Forecasting

Dr. Saurabh Pratap

Assistant Professor
Indian Institute of Information Technology
 Introduction
Forecasting is essential for a number of planning decisions

LONG TERM DECISIONS

• New Product Introduction
• Plant Expansion
MEDIUM TERM DECISIONS
• Aggregate Production
Planning
• Manpower Planning
• Inventory Policy
SHORT TERM DECISIONS
• Production planning
• Scheduling of job orders
 PLANNING PROCESS
System
Objectives

Demand System to be Plan of

Forecast Managed Action

Constraints
• Budget
• Space
• Resources
- Men , Equipment
A Forecast of Demand is an essential Input for Planning
 METHOD OF FORECASTING

(a) Subjective or intuitive methods

• Opinion polls, interviews
• DELPHI

(b) Methods based on averaging of past data

• Moving averages
• Exponential Smoothing
(c) Regression models on historical data
• Trend extrapolation

(d) Causal or econometric

(e) Time - series analysis using stochastic models

• Box Jenkins model
 FORECASTING (F) v/s PRODUCTION (P)

F P
 Objective  Subjective
 Scientific  Intuitive
 Free from ‘BIAS’  Individual BIAS
 Reproducible  Non – Reproducible
 Error Analysis  Error Analysis
Possible Limited
 OPINION POLLS

• Personal interviews
e.g. aggregation of opinion of sales
representatives to obtain sales forecast
of a region
• Knowledge base (experience)
• Subjective bias
• Questionnaire method
• questionnaire design
• choice of respondents
• obtaining respondents
• analysis and presentation of results (forecasting)

• Telephonic conversation
• Fast

• DELPHI
 COMMONLY OBSERVED
“NORMAL” DEMAND PATTERNS
D Seasonal
D
Cyclic Pattern with
Growth
t t
ABNORMAL DEMAND
PATTERNS
 DELPHI

• RAND developed the Delphi method in the 1950s,

originally to forecast the impact of technology on
warfare.
• The method entails a group of experts who
anonymously reply to questionnaires and
subsequently receive feedback in the form of a
statistical representation of the "group response,"
after which the process repeats itself.
• The goal is to reduce the range of responses and
arrive at something closer to expert consensus. The
Delphi Method has been widely adopted and is still
in use today
 DELPHI

A structured method of obtaining responses from experts.

• Utilizes the vast knowledge base of experts
• Eliminates subjective bias and ‘influencing’ by members
through anonymity
• Iterative in character with statistical summary at end of
each round (Generally 3 rounds)
• Consensus (or Divergent view Points) usually emerge at
the end of the exercise.
 Expert 1

Coordinator Expert 2

Expert n

A Statistical
• Mean summary
•Median can be given
1990 1995 2000 2005 2010 •Std. deviation at end of
year
each round
DELPHI (Contd.)

Round
1

Moving
Towards
Consensus Round
2

Round
3
 DELPHI (Contd.)

Round
1
Moving
Towards
Divergent
View Points Round
2

Round
3
CHARACTERISTICS OF MOVING AVERAGES

Dt Dt

t t

(1) MOVING AVERAGES LAG A TREND

 Dt

(2) MOVING AVERAGES ARE OUT OF PHASE FOR

CYCLIC DEMAND
Dt

(3) MOVING AVERAGES ARE FLATTEN PEAKS

 MOVING AVERAGES
Month Demand 3 Month MA 6 Month MA

Jan 199
Feb 202
Mar 199 200.00
Apr 208 203.00
May 212 206.33
Jun 194 204.66 202.33
Jul 214 205.66 207.83
Aug 220 208.33 210.83
Sep 219 216.66 213.13
Oct 234 223.33 217.46
Nov 219 223.00 218.63
Dec 233 227.66 225.13
K PERIOD MA = AVERAGE OF K MOST
RECENT OBSERVATIONS

For instance : 3 PERIOD MA FOR MAY

= Demands of Mar, Apr, May / 3
= (199 + 208 + 121) / 3 = 206.33
230

220

6 Month
210 MA

200 6 Month
MA
190
J F M A M J J A S O N D J
Month
 Weighted moving average
method:
 In some conditions it may desirable to apply unequal
weights to the historical data
 If more recent data are to be believed to be more
relevant to a forecast period, larger weights could be
applied
• Lets take an example
week Actual weight
data
1 85 .20
2 102 .30
3 110 .50
The forecast for the 4th week
F10 =85x.20 + 102x.30 + 110x.50= 102.6
EXPONENTIAL SMOOTHING
(Equivalence between  & N :)

