Forecasting

[ref.Chopra & Meindl p- 68 to75]

Forecasting is a technique of projecting past data

into future

Forecasting and prediction

Starting point for planning

Long range, medium range & short range

forecast
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Long range forecast

Capacity development
Medium range forecast
Aggregate planning
Capacity plan
Production plan
Short range forecast
Services scheduling

Some characteristics of forecasts

Forecasts are almost always wrong

Forecasts are more accurate for groups or

families of items than for specifics

motor cars and models

Aggregate forecasts are more accurate
annual rainfall and daily rainfall
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Forecasts are more accurate for short periods

(tomorrow, next year)

Forecast should include an estimate of error

Forecasts are no substitutes for facts

Components of forecast
Past demand
Planned advertising or marketing efforts
Planned price discounts
State of economy
Competitors actions
Forecasters knowledge and judgment

Major categories of forecasts

(forecasting methods)
Qualitative & quantitative forecasts
Qualitative forecasting
Forecast is based on personal judgment
Subjective (opinion based)
Rapid in nature
Facts are unavailable for other methods
Made for specific items rather than markets
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Some qualitative methods of forecasting

Market surveys potential customers opinions

Delphi method or panel consensus

Life cycle analogy

Informed judgment sales force

Quantitative forecasting
Fact based, scientific models
Causal-Correlating demand to specific causal
factors in environment. Estimate these causal
factors and forecast demand. Ambient temperature
and coffee consumption! Monsoon rice
production!
Econometric models-statistical analysis of
various sectors of economy
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Input-output models
Examine flow of products and services for
markets and market segments
Generally used for forecasting project
opportunities
Simulation using computer simulation to
simulate sectors of economy

Time series
Moving average method
Simple moving average estimator decides the
period over which average is taken. 3 months or so
Weighted moving average
A weighted factors are assigned to the periods
over which averaging is being done

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MONTHS

ACTUAL

FORECAST

JANUARY

4200

FEBRUARY

4300

MARCH

4350

APRIL

4283

11/24/2014

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Weighted moving average

MONTHS

WEIGHTS

SALES

WEIGHTED
SALES

JANUARY

4200

8400

FEBRUARY

4300

12,900

MARCH

4350

21,750

TOTAL

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43050

Weighted forecast for April = 4305

11/24/2014

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Exponential smoothing
Smoothing factor is used to smoothen the error of
forecast. Exponential smoothing is useful only
when we have a long history of demand. For short
periods, exponential smoothing is not effective
(Oct/nov13-In time series analysis we have the
moving averages method and the exponential
smoothing method. Which of the methods is better?
Give your reasons)

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Regression analysis
Line of best fit
Regression analysis can be used in time series and
also in causal forecasting method
Independent variable in time series is time
Independent variable in a causal forecast is
always some variable

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Forecasting errors
Difference between forecast and actual should be
measured for estimating error

Mean Forecast Error (MFE)

MFE = [(At Ft)]/n

(t =1 to n)
The above estimate shows the bias of the forecasting
method, unbiased (MFE=0), over project (MFE is
negative) or under project the demand (MFE is positive)
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Mean Absolute Deviation (MAD)

[|At Ft|]/n
(t =1 to n)
Average forecast error, always a positive number
Mean Square Error(MSE)
MSE = [(At Ft) 2] /n
(t=1 to t=n)
Tracking Signal
(n X MFE)/MAD
It is signal to indicate if the forecasting method is
adequate or inadequate (off track). A thumb rule
used says that if the signal is within 4, the
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method is adequate

(Oct/nov11: Why are forecasting errors important?

What deductions can be made using the forecasting
errors? Explain why tracking signal is
advantageous as compared to MAD or MSE-5mks)
(Oct/nov11:What is Mean Absolute Deviation
measure in forecasting? 4mks)
(Oct/nov10-Sh/n: Types of Forecast model
5mks)

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Numerical problems

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