FORECASTING

By:

PROF. ARTHUR S. ALVAREZ

COURSE INTENDED LEARNING OUTCOMES
At the end of this module, students will be able to:
1.Evaluate at least three qualitative forecasting techniques and the
advantages and disadvantages of each.
2.Compare and contrast qualitative and quantitative approaches to
forecasting.
3.Explain three measures of forecast accuracy
4.Compare two ways of evaluating and controlling forecasts.
Assess the major factors and trade-offs to consider when choosing
a forecasting technique.
Elements of Good Forecasting System
1.Timely
2.Accurate
3.Reliable
4.Correct Units
5.Understandable
 Steps in the Forecasting Process
1.Determine the purpose of the forecast.
2.Establish a time horizon.
3.Collect Information.
4.Choose the Forecasting Model.
5.Make the Forecast
6.Monitor the forecast.
Approaches/Methods to Forecasting
• Quantitative methods involve either the projection of
historical data or the development of associative models
that attempt to utilize causal (explanatory) variables to
make a forecast.
• Qualitative techniques permit inclusion of soft information
(e.g., human factors, personal opinions, hunches) in the
forecasting process. Those factors are often omitted or
downplayed when quantitative techniques are used
because they are difficult or impossible to quantify.
 Qualitative Forecasting
1.Executive opinions: The opinions of experts from
different departments are considered and averaged to
forecast the future sales.
2.Consumer surveys: In this method, the survey is
conducted directly on the customers on their purchases.
3.Salesforce opinion: In this method, the forecast is done
based on the opinions of salespeople who have steady
interactions with the clients.
 Quantitative Forecasting Models
A.Time-series Models – These models examine the past
data patterns and forecast the future on the basis of
underlying patterns that are obtained from those data. There
are many types of time series models like Simple and
weighted moving average, seasonal indexes, trend
projections, simple mean and exponential smoothing.

A.1 Behaviors to consider in Time-series Models:

A.1.1 Trend - refers to a long-term upward or downward
movement in the data. Population shifts, changing incomes,
and cultural changes often account for such movements.
A.1.2 Seasonality - refers to short-term, fairly regular
variations generally related to factors such as the calendar or
time of day. Restaurants, supermarkets, and theaters
experience weekly and even daily “seasonal” variations.
A.1.3 Cycles - are wavelike variations of more than one
year’s duration. These are often related to a variety of
economic, political, and even agricultural conditions.
Quantitative Forecasting Models
A.2.1 Naive Forecast - forecast for
any period that equals the previous
period’s actual value. It uses a
single previous value of a time
series as the basis of a forecast.
The naive approach can be used
with a stable series (variations
around an average), with seasonal
variations, or with trend. With a
stable series, the last data point
becomes the forecast for the next
period.
Quantitative Forecasting Models
A.2.2 Moving average - technique that averages a
number of recent actual values, updated as new
values become available. A moving average
forecast uses a number of the most recent actual
data values in generating a forecast. The moving
average forecast can be computed using the
following equation:
Quantitative Forecasting Models
A.2.3 Weighted Moving Average - it is
similar to a moving average, except that it
assigns more weight to the most recent
values in a time series.
 Monitoring Forecast
Many forecasts are made at regular intervals (e.g., weekly, monthly, quarterly). Because
forecast errors are the rule rather than the exception, there will be a succession of
forecast errors. Tracking the forecast errors and analyzing them can provide useful
insight on whether forecasts are performing satisfactorily.

Possible Source of Error in Forecast

1.Incorrectly identifying the relationship between variables
2.Not recognizing trends in demand
3.Not updating forecasting assumptions and techniques
4.Projecting past trends into the future
5.Reacting to random or special cause variations
6.Relying on biased information sources
7.Using an insufficient number of data points
 SEATWORK

1.What are the main advantages that quantitative techniques for

forecasting have over qualitative techniques?

2. Explain some of the consequences of poor forecasts?

3. Cite some forecasting problems on your chosen company?