By: Dr. Abdulfatah Salem7 Predict or estimate a Is the practice of predicting something that will happen or come to be A the future. It is not, however, like or other parton ese fens Poy eenot perched Forecasting relies on solid evidence to predict future events. It is used in a number of areas today, most commonly in the process of predicting the and the imminent Gree Cs Meu Cont) Forecasting is the attempt to predict future eC en outcomes based on past events planning, and estimating future growth. Dee uraBecause many of the decisions be made under uncertainty Forecasting lays a ground for reducing the risk in all decision making In all business applications, forecasting serves as a starting point of the major decisions in all organization functions 9-Jul-23 Dr. Abdulfatah Salem SSSSsS=e}New Laws and Regulations Competition Technology Growth Trend Political Change 9-Jul-23 Dr. Abdulfatah Salem | 4Darel f Treg Lael 4 new product quality Pret ad fesearch and i) improvement Perel ROTI Tat lalg = 9-Jul-23 Dr. Abdulfatah Salem [i 5) lB|Make forecast and implement results 99-Jul-23 E Dr. Abdulfatah Salem | gl| Facts about the forecasting | { A statement about the future value of a variable of interest such as demand. ] { Forecasting is used to make informed decisions. { People make and use forecasts all the time both in their jobs and in everyday lite | Accurate forecasts lead to efficient operations | Inaccurate forecasts lead to inefficient, high cost operations. 9-Jul-23 Dr. Abdulfatah SalemSZ ao Forecasts rarely perfect because of randomness 25 LF Forecast accuracy decreases as time horizon increases a 9-Jul-23 Dr. Abdulfatah Salem 8*Consists of Objective inputs Consists of Subjective inputs *Generated thru math. Modeling Generated by the forecaster *Involve hard data «Includes soft information (human (projection of historical data, factors, personal opinion, expertise ) analyzing objectives) used to predict what something in the * used to predict future figures and future will be in terms of things other quantities such as sizes and lengths. than set figures. 9-Jul-23 MM Dr: Abdulfatah SalemAveraging Techniques | 9-Jul-23_ | Dr. Abdulfatah SalemA method of forecasting using a composite forecast prepared by a number of individual executive. The executives form their own opinions initially from the data given, and revise their opinions according to the others' opinions. Finally, the individuals’ final opinions are combined. Production manager 125 40% 50 marketing manager 160 35% 56 Financial manager 100 25% 25 9-Jul-23 Dr. Abdulfatah Salem 11Executive Opinion Advantages Disadvantages 1. This method is useful for a company which is innovating new products. 1. Its opinion and experience oriented not based on facts. 2, Very quick and simple process and itis easily done through holding meetings periodically. 2. There can be biased opinions. 3. Collective decision is been taken considering the opinions of all the top level executives. 4, Useful for small business because of the simplicity of this method. 3. The responsibility of the decision is distributed among all the executives and no single person will be liable for any faulty forecast. 9-Jul-23 Dr. Abdulfatah SalemDelphi is based on the principle that forecasts (or decisions) from a structured group of individuals are ‘more accurate than those from unstructured groups. The technique can also be adapted for use in face-to-face meetings, and is then called mini-Delphi or Estimate-Talk-Estimate (ETE). Delphi has been widely used for busine forecasting and has certain advantages over another structured forecasting approach, prediction markets | The experts answer questionnaires in two or more rounds. After each round, a facilitator or change agent provides an anonymous summary of the experts’ forecasts from the previous round as well as the reasons they provided for their judgments. Thus, experts are encouraged to revise their earlier answers in light of the replies of other members of their panel, itis believed that during this process the range of the answers will decrease and the group will converge towards the "correct" answer. i Finally, the process is stopped after a predefined stop criterion (e.g. number of rounds, achievement of consensus, stability of results) and the mean or median scores of the final rounds determine the results. 