SAMPLE ACTIVITIES/ASSESSMENTS (Chapter 2)

1. What is the relationship between the forecasting time horizon and the choice of

forecasting models?

The use of forecasts is clearly universal. However, the type of data used, the type of

analysis performed, and the tools and techniques used may vary. Therefore, it is helpful to

understand the causes of these fluctuations and subdivide and group them. The forecast period

provides a solid foundation for classification. Forecasting models are one of many tools that

companies use to predict outcomes related to sales, supply and demand, consumer behavior,

and more. These models are especially useful in sales and marketing. There are several

forecasting methods used by businesses that provide different levels of information. The appeal

of using predictive models, from simple to complex, is that you can visually see the expected

results.

2. Explain how forecasting helps an organization handle uncertainties.

Forecasts are valuable to businesses as they enable them to make informed business

decisions and develop data-driven strategies. Financial and operating decisions are made

based on current market conditions and expectations for the future. Past data is aggregated and

studied to find patterns used to predict future trends and changes. Forecasting helps

businesses become more active than reactive. If a trend is expected to enter the market or if

data shows changes in consumer behavior, it is important to recalibrate the entire market and

optimize resources to stand out from the competition. Having an overview of current data and

predictions of what might happen in the future helps companies adjust their business strategies

and modify current operations to change their bottom line.

3. Is there a relationship between the choice of data and the type of forecasting

model that one wishes to use?

Yes. We have already seen much of the logic behind developing a forecasting system

critically depends on what kind of issues. And as we have already seen, the type of data

required for developing a plan and the nature of decisions to which the output from the

forecasting system is put differs significantly. Once the purpose, the time horizon, and the nature

of data required are clearly identified, the next step in the process involves choosing an

appropriate model from the available set. This is quickly done by collecting sample data and

analyzing them using simple tools such as visual inspection and statistical measures. This is a

crucial step to understanding the specific requirements of the proposed forecasting system. In

short, you will only know the model to use after you gather and see the nature of the data.

4. Suppose an organization wishes to forecast the demand for the next financial year

to prepare its annual budget.

Suppose an organization wants to develop a forecasting system to estimate

the annual demand for equipment, it manufactures for production planning purposes. Assume a

sample of one year's sales data for equipment is collected and graphed. From the graph plotted,

the organization can tell if there is a distinct seasonal pattern. If there is a seasonality model, it

must be able to handle seasonality. Likewise, graphing data can also sometimes reveal the

significant impact of business cycles. Understanding these patterns in the data will help select an
appropriate set of models for the candidate to consider. Based on these analyses, one can

choose a suitable model for active consideration.

5. What sources of data are useful for this exercise?

Investopedia and Omnisci.

6. What factors influence the choice of an appropriate fore- casting model?

A number of factors influence the selection of a forecasting model. They include the

following:

1. Amount and type of available data. Quantitative forecasting models require certain types

of data. If there are not enough data in quantifiable form, it may be necessary to use a

qualitative forecasting model. Also, different quantitative models require different amounts of

data. Exponential smoothing requires a small amount of historical data, whereas linear

regression requires considerably more. The amount and type of data available play a large

role in the type of model that can be considered.

2. Degree of accuracy required. The type of model selected is related to the degree of

accuracy required. Some situations require only rough forecast estimates, whereas others

require precise accuracy. Often, the greater the degree of accuracy required, the higher the

forecasting process's cost. This is because increasing accuracy means increasing the costs

of collecting and processing data and the cost of the computer software required. A simpler

and less costly forecasting model may be better overall than a very sophisticated but

expensive one.

3. Length of forecast horizon. Some forecasting models are better suited to short forecast

horizons, whereas others are better for long horizons. It is very important to select the correct

model for the forecast horizon being used.

7. What are the different methods available for assessing the accuracy of forecasts?

How should one select an appropriate measure?

I'm comparing some forecasting methods using four accuracy measures:

Mean Absolute Error

(MAE), Mean Squared Error (MSE), Mean Absolute Percentage Error (MAPE), Mean Absolute

Scaled Error (MASE).

Disagreement among these measures is natural as they target different objectives. Suppose

you'd know the true probability distribution of the random variable (call it YY) of interest. Then,
in order to minimize the MSE, you'd state the mean of YY as a forecast. In order to minimize the

MAE, however, you'd state the median of YY, which is different from the mean if the
distribution

of YY is skewed. Hence it is easily possible that method A gives better forecasts of the mean,

whereas method B is better for the median, which makes the measures disagree. In order to

choose an accuracy measure, you should think about which concept your interested in.

8. Visit http://www.k2b.net/pdfs/k2b_resourcelibrary_for- rester.pdf. Read the article,

“Demand Forecasting Done Right.”

(a) What are the challenges in demand forecasting? How can you overcome some of

them?

Forecasting demand too low

To avoid the problems created by forecasting demand too low, you should find ways to

keep up with demand in a pinch. This means identifying sources of labor, like on-demand

labor, and having protocols in place for quickly ramping up your operations. For example, you
could run an extra shift or focus all activity on meeting the urgent order.

Forecasting demand too high

To avoid the problems created by forecasting demand too high, you should know what to

do when too many workers and materials are available. Plan for how you can keep workers

doing value-add work if they’ve already been scheduled, or identify workers who are willing to

drop shifts when there isn’t work to be done.

Supply chain dependencies causing last-minute changes

To avoid getting burned by the complexities of the supply chain, you should find ways to

give yourself more flexibility in responding to demand. To do this, you’ll need to tighten up

your demand forecasting to a shorter period and conduct it more frequently. That way, you

can get it closer to the timeline for scheduling your workers, and you can more easily avoid

being overstaffed or understaffed.

Forecasting demand too early

To avoid forecasting demand too early, aim for as short of a time period in your forecast
as possible. For example, forecasting for the week is better than forecasting for the month.

Forecasting for the next couple of days is even better if you can get past your labor
constraints to do so. The closer to the actual production of orders you can forecast demand, the
closer you are to the idea of real-time response to demand.

(b) How do organizations benefit from accurate demand forecasting data?

Enhanced Financial Planning - With accurate sales/demand forecasting, not only by

volume but also by product or service type, you can ensure that you have the resources
needed to pay bills on time.

Improved Staffing - If you can accurately forecast office staff needs, you can create a better

organization chart, ultimately enabling you to hire and staff proactively.

Enhanced Targeted Marketing - If you can accurately plot your revenue during the year,

you will also be able to schedule more low-cost marketing during slow periods and plan for

more expensive marketing efforts during a busy season (or when you have more cash).

Enhanced Production Management - Accurate sales and demand forecasting enables you

to spread out production to ensure your customers and clients have products when they

need them.