Chapter – 4

Forecasting
Windows QM
 Forecasting

Forecasting is a process of
predicting or estimating future
events based on past data through a
scientific approach
 Demand Forecasting

 Demand Forecasting refers to the

process of predicting the future
demand for the firm’s products or
services. (no. of customers)
 Ittries to estimate the customers’
need of a particular good or service
over a period of time.
 Decisions that Need Forecasts
 Forecasting increases the confidence of the management to
make important decisions.
Forecasts serve as a basis for planning
 Which markets to pursue?
 What products to produce?
 How many units to purchase?
 How many units to produce?
 What is best capacity ?
 And so on……
 Is your forecasting method
accurate?
• Mean Absolute Deviation (MAD)

MAD 
 | Actual  Forecast |
n
• Mean Absolute Percent Error (MAPE)

| Actual - Forecast |
 Actual
*100%
MAPE 
n

Mean Square Error (MSE):

Penalizes extreme errors

 actual - forecast
2

MSE  5
n
 ‫السنة‬ ‫الطلب‬
the demands
for the 2004 1500
products of a
company 2005 1400
were over the
years as
shown below 2006 1800
2007 1200

2008 1900
2009 1750
2010 2100
2011 2200
6
2012 2500
Mad Forecasting Method
Naïve Method

Moving Average ( 3)

Weighted Moving Average

(3) 40% , 30%, 30%

Exponential Smoothing 0.6

Moving Average ( 2)

Exponential Smoothing 0.9

Weighted Moving Average

(2) / 75%
7
Mad Forecasting Method
337.5 2500 Naïve Method

361 2266 Moving Average ( 3)

356.667 2290 Weighted Moving Average

(3) 40% , 30%, 30% = 100%

314.029 2340 Exponential Smoothing 0.6

321 2350 Moving Average ( 2)

321 2468 Exponential Smoothing 0.9

325 2425 Weighted Moving Average

(2) / 75%
8
Quantitative (statistical) methods

 Causal Models:
 Explores cause-and-effect relationships
The Causal method is a quantitative method that uses
historical data on independent variables, such as promotional
campaigns, economic conditions, and competitors’ actions, to
predict demand.

 Time Series Models:

A statistical approach that relies heavily on historical
demand data to project the future size of demand and
recognizes trends and seasonal patterns
It assumes the future will follow same patterns as the past
 Causal Methods
Linear Regression
 Causal methods are used when historical data are available and
the relationship between the factor to be forecasted and other
external or internal factors can be identified.
 Linear regression: A causal method in which one variable (the
dependent variable) is related to one independent variable by a
linear equation.
 Simple linear regression : a single independent variable is used to
predict the value of a dependent variable. Multiple linear
regression : two or more independent variables are used to predict
the value of a dependent variable.
 Dependent variable: The variable that one wants to forecast.
 Independent variables: Variables that are assumed to affect the
dependent variable and thereby “cause” the results observed in
the past over the dependent variable.
 Causal Methods
Linear Regression

Y Regression
Estimate of
Y from equation:
Dependent variable

regression Y = a + bX
equation
Y = dependent variable
X = independent variable
a = The intercept
b = slope of the line

Value of X used
to estimate Y

X
Independent variable
 Correlation coefficient
 Correlation coefficient (r) measures the direction and strength of the linear
relationship between two variables. The closer the r value is to 1.0 the
better the regression line fits the data points.
r squared
► Coefficient of Determination, r2, measures the
percent of change in y predicted by the change in x
.
it measures the strength of the effect of independent variable over the
dependent variable ). The value of r2 ranges from 0 to 1

Example:
r = .901
r2 = .81
 Below is the annual demand for one of
the electrical products produced by an
industrial company. Using Trend Line
equation forecast the demand for the
years, 2020, 2021, 2025.

Year Sales
2015 100
2016 120
2017 118
2018 125
2019 124
The following are sales and advertising data
for the past 5 months. The marketing
manager says that next month the company
will spend $310 on advertising for the
product. Use linear regression to develop an
equation and a forecast for this product.
advertising Sales
Jan , 2018 500 132

Feb, 2018 260 58

March, 2018 180 80

Apr. , 2018 200 50

May, 2018 400 110

The following data shows the sales of a cement factory and the average income

year average monthly sales of a cement

income
2009 560 142
2010 550 140
2011 560 145
2012 570 135
2013 580 140

Linear Regression Linear Trend

The forecasted sales The forecasted sales
in 2014 if the in year 2014
income is 595
linear regression linear trend equation
equation
r r

r2 r2

MAD MAD
 Year Price Sales
A Company,
2015 5 5 following make to
order strategy,
2016 4 6
produces engines
2017 3 7 for cargo
transport aircraft
2018 3 8

The table above shows the relationship between price and demand over five
years
• What is the expected demand for , 2019 and 2020?
• If you know that the price will be 3.5 JD in 2019, what is the expected
demand?