FORECAST

TYPES OF FORECAST BASED ON

TIME SERIES FORECAST
FORECAST JUDGEMENT & OPINION

TREND
• Executive Opinions
Judge mental

• Sales Force Opinions

SEASONALITY
• Consumer Survey
Time Series
• Delphi Method CYCLE

▪ Opinions of
Associative Models managers and
IRREGULAR
staff VARIATIONS
▪ Achieves a
consensus
forecast RANDOM
VARIATIONS

NAÏVE FORECAST

• SIMPLE TO USE
• VIRTUALLY NO COST
• QUICK AND EASY TO PREPARE
• DATA ANALYSIS IS NON-EXSITENT
• EASILY UNDERSTANDBLE
• CONNOT PROVIDE HIGH ACCURACY
• CAN BE A STANDARD FOR ACCURACY
 TECHNIQUES FOR
AVERAGING

MOVING WEIGHTED MOVING EXPONENTIAL

AVERAGE AVERAGE SMOOTING

• The more periods in a

• More recent values in a
moving average, the • It is an averaging
series are given more
greater the forecast will method based on a
weight or weighting
smooth or lag changes in previous forecast plus a
factors in computing a
the data but less percentage of the
forecast.
responsive. forecast error.

• The fewer the period or • Next forecast = Previous

• The heaviest weights are
the data points in an forecast + (Actual –
assigned to be the most
average, the less it will Previous Forecast)
recent values.
smooth but the more
responsive.

TECHNIQUES FOR
TECHNIQUES FOR
SEASONALITY
CYCLES

• Longer duration than seasonal

• ADDITIVE MODEL variations,
• Search for another variable
• MULTIPLICATIVE
that relates to, and leads, the
MODEL
variable of interest.
 TECHNIQUES FOR
TREND

LINEAR TREND TREND ADJUSTED

EXPONENTIAL
EQUATION
SMOOTHING

SMOOTHED TREND
A trend line indicates a linear
ERROR FACTOR
relationship. The equation for a
linear relationship is y = mx + b,
where x is the independent
variable, y is the dependent
variable, m is the slope of the line,
and b is the y-intercept.
 ASSOCIATIVE TECHNIQUES
FORECASTING

REGRESSION

SIMPLE LINEAR LINEAR MODEL

REGRESSION SEEMS REASONABLE CORRELATION

• It measures the strength and

direction of the relationship
between two variables.

Correlation can range from -1.00

to, +1.00. A correlation of +1.00
indicates that changes in one
variable are always matched by
changes in the other; a correlation
of -1.00 indicates that increases in
one variable are matched by
decreases in the other, and a
• Simple linear regression is a correlation close to zero indicates
regression model that little linear relationship between
estimates the relationship two variables.

between one independent

variable and one dependent
variable using a straight line.
 REGRESSION

COMMENTS ON THE ALWAYS OBSERVE WEAKNESSES OF

USE OF LINEAR THE FOLLOWING: REGRESSION
REGRESSION

1. Variations around 1. Always plot the

the line are random. If data to verify that a 1. Simple linear
they are random, no linear relationship is regression applies
patterns such as appropriate. only to linear
cycles or trends relationships with one
2. The data may be a
should be apparent independent variable.
time-dependent
when the line and 2. One needs a
variable versus time;
data are plotted. considerable amount
if patterns appear,
2. Deviations around use analysis of time of data to establish
the line should be series instead of the relationship-in
normally distributed. regression, or use practice,20 or more
A concentration of time as an observations.
values close to the independent variable 3. All observations
line with a small as part of a multiple are weighted equally.
proportion of larger regression analysis.
deviations supports
3. A small correlation
the assumption of
may imply that the
normality.
other variables are
3. Predictions are important.
being made only
 CURVILINEAR &
MULTIPLE REGRESSION Forecast Error
ANALYSIS

ERROR = ACTUAL – FORECAST

It involves more than one
predictor variable.

Positive error – Low Forecast Negative error – High Forecast

ACCURACY AND CONTROL

OF FORECASTS

Accuracy and control of Forecast error is the

forecasts are vital aspects of difference between the
forecasting, so forecasters value that occurs and the
want to minimize forecast value that was predicted for
errors. Accurate forecasts a given time period.
are necessary for the success
of daily activities of every
business organization.
 Summarizing forecast
Accuracy

Mean Absolute Possible sources of forecast

Deviation (MAD) errors

• Omission on an important
Mean Squared
variable, a change or shift in
Error (MSE) the variable that the model
cannot deal with, the
appearance of a new
Mean Absolute variable
Percent Error • Natural phenomena
(MAPE) • Used incorrectly, results
misinterpreted
• Randomness
Forecast
Accuracy

• Error - the difference between the actual value and predicted value
• Mean Absolute Deviation (MAD)
• Average absolute error
• Mean Squared Error (MSE)
• Average of squared error
• Mean Absolute Percent Error (MAPE)
• Average absolute percent error
 Controlling
Forecast

Control Forecasting errors

Chart are in controls if

• A visual tool for

monitoring forecast • All errors are within
errors the control limits
• Used to detect non- • No patterns, such as
randomness in trends or cycles, are
errors present

Model may be
Inadequate

Sources of forecast Irregular

errors
variations

Incorrect use of
forecasting techniques
 Choosing a forecasting
technique

• No single technique
• Two most important
works in every • Other factors include
factors
situation the availability of:
• Historical data
• Computers
Cost • Time needed to
gather and analyze
the data
• Forecast Horizon
Accuracy

Proactive
Approach
Using forecast
information
Reactive
Approach
 FORECAST

Elements of a
Uses of Forecast STEPS IN THE
FORECASTING Good Forecast
PROCESS
TIMELY

Accounting Cost/profit 1.Determine the purpose RELIABLE

estimates of the forecast
Cash flow
Finance and 2.Establish a time horizon ACCURATE
funding
MEANINGFUL
Human Hiring/
Resources Recruiting/
3.Select a forecasting UNITS
Training technique
IN WRITING
Pricing,
Marketing Promotion, 4.Obtain, clean and
Strategy COST EFFECTIVE
analyze appropriate
IT/IS systems, data
MIS services EASY TO USE
Operations Schedule,
MRP, 5.make the forecast
Workloads

Product/Service New Product 6.monitor the forecast

Design and
Services

APPROACH IN
FORECASTING

• Qualitative
- Methods consist mainly of subjective inputs, which often defy precise numeral descriptions

• Quantitative
- Consist mainly of analyzing objective, or hard data. Usually avoid personal biases that sometimes contaminate qualitative
methods