TECHNIQUES FOR AVERAGING

 Moving Average
 Weighted Moving Average
 Exponential Smoothing
MOVING AVERAGE

- A technique that averages a number of the most recent

actual values in generating a forecast
n

MAn = A t-n+ ... + A t-2 + A t-1  Ai

= i  1
n
n
WEIGHTED MOVING AVERAGE

- More recent values in a series are given more weight

in computing the forcast.

Ft = wt (At) + wt-1 (At-1) + ... + wt-n (At-n)

wt = weight for period t, wt-1 = weight for period t - 1, etc

A1 = the actual value for period t, At-1 = the actual value for period t-1
EXPONENTIAL SMOOTHING

Premise- the most recent observation, might have the

highest predictive value.
therefore, we should give more weight to the more
recent time periods when forecasting.

Ft = Ft-1 + α(At-1 - Ft-1)

- Weighted averaging method based on previous forecast

plus a percentage of forecast error.
 COMMON NON-LINEAR TRENDS

 Parabolic
 Exponential
 Growth
 LINEAR TREND EQUATION

Ft = a + bt

Ft - Forecast for period t

t - Specified number of time periods
a - Value if Ft at t=0
b - Slope of the line
 TECHNIQUES FOR SEASONALITY

- Regularly repeating movements in series values that can

be tied to recurring events

MODELS OF SEASONALITY
• Additive - Expressed as a quantity that gets added to or
subtracted from the time-series average in order to
incorporate seasonality.
• Multiplicative - Expressed as a percentage of the average
(or trend) amount which is then used to multiply the value
of a series in order to incorporate seasonality.
ASSOCIATIVE FORECASTING TECHNIQUES

- based on the development of an equation that

summarizes the effects of predictor values.

• Predictor Values- Used to predict values of

variable interest.
• Regression- Technique for fitting a line to a set
of points.
• Least Squares Lines- Minimizes sum of
squared deviations around the line.
MONITORING THE FORECAST

 Tracking forecast errors and analyzing them can provide

useful insights as to whether forecast are performing
satisfactorily.

 Sources of Forecast Errors:

- a model may be inadequate due to:
• omission of an important variable
• change or shift in the variable the model cannot handle.
• appearance of a new variable.

- Irregular variations may have occurred.

- Random Variation
 Control charts are useful identifyig the presence of
non-random error in forecast
Tracking signals can be used to detect forecast bias
CHOOSING A FORECASTING TECHNIQUE

FACTORS TO CONSIDER:
 Cost
 Accuracy
 Availability of Historical Data
 Availability of Forecasting software
 Time needed to gather and analyze data and
prepare a forecast
 Forecast Horizon
 OPERATION STRATEGY

The better forecast are, the more able organization will be to

take advantage of future opportunities and reduce potential risks.

- to work to improve short-term forecasts

• accurate up-to-date information can have a signifiant effect on
forecast accuracy:
Prices
Demand
Other important variables
- Reduce the time horizon forecast have to cover
- Sharing forecasts or demand data through the supply chain can
improve forecast quality.