Professional Documents
Culture Documents
Lec 10 & 11
Learning Objectives
List the elements of a good forecast.
Outline the steps in the forecasting process.
Compare and contrast qualitative and quantitative
approaches to forecasting.
Briefly describe averaging techniques, trend and
seasonal techniques, and regression analysis,
and solve typical problems.
Describe measure(s) of forecast accuracy.
Describe evaluating and controlling forecasts.
FORECAST:
A statement about the future value of a
variable of interest such as demand.
Forecasting is used to make informed
decisions
Match supply to demand.
Two important aspects:
Level of demand
Degree of accuracy
Long-range – plan the system (strategic)
Short-range – plan to use the system (on-
going operations)
Forecasts
Forecasts affect decisions and activities
throughout an organization
Accounting Cost/profit estimates
Timely
Reliable Accurate
l s e
g fu u
i n Written to
n s y
a
M
e Ea
Cost Effective
Steps in the Forecasting Process
“The forecast”
7.
Is accuracy of No 8b. Select new
forecast forecast model or
acceptable? adjust parameters of
existing model
Yes
9. Adjust forecast based 10. Monitor results
8a. Forecast over
on additional qualitative and measure forecast
planning horizon
information and insight accuracy
Types of Forecasts
Irregular
variation
Trend
Cycles
90
89
88
Seasonal variations
Naive Forecasts
Uh, give me a minute....
We sold 250 wheels last
week.... Now, next week
we should sell....
Moving average
Weighted moving average
Exponential smoothing
Moving Averages
Moving average – A technique that averages a
number of recent actual values, updated as
new values become available.
At-n + … At-2 + At-1
Ft = MAn=
n
Weighted moving average – More recent
values in a series are given more weight in
computing the forecast.
If the actual demand in period 6 is 38, then the moving average forecast for
period 7 is:
Simple Moving Average
Actual
MA5
47
45
43
41
39
37 MA3
35
1 2 3 4 5 6 7 8 9 10 11 12
1 42
2 40 10%
3 43 20%
4 40 30%
5 41 40%
Exponential Smoothing
F3 F2 ( A2 F2 )
0.10, F3 42 0.10(40 42) 42 0.10 (2) 42 0.2 41.8
F4 F3 ( A3 F3 )
0.10, F4 41.8 0.10(43 41.8) 41.8 0.10 1.2 41.8 0.12 41.92
Picking a Smoothing Constant
Actual
50
.4
.1
45
Demand
40
35
1 2 3 4 5 6 7 8 9 10 11 12
Period
Common Nonlinear Trends
Parabolic
Exponential
Growth
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
Calculating a and b
n (ty) - t y
b =
n t 2 - ( t) 2
y - b t
a =
n
Linear Trend Equation Example
t y
2
W eek t S a le s ty
1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885
2
t = 15 t = 55 y = 812 ty = 2 4 9 9
2
( t) = 2 2 5
Linear Trend Calculation
5 (2499) - 15(812) 12495-12180
b = = = 6.3
5(55) - 225 275 -225
812 - 6.3(15)
a = = 143.5
5
Ft = 143.5 + 6.3t
Associative Forecasting
4 15 40
14 25 30
15 27 20
16 24 10
0
12 20 0 5 10 15 20 25
14 27
20 44
15 34
7 17
A straight line is fitted to a set of sample points.
Linear Regression
y = a + bx a = y-bx
xy - nxy
b =
x2 - nx2
where
a = intercept
b = slope of the line
x
x = = mean of the x data
n
y
y = n = mean of the y data
Linear Regression Example
x y
(WINS) (ATTENDANCE) xy x2
4 36.3 145.2 16
6 40.1 240.6 36
6 41.2 247.2 36
8 53.0 424.0 64
6 44.0 264.0 36
7 45.6 319.2 49
5 39.0 195.0 25
7 47.5 332.5 49
49 346.7 2167.7 311
Linear Regression Example
49
x= = 6.125
8
346.9
y= = 43.36
8
xy - nxy
b=
x2 - nx2
(2,167.7) - (8)(6.125)(43.36)
=
(311) - (8)(6.125)2
= 4.06
a = y - bx
= 43.36 - (4.06)(6.125)
= 18.46
Linear Regression Example
60,000 –
50,000 –
40,000 –
Attendance, y
| | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10
Wins, x
Correlation and Coefficient of
Determination
Correlation, r
Measure of strength of relationship between the
dependent variable (demand) and the independent
variable
Varies between -1.00 and +1.00
Coefficient of determination, r2
Percentage of variation in dependent variable
resulting from changes in the independent variable
Computing Correlation
n xy - x y
r=
[n x2 - ( x)2] [n y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
r=
[(8)(311) - (49)2] [(8)(15,224.7) - (346.9)2]
r = 0.947
Coefficient of determination
r2 = (0.947)2 = 0.897
Forecast Accuracy
Error - difference between actual value and predicted value
Mean Absolute Deviation (MAD)
Average absolute error
Weights errors linearly.
Mean Squared Error (MSE)
Average of squared error
Gives more weight to larger errors, which typically cause more problems
Mean Absolute Percent Error (MAPE)
Average absolute percent error
MAPE should be used when there is a need to put errors in perspective. For
example, an error of 10 in a forecast of 15 is huge. Conversely, an error of 10 in a
forecast of 10,000 is insignificant. Hence, to put large errors in perspective, MAPE
would be used.
MAD, MSE, and MAPE
Actual forecast
MAD =
n
2
( Actual forecast)
MSE =
n -1
Tracking signal =
(Actual-forecast)
MAD
Bias – Persistent tendency for forecasts to be
Greater or less than actual values.
Forecast Control
Tracking signal
monitors the forecast to see if it is
biased high or low
(Dt - Ft) E
Tracking signal = =
MAD MAD
1 MAD ≈ 0.8 б
Control limits of 2 to 5 MADs are
used most frequently
Tracking Signal Values
Tracking Signal Plot
Sources of Forecast errors
Model may be inadequate
Irregular variations
Incorrect use of forecasting technique
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
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
Supply Chain Forecasts
Sharing forecasts with supply can
Improve forecast quality in the supply chain
Lower costs
Shorter lead times