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# Chapter 3

Forecasting

FORECAST:  A statement about the future  Used to help managers  Plan the system  Plan the use of the system .

and medium-range plans related to:  Inventory management  Workforce levels  Purchasing  Budgeting  Plan the use of the system .Forecast Uses  Plan the system  Generally involves long-range plans related to:  Types of products and services to offer  Facility and equipment levels  Facility location  Generally involves short.

individuals  Forecast accuracy decreases as time horizon increases .Common Features  Assumes causal system past = future  Forecasts rarely perfect because of randomness  Forecasts more accurate for groups vs.

Elements of a Good Forecast Timely Dependable Correct Cost effective Meaningful Written Easy .

Steps in the Forecasting Process Step 6 Monitor the forecast Step 5 Make the forecast Step 4 Gather and analyze data Step 3 Select a forecasting technique Step 2 Establish a time horizon Step 1 Determine purpose of forecast .

uses subjective inputs (qualitative)  Time series .uses explanatory variables to predict the future .uses historical data assuming the future will be like the past (quantitative)  Associative models .Types of Forecasts  Judgmental .

Judgmental Forecasts (Qualitative)  Opinions of managers and staff .Consumer surveys Delphi method Executive opinions Sales force.

short-term regular variations in data  Irregular variations .long-term movement in data  Seasonality .caused by chance  CYCLE.Time Series Forecasts (Quantitative)  Trend .wave like variations lasting more than one year .caused by unusual circumstances  Random variations .

Forecast Variations Figure 3-1 Irregular variation Trend cycle Cycles 90 89 88 Seasonal variations .

The Forecast of Forecasts      Naïve Simple Moving Average Weighted Moving Average Exponential Smoothing ES with Trend and Seasonality .

Naïve Forecast      Simple to use Virtually no cost Data analysis is nonexistent Easily understandable Cannot provide high accuracy .

Techniques for Averaging  Moving average  Weighted moving average  Exponential smoothing .

Simple Moving Average  Smoothens out randomness by averaging positive and negative random elements over several periods  n .5 .number of periods (this example uses 4) Period Demand Forecast 1 74 2 90 3 100 4 60 5 80 81 6 90 82.5 7 82.

Weighted Moving Average .Points to Know on Moving Averages  Pro: Easy to compute and understand  Con: All data points were created equal…. ….

3 7 0.number of periods ai – weight applied to period t-i+1 Ft 1  Period Demand Forecast i  t  n 1 1 46  a t  i 1 A i Alpha 2 48 3 47 4 23 5 40 32.Weighted Moving Average  Similar to a moving average methods except that it assigns more weight to the most recent values in a time series.60 0.6 6 35.1 8 Average .70 t 1 2 3 0.  n -.

2 3 100 73.1 8 Average .98 4 60 5 6 7 0. equivalent to WMA a – exponential smoothing parameter (0< a<1)  Ft  Ft 1  a ( At 1  Ft 1 ) a Period Demand Forecast 1 74 72 2 90 72.Exponential Smoothing  Simpler equation.