9-Jul-23 Dr: Abdulfatah Salem 13 |FORECASTING 9-Jul-23 Dr. Abdulfatah Salem | 14Time Series Forecast (Extrapolative) Statistical techniques that Time ordered sequence of make use of historical data observations taken at regular collected over a long period of observations taken at regular intervals. Forecasts based on only one factor - time. For example: OGross Domestic Product Each Quarter QWMonthly Profits QO Annual Rainfall QDaily Stock Market Index 9-Jul-23 Dr. Abdulfatah Salem | 16 time..FORECASTING Patterns of the Time Series Increasing No Recognizable Pattern Linear Trend Time, | Time, } Seasonal Pattern plus Linear Growth 2 Time,FORECASTING Time Series fmeeenes BEstEb ~— [Is S Dr. Abdulfatah SalemFORECASTING __Naiive Forecasts | Estimating technique in which the last period's actual are used as this period's forecast, | without adjusting them or attempting to establish causal factors. It is used only for comparison with the forecasts generated by the better (sophisticated) techniques. Example Month Sales actual Forecast JAN 390 FEB 420 MAR 190 APR 380 MAY 400 June FeAu + (As# Ad) June 9-Jul-23 Dr. Abdulfatah Salem | 19Simple Mean Forecasts Ana = Ayn Period ‘January, February Dr. Abdulfatah Salem | 20F, = MA,= F, = forecast for time period t MA, =n period moving average A,.4 = actual value in period t-1 n_ number of periods ( data points ) 9-Jul-23 Dr. Abdulfatah Salem | otFORECASTING ‘he weekly sales figures (in millions of dollars) presented in the following table are used by a major department store to determine the need for temporary sales personnel (n=3). Determine the forecast value of week 26 5.7 Aegan | 9-Jul-23_ | Dr. Abdulfatah Salem Period @ a la | la cof on /or}OJon}on| onl a jonionio co] |] | 0 [e209 2] |] on} n] on} en1 > |en/o) |S on|io Sfi o|January February March 3 month MA: (oct+nov+dec)/3 = 258.33 April May June 6 month MA: July (jultaug+...tdec)/6 = 249.33 AUGUSE 12 month MA: September (Jan+feb+...+dec)/12 = 205.33 October November December 9-Jul-23 Dr. Abdulfatah SalemHistorical values of the time series are assigned different weights when performing the forecast. In a weighted moving average, weights are assigned to the most 9-Jul-23 Dr. Abdulfatah Salem | 24The table contains the pas patelofichanee) exchange rate between the Kuwaiti 20/8/2023) pO 7a ‘ . 21/4/2023 100.768 dinar and the Eqyptian pound from 22/4/2023 ADOnSe 20/4/2023 to 1/5/2023 Calculate the — | -szyazaoas a four-days weighted moving 24/4/2023 100.566 average to forecast for the rate of 25/4/2023 101.256 change at 2/5/2023 using the 26/4/2023 100.668. ights (0.62 0.21 0.13 0.04) 27/4/2023 99.898 28/4/2023 100.457 29/4/2023 100.893 e forecast value at 023 30/4/2023 101.187 = 101.213*0.62 + 100.785*0.21 31/4/2023 100.785 + 101.187*0.13 + 100.893*0.04 erei2i23 a = 101.107 2/5/2023 | 101.107 Lia3-period weighted moving average forecasting Period Actual value Month 1 Month 2 Month 3. Month 4 Month 5 Month 6 Month 7 Month 8. Month 9 Month 10 Month 11 Month 12 STARCO supply Forecast Dr. Abdulfatah Salem+The most recent observations might have the highest predictive value. - Therefore, we should give more weight to the more recent time periods when forecasting. -The method based on previous forecast plus a percentage of the forecast error -Forecast = previous forecast + % Error -Error = Actual value - Forecast value is Fea) Determination of OL is usually judgmental and subjective and often based on triakand -error experimentation. The most commonly used values of Ol are between 0.10 and 