less smoothing Smoothing means that values are less variable smooth curve .

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