Technological Forecasting – Learning Objectives

   List the elements of a good forecast. Outline the steps in the forecasting process. Describe at least three qualitative forecasting techniques and the advantages and disadvantages of each. Compare and contrast qualitative and quantitative approaches to forecasting.

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Learning Objectives
 Briefly describe averaging techniques, trend and seasonal techniques, and regression analysis, and solve typical problems. Describe two measures of forecast accuracy. Describe two ways of evaluating and controlling forecasts. Identify the major factors to consider when choosing a forecasting technique.
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 

FORECAST:
 A statement about the future value of a variable of interest such as demand.  Forecasting is used to make informed decisions.  Long-range  Short-range

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Forecasts
 Forecasts affect decisions and activities throughout an organization
 Accounting, finance  Human resources  Marketing  MIS  Operations  Product / service design

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promotion.Uses of Forecasts Accounting Finance Cost/profit estimates Cash flow and funding Human Resources Marketing MIS Operations Product/service design Hiring/recruiting/training Pricing. MRP. strategy IT/IS systems. workloads New products and services 3-5 . services Schedules.

individuals I see that you will get an A this semester.Features of Forecasts  Assumes causal system past ==> future  Forecasts rarely perfect because of randomness  Forecasts more accurate for groups vs.  Forecast accuracy decreases as time horizon increases 3-6 .

Elements of a Good Forecast Timely Reliable Accurate Written 3-7 .

clean and analyze data Step 3 Select a forecasting technique Step 2 Establish a time horizon Step 1 Determine purpose of forecast 3-8 .Steps in the Forecasting Process “The forecast” Step 6 Monitor the forecast Step 5 Make the forecast Step 4 Obtain.

Types of Forecasts  Judgmental .uses historical data assuming the future will be like the past  Associative models .uses subjective inputs  Time series .uses explanatory variables to predict the future 3-9 .

Judgmental Forecasts  Executive opinions  Sales force opinions  Consumer surveys  Outside opinion  Delphi method  Opinions of managers and staff  Achieves a consensus forecast 3-10 .

caused by chance 3-11 .Time Series Forecasts  Trend .long-term movement in data  Seasonality .short-term regular variations in data  Cycle – wavelike variations of more than one year’s duration  Irregular variations .caused by unusual circumstances  Random variations .

Forecast Variations Figure 3.1 Irregular variatio n Trend Cycles 90 89 88 Seasonal variations 3-12 .

... Now.. The forecast for any period equals the previous period’s actual value.. We sold 250 wheels last week... next week we should sell...Naive Forecasts Uh. give me a minute. 3-13 .

Naïve Forecasts        Simple to use Virtually no cost Quick and easy to prepare Data analysis is nonexistent Easily understandable Cannot provide high accuracy Can be a standard for accuracy 3-14 .

Uses for Naïve Forecasts  Stable time series data  F(t) = A(t-1)  Seasonal variations  F(t) = A(t-n)  Data with trends  F(t) = A(t-1) + (A(t-1) – A(t-2)) 3-15 .

Techniques for Averaging  Moving average  Weighted moving average  Exponential smoothing 3-16 .

Moving Averages Moving average – A technique that averages a number of recent actual values.0 where t = (1. Ft = MAn= At-n + … At-2 + At-1 n  Weighted moving average – More recent values in a series are given more weight in computing the forecast.  Ft = WMAn= wnAt-n + … wn-1At-2 + w1At-1  or: Ft+1 =  wtAt & wt = 1.n) 3-17 . updated as new values become available.

Simple Moving Average Actual MA5 47 45 43 41 39 37 35 1 2 3 4 5 6 7 8 9 10 11 12 MA3 Ft = MAn= At-n + … At-2 + At-1 n 3-18 .

Exponential Smoothing Ft = Ft-1 + (At-1 . 3-19 .Ft-1) • Premise--The most recent observations might have the highest predictive value. we should give more weight to the more recent time periods when forecasting.  Therefore.

Ft-1)  Weighted averaging method based on previous forecast plus a percentage of the forecast error  A-F is the error term.Exponential Smoothing Ft = Ft-1 + (At-1 .  is the % feedback 3-20 .

Example 3 .25 42.36 -1.73 -2.75 1.36 41.92 41.73 41.39 41.87 -5.92 -0.66 4.61 2.15 2.53 40.8 -1.15 -2.4 Error 42 41.88 -1.2 41.92 -2 1.73 -2.55 43.1 Error 42 41.09 5.93 -4.20 -1.92 -0.Exponential Smoothing Period 1 2 3 4 5 6 7 8 9 10 11 12 Actual 42 40 43 40 41 39 46 44 45 38 40 Alpha = 0.13 43.00 1.92 Alpha = 0.88 41.92 41.92 41.8 41.66 41.15 41.07 42.09 40.85 42.53 3-21 .45 1.