0.50. [__9-Jul-23__| Dr. Abdulfatah SalemFORECASTING The shown table is the expected value and the actual value of the sales of the new apartments this year, determine the forecast value of sales for the next year using exponential smoothing method with a = 0.15 This year Forecast Actual $ 300000 $ 280000 Fpextyear = 300000 + 0.15 (280000 - 300000) = 300000 + 0.15 (-20000) = $§ 297000 9-Jul-23 Dr. Abdulfatah Salem | asGiven the weekly demand data, what are the exponential smoothing forecasts for Month 10 using a = 0.10 1 #0 (Ary Fya) cee [ex F, = 820+ 0.10 (820-820) = 820 F, = 820+ 0.10 (775-820) = 815, F,= 815+ 0.10 (680-815) = 801.5 F, = 801.5 + 0.10 (655-801.5) - 787 F,= 787 +0.10 (750-787) = 783 F, = 783 + 0.10 (802-783) = 785 F,= 785 + 10 (798-785) = 786.3 Fy = 786.3 + 0.10 (689-786.3) = 776.6 Blelal|slafulaluln|e F,p= 776.6 + 0.10 (775-7766) = 776.4 9-Jul-23 Dr. Abdulfatah Salem | 29[) Trend is a long term movement in a time series. It is the underlying direction(an upward or downward tendency) and rate of change in a time series, when allowance has been made for the other components. A simple way of detecting trend in seasonal data is to take averages over a certain period and if these averages change with time we can say that there is evidence of a trend in the series, indicating that the population mean is time dependent. F, = Forecast for period t t= Specified number of time periods a=Value of F, att=0 b = Slope of the line 9-Jul-23 Dr. Abdulfatah Salem | 30sFORECASTING Calculating a and b Time (t) | Value (y) 8 14 21 # # 2) paDZe)-ztzy oes ; att -(=bFORECASTING weeks addy. Et Dy mrt? - (E92 = Ly -bEt b= $0) 18012) es 12180 58 BS Tens s12_- 6303) = 3s \ 43.5 + 6.3 \ ) | 9-Jul-23 | Dr. Abdulfatah Salem iiaThe shown are the electric Power consumption Year pElcctricalPower for Alexandria city from 2012 to 2018. Sar _Demand (megawatt) Required Calculate the predicted demand for 2019 ? First, plot the relation between the year and the consumptions. Note that the relation is an ascending trend Time Electrical Power Year Period (¢) Demand (megawatt) 2012 74 2013 2 ” 2014 80 2015 90 2016 105 2017 142 2018 an Sys@n | 9-Jul-23 | Dr. Abdulfatah SalemnS (ty) -TtEy nse. (507 70 + 10.54t Trend line, Y= 56.70 + 10.54t 2012 2013 2014 2015 2016 2017 2018 2018 2020 Year | 9-Jul-23 | Dr. Abdulfatah Salem ise 34 as90,000,000,000 87,025,000,000 108,900,000,000 119,025,000,000 102,400,000,000 136,900,000,000 144,400,000,000 160,000,000,000 148, 225,000,000 184,900,000,000 1D | 0 [co |N Jo fur] for [ny | let Demand for 2001 is y: t=11 foryear2001 77333 + 14576*11 = 437669 9-Jul-23 MD. Abdulfatah SalemFORECASTING Compu-Arab Computer assembly Co., It assemble computers from generic parts. the company has had steady growth since it started. It purchase generic parts in volume at a discount from a variety of sources whenever they see a good deal. Thus, they need a good forecast of demand for their computers so that they will know how many parts to purchase and stock. They have compiled demand data for the last 12 months as shown. -patDity DID) a aye (50) b=1.72 a=35.2 y=35.241.72t for period 13. 8 y=35.2+1.72013)=57.56 | 9-Jul-23 | Dr. Abdulfatah Salem P3671912023 Dr. Abdulfatah SalemFORECASTING Seasonality Seasonality is a characteristic of a time series in which the data experiences regular and predictable changes that recur every fixed interval of time. Any predictable change or pattern in a time series that recurs or repeats over a one-time period can be said to be seasonal. If you live in a climate with cold winters and warm summers, your home's heating costs probably risen he winter and fall in the summer. You reasonably expect the seasonality of your heating costs to recur every year. | Seasonal Seasoal atern Linear GreTerms & Definitions Seasonality — Repetition at Fixed Intervals ‘Seasonal variations — Regularly repeating movements in series values that can be tied to recurring events. — Itis applied