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Advanced class this week
Next classes:
December 7 (9th),
December 14 (report),
December 21*,
Manage 2 MSPM make-up classes
December 28*,
Forecasting
Pirzada
November 28, 2021
Forecasting
• Foretell
• Predict,
• Project,
• Estimate,
• Guess
Forecasts: Need and importance
1. Economic forecasts
Inflation rates, money supplies, housing starts, and other
planning indicators.
2. Technological forecasts
Rates of technological progress, requiring new plants and
equipment.
3. Demand forecasts
Accurate information about real demand. drive a company’s
production, capacity, marketing, and personnel planning.
Forecasting Time Horizons
1. Short-range forecast:
Span: < 3 months - 1 year.
Use: purchasing, job assignments and scheduling,
2. Medium-range forecast: Span: 3 months - 3 years.
Use: Sales planning, production planning and budgeting,
3. Long-range forecast:
Span: 3 years or more,
Use: New products, capital expenditures, facility location or
expansion, and research and development.
Demand Management: Influencing Demand
Active role:
• Incentives, • Campaigns, • Price cuts etc.
Passive role:
Simply accept because:
• Firm is running to full capacity,
• Market is fixed and static, and
• Funding issues etc.
Types of Forecasting
Qualitative
Time series analysis
Casual relationship
Simulation
Panel Consensus
Panel of people from variety of position
Open meeting & free exchange
Historical Analogy
Modeling a generic product
Qualitative Techniques -II
Grass Roots
- The person closest to customers knows future needs best.
Delphi Method
Average demand
Trends
• Linear • S-curve • Asymptotic • Exponential
Seasonal elements
Cyclic elements
Random variation
Auto correction
At 1 At 2 At 3 .... At n
ft
n
Ft: Forecast for the coming period
n: No. of periods to be averaged
At-1: Actual occurrence in the past period
At-2, At-3, At-n : Actual occurrence in 2
periods ago, 3 periods ago, n periods ago,
Ft w1 At 1 w2 At 2 w3 At 3 ....wn At n
n
w
i 1
i 1
Ft Ft 1 ( At 1 Ft 1 ) Premise
Most recent
i. Most recent forecast: (Ft-1)
occurrences
ii. The actual demand (At-1)
are most
iii. Smoothening constant (α)
iv. Forecast for period t: (Ft) indicative.
Regression Residuals
Y = a + b x1
The difference between
an observed value of the
Least square fitting response variable and
Sum of the residuals is least the value of the
response variable
predicted from the
regression line.
Linear Regression
Y a bx
Y= Value of dependent variable from a y bx
regression equation.
xy n x. y
a : Y –intercept b
b: Slope of the line. x 2 n x x
n
y : Average of all ys
i i
( y Y ) 2
x : Average of all xs S yx i 1
1. Find causes
2. Develop a relation ship
3. Make forecast
Regression: Y = a + b x1
Multiple regression: Y = a + b x1 + b x2 + b x3 + …
Least square fitting: Sum of the residuals is least
Multiple Regression Analysis
S B Bm ( M ) Bh ( H ) Bi ( I ) Bt (T )
Bias Errors:
Making a consistent mistake:
Because of :
• Failure to include right variables,
• Using wrong relationships
• Wrong/ undetected trends
Random Errors:
Errors that cannot be explained.
Measurement of Errors
At Ft
MAD i 1
n
1 MAD = 0.8 Standard deviation
3.75 MAD = 3 Standard deviation
RSFE
TS
MAD
RSFE: Running sum of forecast errors
MAD: the average of absolute forecast errors.
Problem Nos. 4, 5, 6
Statistics: Few terms