•  = 2 / (N+1)
 EXPONENTIAL SMOOTHING

Ft = Forecast for the period t,

Ft-1 = Forecast for period t-1
 = Smoothing constant (between 0 & 1)
At-1= Actual demand data at t-1 period
Ft= At-1+(1- )Ft-1
Example: Shirely Johonson talks to analyst at company headquartor about
the forecasting weekly demand from inventory from her warehouse. The
analyst suggest that Shirley consider using exponential smoothing constants
of 0.1, 0.2 and 0.3. Shirley decided to compare the accuracy of the
smoothing constant for most recent 10 week period.
week Actual Forecast Forecasts Forecast
inventory α =.1 α =.2 α =.3
demand
1 85 85 85 85
2 102 85 85 85
3 110 86.7 88.4 90.1
4 90 89 92.7 94.3
5 105 89.1 92.2 94.3
6 95 90.7 94.8 102.3
7 115 91.1 94.8 96.8
8 120 93.5 98.8 102.3
9 80 96.2 103.0 107.6
10 95 94.6 98.4 99.3
11 100 94.6 97.7 98.0
All the data for the 1st week are selected arbitrarily. Beginning
of the foercasts are nessary to use exponential .
Traditionally we set these forecast equal to the actual data of the
period.
Let us consider for 4th week, the forecasts are

F10  F9   ( A9  F9 )
  0.1 F10  86.7  .1(110  86.7)  89.0
  0.2 F10  88.4  .2(110  88.4)  92.7
  0.3 F10  90.1  .3(110  90.1)  96.1
 Exponential smoothing with
trend
 While considering the short range forecast move
towards medium range forecast, seasonality and trend
becomes more important.
 Incorporating a trend component into exponentially
smoothed forecast is called double exponential
smoothing because the estimate average and the
estimate for the trend are both smoothed.
α= the smoothing constant for the average
β= the smoothing constant for the trend
Model :
St = smoothed forecast
Tt = trend estimate period
At = actual demand in period t
t = the next time period
t- 1= the prior time period
FTt = forecast with trend in period t
α = smoothing constant for the average from 0 to 1
β= smoothing constant for the trend from 0 to 1.

FTt = St-1 +Tt-1

St = FTt +α  A t -FTt 
Tt =Tt-1 +β  FTt -FTt-1 -Tt-1 
Example:
Ann Hickman must forecast the sales of her expanding trucking
firm so that she can plan cash, personnel and fuel needs in
future. She believes that the sales during the past six-month
period should be representative of future sales. Develop an
exponential smoothing forecast with trend for sales in month
7 if α=0.2 and β=0.3 and the past sales are
Month Sales
5 146
(t) (At)
6 150
1 130
2 136
3 134
4 140
Solution:
The forecast for month 1
FT1 = A1 = 130
Trend T1= (A6-A1)/5=4
Now calculate the smoothed for the months:
St = FTt +α  At -FTt 
For month 1; S1= 130+.2(130-130)=130
forecast for month 2 =FT2 = 130+4= 134
For month 2; F2= 134
S2= FT2+ α (A2-FT2)= 134+.2(136-134)=134.4
T2 = T1+ β(FT2-FT1-T1)=4+.3(134-130-4)=4
FT3= S2+T2=134.4+4=138.4
For month3:
FT3=138.4
S3= FT3+.2(A3-FT3)=138.4+.2(134-138.4)=137.52
T3=T2+.3(FT3-FT2-T2)=4+.3(138.4-134-4)=4.12
FT4= 137.52+4.12=141.64
For month4:
FT4=141.64
S4= FT4+.2(A4-FT4)= 141.64+.2(140-141.64)=141.31
T4= T3+.3(FT4-FT3-T3)= 4.12+.3(141.64-138.4-4.12)=3.86
FT5=141.31+3.86=145.17
For month5:
FT5= 145.17
S5= FT5+.2(A5-FT5)= 145.17+.2(146-145.17)=145.34
T5= T4+.3(FT5-FT4-T4)=3.86+.3(145.17-141.64-3.86)=3.76
FT6= 145.34+ 3.76=149.1
For month6:
FT6=149.1
S6= FT6+.2(A6-FT6)= 149.1+.2(150-149.1)=149.28
T6= T5+.3(FT6-FT5-T5)=3.76+.3(149.1-145.17-3.76)= 3.81
So forecast for the month of 7
FT7= S6+T6= 149.28+3.81=153.09