to annually, monthly, weekly, daily and other regularly recurring patterns in data. Seasonal relative (index) — Percentage of average or trend Centered moving average — Amoving average positioned at the center of the data that were used to compute it. 7/9/2023 Dr. Abdulfatah Salem | 39FORECASTING FORECASTING METHODS FOR SEASONAL SERIES ] House Cleaning Services Company needs a quarterly forecast of the number of customers expected next year. The business is seasonal, with a peak in the third quarter and a trough in the first quarter. Forecast customer demand for each quarter of year 5, based on an estimate of total year 5 demand of 2,600 customers. Quarter Year 1 Year 2 Year 3 Year 4 45, 70 100 100 335 370 585 725 520 590 830 1160 100 170 285 215 1000 1200 1800 2200 250 300 450 550 7/9/2023 Dr. Abdulfatah Salem | 40Multiplicative Seasonal Influences A seasonal influence is multiplicative if the quarterly demand forecast of a quarter = Projected average period demand x Average seasonal index of that quarter. Actual Seasonal Value Average Value oi the Period Seasonal Index = Quarter Year 1 Year 2 Year 3 Year 4 1 45/250 = 0. 70/300 = 0. 100/450 =0.22 100/550 = 0.18 2 335/250 = 1.; 370/300 = 1. 585/450 = 1.30 725/550 = 1.32 3 520/250 = 2.1 590/300 = 1: 830/450 = 1.84 1160/550 = 2.11 4 100/250 = 0.: 170/300 = 0. 285/450 = 0.63 215/550 = 0.39 7/9/2023 Dr. Abdulfatah Salem | atSra Bi Bes rite Sooke Eee | Scull Forecast Peeeenr| eC kcos een iol demand for CES ela) Ta} each period. [f) for each seasons of period. Urol alelen Dr. Abdulfatah Salem 7/9/2023FORECASTING Quarterly demand for last four years is given in the table below. use a 5-step process to forecast. Quarter Year | Year 2 Fall 2530 2690 ‘Winter 2300 2420 Spring 2000 Summer 1775 7/9/2023 Dr. Abdulfatah SalemFORECASTING Step 1: Find average quarterly demand for each year. Quarter Year 1 Year 2 Year 3 Year 4 Fall 2530 2690 2790 2860 Winter 2300 2420 2410 2600 Spring 1900 2000 2105 2175 Summer 1510 1775 1875 1945 Average 2060 2221 2295 2395 = (1510+ 1900+ | =(1775+2000+ | =(1875+2105+ = (1945 +2175 + Formula 2300 + 2530)/4) 2420 + 2690)/4) 2410 + 2790)/4) 2600 + 2860)/4) = 2060 = 2221 = 2295 = 2395 7/9/2023 Dr. Abdulfatah Salem 44FORECASTING Step 2: Compute Seasonal Index (SI) for each quarter for each year. Quarter Fall Winter Spring Summer 7/9/2023 Dr. Abdulfatah Salem | 45St. Pp 3: Calculate the average SI for each quarter. Si, Si, Si, Si, 1.228 1.211 1.216 1.194 4117 1.090 1.050 1.086 0.922 0.900 0.917 0.908 0.733 0.799 0.817 7/9/2023 Dr. Abdulfatah Salem | 46Step 4: Calculate the average quarterly demand for next year. First, the yearly demand has to be estimated or calculated for next year using one of the forecasting techniques. Year 1 Year 2 Year 3 Year 4 Year 5 2060 2221 2295 2395 a Year1 Year? Year3 Year4 Year 5 7/9/2023 Dr. Abdulfatah SalemFORECASTING Step 5: Forecast demand for the four quarters of next year. Multiply the average demand by the SI for each quarter. Fall 1.212 2599x1.212 Winter 1.086 2599x1.086 Spring 0.912 2599x0.912 Summer 0.790 2599x0.790 7/9/2023 Dr. Abdulfatah Salem | 48The manager of a parking lot has computed daily relatives for the number of cars per day in the lot. The computations are repeated here (about three weeks are shown for illustration). A seven period centered moving average is used because there are seven days (seasons) per week Deny [rom ]ves [reer] rt] or [oon] wom frase] on [mor] rr [ont [oun un [ton] wos row] eri [one Joon [oe Cars [|=] =| | |] =|] |||] o| ala] |r] |o]«|o ron] wes frir| ei J 8 [ Son [ton one] wou] rr [ri [sot] in| won rome] wes] mar] re [ew | nf won a|lel=|=|=|=[o|> =l«lel«|=|ol=[=|«|@ Centered MAT L [re[maroe] n [rafoelna manana] elnelra[e [ra] | | Seasonal inde 1.36] +27] 0.51[0.77] 06] 1.03] 1.19 | 14 ]+.21]0.55]0.72]0.0] 1.06] +2 [1.33] I Abdulfatah Salem = :The estimated relatives will be: Monday: (0.77 + 0.72)i2 Tuesday: (0. Wednesday: (1.03 + 1.06)2 = 1.045 