Forecasting

Two General Approaches:

1. Qualitative Methods
2. Quantitative Methods
The different forecasting methods are
classified as:
1. Judgemental forecasts
2. Time series forecasts
3. Causal Methods or Associative models
Demand patterns
1. Horizontal
2. Trend
3. Seasonal
4. Cyclical
5. random
Simple Moving Average
For example, MA3, would refer to a
Three-period moving average
forecast, and MA5, would refer to a
five-period moving average forecast.
Compute a three-period moving average forecast given
demand for shopping carts for the last five periods.
Period 1 2 3 4 5
Demand 42 40 43 40 41

The 3 most recent demands

The moving average forecast for period 6 would be:
Solution

F6 = 43 + 40 + 41 = 41.33
3
If the actual demand in period 6 turns
out to be 38, the moving average forecast
for period 7 would be:
F7 = 40+41+38 = 39.67
3
Weighted Moving Average
A. Compute a weighted average forecast using a weight of .40 for the
most recent period, .30 for the next most recent, .20 for the next,
and .10 for the next.
B. If the actual demand for period 6 is 39, forecast demand for period
7 using he same weights as in part a.

Period 1 2 3 4 5
Demand 42 40 43 40 41
Solution
A.F6 = .10 (40) + .20 (43) + .30 (40) + .
40 (41) = 41.0
B.F7 = .10 (43) + .20 (40) + .30 (41) + .
40 (39) = 40.2
 Exponential Smoothing
Weighted averaging method based on previous forecast
plus a percentage of the forecast error.

Ft = forecast for the time period

α = smoothing constant
The smoothing forecast α represents a percentage of the forecast error. Each new forecast
is equal to the previous forecast plus a percentage of the previous error.
Example:
Suppose that the previous forecast was 42 units, actual demand was 40
units, and α = .10. the new forecast would be computed as follows:

Ft = 42 + .10 (40-42) = 41.8

Seasonal Influence in Forecasting
The Syndicate Carpet Cleaning Company is looking for a quarterly
forecast of the number of customers expected next year. The carpet
cleaning business is seasonal with a peak in the third quarter and a
trough in the first quarter. They have collected the quarterly demand
for each quarter of year 5, if the total demand for the 5th year is
estimated to be 2600 customers.
Demand
Quarter Year 1 Year 2 Year 3 Year 4 Year 5
1 45 70 100 100
2 335 370 585 725
3 520 590 830 1160
4 100 170 285 215
Total 1000 1200 1800 2200 2600
Step 1: For each year, calculate the average demand per
season by dividing the annual demand by the number of
seasons per year.

Year 1: 1000/4 = 250

Year 2: 1200/4= 300
Year 3: 1800/4 = 450
Year 4: 2200/4 = 550
Step 2: For each year, divide the actual demand for a season by the
average demand per season. The result is a seasonal index or seasonal
relatives of each season in the year, which indicates the level of the
demand relative to the average demand.
Quarter Year 1 Year 2 Year 3 Year 4

1 45/250 = 0.18 70/300= 0.23 100/450= 0.22 100/550= 0.18

2 335/250 = 1.34 370/300= 1.23 585/450= 1.3 725/550= 1.32

3 520/250 = 2.08 590/300= 1.97 830/450= 1.84 1160/550= 2.11

4 100/250= 0.4 170/300= 0.57 285/450= 0.63 215/550= 0.39

Step 3. Calculate the average seasonal index for each
season, using the results from step 2. Add the seasonal
indices for a season and divide by the number of years
of data.
Q1 = 0.18 + 0.23 + 0.22 + 0.18 = 0.2
Q2 = 1.34 + 1.23 + 1.3 + 1.32 = 1.3
Q3 = 2.08 + 1.97 + 1.84 + 2.11 = 2
Q4 = 0.4 + 0.57 + 0.63 + 0.39 = 0.5
Step 4. Calculate each season’s forecast for the next year. In order to do
so, first, calculate the average demand per season for the next year.
Then, obtain the seasonal forecast by multiplying the seasonal index by
the average demand for season.
Average demand per season for 5th year
2600/4 = 650

Seasonal forecast
Q1 =0.2 x 650 = 130
Q2 = 1.3 x 650 = 845
Q3 = 2 x 650 = 1300
Q4 = 0.5 x 650 = 325