Professional Documents
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Forecasting
FORECAST
· A statement about the future value of a variable of interest
such as demand.
· Forecasts affect decisions and activities throughout an
organization
· Accounting, finance
· Human resources
· Marketing
· MIS
· Operations
· Product / service design
3-3 Forecasting
Uses of Forecasts
FORECAST
· Assumes causal system, past ==> future
· Forecasts rarely perfect because of randomness
· Forecasts more accurate for groups vs. individuals
· Forecast accuracy decreases I see that you will
as time horizon increases get an A this semester.
3-5 Forecasting
Timely
Reliable Accurate
l s e
fu u
i ng Written y
to
an s
M
e Ea
3-6 Forecasting
“The forecast”
Types of Forecasts
1. Judgmental Forecasts
· Executive opinions
· Sales force opinions
· Consumer surveys
· Outside opinion
· Delphi method
· Opinions of managers and staff
· Achieves a consensus forecast
3-10 Forecasting
Forecast Variations
Irregular
variation
Trend
Cycles
90
89
88
Seasonal variations
3-12 Forecasting
3. Associative Forecasting
Naive Forecasts
Naïve Forecasts
· Simple to use
· Virtually no cost
· Quick and easy to prepare
· Data analysis is nonexistent
· Easily understandable
Moving Averages
· Moving Average – A technique that averages a number of
recent actual values, updated as new values become
n
available.
D i
MAn = i=1
n
[n = number of periods in the moving average, Di = Demand in Period i]
Weighted Moving Average – More recent values in a series are
given more weight in computing the forecast. [Wi = the weight
for period i, between 0 and 100 percent, Wi = 1.00]
WMAn=
i=1
W iD i
3-17 Forecasting
Exponential Smoothing
• Exponential smoothing is a sophisticated weighted
averaging method that is still relatively easy to use
and understand.
• The most recent observations might have the highest predictive value.
· Therefore, we should give more weight to the more recent time
periods when forecasting.
Exponential Smoothing
Parabolic
Exponential
Growth
3-23 Forecasting
Ft
Ft = a + bt
·y = a + bt
3-24 Forecasting
Calculating a and b
n (ty) - t y
b =
n t 2 - ( t) 2
y - b t
a =
n
3-25 Forecasting
2
t = 15 t = 55 y = 812 ty = 2499
2
(t) = 225
3-26 Forecasting
812 - 6.3(15)
a = = 143.5
5
y = 143.5 + 6.3t
3-27 Forecasting
Forecast Accuracy
Actual forecast
MAD =
n
2
( Actual forecast)
MSE =
n -1
Example
Period Actual Forecast (A-F) |A-F| (A-F)^2 (|A-F|/Actual)*100
1 217 215 2 2 4 0.92
2 213 216 -3 3 9 1.41
3 216 215 1 1 1 0.46
4 210 214 -4 4 16 1.90
5 213 211 2 2 4 0.94
6 219 214 5 5 25 2.28
7 216 217 -1 1 1 0.46
8 212 216 -4 4 16 1.89
-2 22 76 10.26
MAD= 2.75
MSE= 10.86
MAPE= 1.28