Thursday: (1.19 + 1.2)/2 = 1.195 Friday: (1.36 + 1.4 + 1.33)/3 = 1.36 Saturday: (1.27 + 1.21)/2= 1.24 ‘Sunday: (0.51 + 0.56)/2 = 0.535, lote The sum of the relatives must equal the number of periods (i.e., 7 in this example). If it is not, you have to multiply by a correction factor. In this example the sum is 6.985, therefore you have to multiply each factor by (7/6.985 = 1.00215) 746 Tue = 0.866 . Thu = 1.196 365 Sat=1.245 9-Jul-23 Dr. Abdulfatah Salem | 50FORECASTING Days cars Weekly avg. Next week avg. Next week forecast Days Relatives Next week avg. Seasonal value 9-Jul-23 Dr. Abdulfatah SalemFORECASTING Associative Forecasting Associative models assume that there is a causational relationship between the variable of interest and other variables called predictors Predictor variables - used to predict values of variable Price of beef and price of chicken of interest Crop yields and soil condition Regression - technique for fitting a line to a set of points Crop yields & timing of water Regression Methods ~ Regression (or causal ) methods Profits and sales that attempt to develop a mathematical relationship Price of products and energy cost between the item being forecast and factors that cause it to behave the way it does. 7/9/2023 Dr. Abdulfatah Salem | 52FORECASTING Simple Linear Regression The simplest and most widely used form of regression involves a linear relationship between two variables. The objective in linear regression is to obtain an equation of a straight line that minimizes the sum of squared vertical deviations of data points from the line (i.e. the least squares criterion) = nEGy)- Exdy This least squares line has the form: nsx? - (Ext y=a+bx Where: Y= predicted (dependent or response) variable - predictor (dependent or explanatory) variable = Ex-th tercept lope (change rate) umber of paired observations _/ 7/9/2023 Dr. Abdulfatah Salem | 53Conditions required for predictor to be valid |. The relationship between movements of an indicator and movements of the variable should have a logical explanation. . Movements of the indicator must precede movements of the dependent variable by enough time so that the forecast isn’t outdated before it can be acted upon. . A fairly high correlation (r ) should exist between the two variables. T = 220y)- Exedy er? 27) (027- y?) Correlation factor r is'a measure of the strength and direction of relationship between two variables Correlation r ¢ dicate weak linear relationship between two variables “Correlation r le strength linear relationship between two variables (directly change) “Correlation r cae strength linear relationship between lwo variables (inversely change) 7/9/2023 [ini 54 aaaFORECASTING Simple Linear Regression — Variations around the line are — Always plot the data to verify random linearity — Deviations around the line — Check for data being time- normally distributed dependent — Predictions are being made — Small correlation may imply only within the range of that other variables are observed values important 7/9/2023 Dr. Abdulfatah Salem | 55Carrefour has a chain of 10 Stores in Egypt. Sales figures and profiles for the stores are giving in the following table. Obtain a regression for the data, and predict profit for a store assuming sales of 23 million. 7/9/2023 Dr. Abdulfatah Salem | 56441 324 361 484 256 170 289 100 375 625 226 20 13 260 400 169 ExEI9O Sy=1115 = Sxy=2184 YxX=3694 Sy=1297.25 pr -—B zy) dad (es? -") xs I= 093 7/9/2023 Dr. Abdulfatah Salempb = 10(2184) — (190)4111.5 10(3694) — (190)2 _ 111.5—0.78 (190) _ 10 -3.67 + 0.78X when x = 23 million -3.67 + 0.78(-23) 14.27 million PgThe following table shows the profits (in EGP) resulting from the weekly sales (in tons) of candy in a Yr 7 | 15 | confectionery factory in Tanta city. Discuss the possibility of forecasting profits using sales Build a forecasting model +Forecast the weekly profit resulting from sales of 10.3 tons 7/9/2023 Dr. Abdulfatah Salem