Picking a Smoothing Constant Actual 50 Demand   .4 45 40 35 1 2 3 4 5 6 7 8   .1 9 10 11 12 Period 3-22 .

Common Nonlinear Trends Figure 3.5 Parabolic Exponential Growth 3-23 .

Linear Trend Equation Ft Ft = a + bt 0 1 2 3 4 5 t     Ft = Forecast for period t t = Specified number of time periods a = Value of Ft at t = 0 b = Slope of the line 3-24 .

Calculating a and b n  (ty) .(  t)  y .b t a = n 3-25 . t  y b = 2 2 n t .

Linear Trend Equation Example t Week 1 2 3 4 5 t2 1 4 9 16 25 y Sales 150 157 162 166 177 ty 150 314 486 664 885  t = 15  t2 = 55 2 ( t) = 225  y = 812  ty = 2499 3-26 .

5 5 y = 143.225 = 12495 -12180 275 -225 = 6.Linear Trend Calculation b = 5 (2499) .5 + 6.3 812 .3(15) a = = 143.3t 3-27 .6.15(812) 5(55) .

3-28 .  Seasonal relative  Percentage of average or trend  Centered moving average  A moving average positioned at the center of the data that were used to compute it.Techniques for Seasonality  Seasonal variations  Regularly repeating movements in series values that can be tied to recurring events.

used to predict values of variable interest  Regression .minimizes sum of squared deviations around the line 3-29 .technique for fitting a line to a set of points  Least squares line .Associative Forecasting  Predictor variables .

Linear Model Seems Reasonable X 7 2 6 4 14 15 16 12 14 20 15 7 Y 15 10 13 15 25 27 24 20 27 44 34 17 Computed relationship 50 40 30 20 10 0 0 5 10 15 20 25 A straight line is fitted to a set of sample points. 3-30 .

Linear Regression Assumptions  Variations around the line are random  Deviations around the line normally distributed  Predictions are being made only within the range of observed values  For best results:  Always plot the data to verify linearity  Check for data being time-dependent  Small correlation may imply that other variables are important 3-31 .

difference between 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 3-32 .Forecast Accuracy  Error .

MSE.MAD. and MAPE MAD =  Actual  forecast n MSE =  ( Actual  forecast) 2 n -1 ( Actual  forecas t n MAPE = / Actual*100) 3-33 .

MAD. MSE and MAPE  MAD  Easy to compute  Weights errors linearly  MSE  Squares error  More weight to large errors  MAPE  Puts errors in perspective 3-34 .

86 1.94 2.89 10.46 1.46 1.75 10.28 3-35 .92 1.90 0.41 0.Example 10 Period 1 2 3 4 5 6 7 8 Actual 217 213 216 210 213 219 216 212 Forecast 215 216 215 214 211 214 217 216 (A-F) 2 -3 1 -4 2 5 -1 -4 -2 |A-F| 2 3 1 4 2 5 1 4 22 (A-F)^2 4 9 1 16 4 25 1 16 76 (|A-F|/Actual)*100 0.28 0.26 MAD= MSE= MAPE= 2.

such as trends or cycles. are present 3-36 .Controlling the Forecast  Control chart  A visual tool for monitoring forecast errors  Used to detect non-randomness in errors  Forecasting errors are in control if  All errors are within the control limits  No patterns.

Sources of Forecast errors  Model may be inadequate  Irregular variations  Incorrect use of forecasting technique 3-37 .

3-38 .Tracking Signal •Tracking signal –Ratio of cumulative error to MAD (Actual-forecast)  Tracking signal = MAD Bias – Persistent tendency for forecasts to be Greater or less than actual values.

Choosing a Forecasting Technique  No single technique works in every situation  Two most important factors  Cost  Accuracy  Other factors include the availability of:     Historical data Computers Time needed to gather and analyze the data Forecast horizon 3-39 .

Operations Strategy  Forecasts are the basis for many decisions  Work to improve short-term forecasts  Accurate short-term forecasts improve      Profits Lower inventory levels Reduce inventory shortages Improve customer service levels Enhance forecasting credibility 3-40 .

Supply Chain Forecasts  Sharing forecasts with supply can  Improve forecast quality in the supply chain  Lower costs  Shorter lead times  Gazing at the Crystal Ball (reading in text) 3-41 .

Exponential Smoothing 3-42 .

Linear Trend Equation 3-43 .

Simple Linear Regression 3-44 .

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