FORECASTING

——
A forecast is a prediction, estimate, or
determination of what will occur in the future
based on a certain set of factors.
 Major Categories of Forecasting Time Horizons

1. Short-term Forecast. It covers one day to one year and are used
mainly for short- run control such as employment, purchasing,
scheduling, sales, and production rates.
2. Intermediate-term Forecast. A period ranging from one season to
one or two years and is used for production schedules, revenues, cash
flow, and budget planning.

3. Long-term Forecast. When a forecast covers from two to five years

or more like market trends, technology, facilities expansion, and general
policy
Forecasting Techniques
1. Qualitative Techniques. A technique that is based on qualitative data
such as the collective opinion of the sales force to forecast the future.
2. Time Series Analysis. A statistical forecasting technique that is based
solely on historical data accumulated over a period of time.
3. Causal Method. A method that define as relationships among
independent and dependent variables in a system of related equations.
Factors in Forecasting
1. Trend. It is the general movement of direction in the data. (e.g. The
amount of supply and population in a certain city.)
2. Seasonal Factors. Forecasting factors in which variations in a
time series associated with a particular period of time; say a quarter, or a
month. (e.g. Sales of Christmas decorations during the months of
November and December.)
3. Cyclical Factors. Forecasting factors applicable in longer-
term regular fluctuations which make take several years to complete.
(e.g. Economic activity of Japan after World War II to the present.)
4. Random Factors. These are events or effects that cannot be
predicted with certainty but can impact on the data. (e.g. The price of
materials for house construction in a certain city after a major
Forecasting Methods or Time
Series Methods

1. Simple Moving Average

2. Weighted Moving Average

3. Simple Exponential
Smoothing
4. Adjusted Exponential
Smoothing
Simple Moving Average - the un-weighted average of a
consecutive number of data points. It is a forecasting method simply
eliminates the effects seasonal, cyclical, and erratic fluctuations by
getting the historical data.

Simple Moving Average = Σ (most recent n date

values)

Number of time
periods
Where: Fι = Forecast for the time period
St-i = actual time values for period
t-1
N = number of time periods used in
Example: The WSS motorcycle dealer in Quezon Avenue area wants
to accurately forecast the demand forthe WSS hybrid motorcycle
during the next month. Because the distributor is in Germany, it is
difficult to send motorcycle back or recorded it the proper number of
motorcycles is not ordered a month ahead. From sales records, the
dealer has accumulated the following data for the past 11 months.
Compute the three and five months moving average forecast on
demand.
Computation for the
Forecast on 3-Month
Moving
April Average: ═ 180 ═ 60
= 60+70+50
3 3
May = 70+50+90 = 210 = 70
3 3 October = 150+70+110 = 330 =110
June = 50+90+10 = 150 = 3 3
50 November = 70+110+150 = 330 =110
3 3 3 3
July = 90+10+80 = 180 =
60
3 3 December = 110+150+130 = 390 =130
August =10+80+150 = 240 3 3
September
= 80 = 80+150+70 = 300
= 100
3 3
3 3
Computation for the Forecast on
5- Month MovingJune
Average
= 60+70+50+90+10 = 280 = 56
5 5
July = 70+50+90+10+80 = 300 = 60
5 5
August = 50+90+10+80+150 = 380 = 76
5 5
September = 90+10+80+50+70 = 400 =80
5 5
October = 10+80+150+70+110 = 420 = 84
5 5
November = 80+150+70+110+150 = 560 =112
5 5
December = 150+70+11=+150+130 = 610 = 122
5 5
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 9.3 Weighted Moving
A weighted moving average is a time series forecasting method in
Average
which the most recent data are weighted heavier compared to later data.
This is desirable to vary the weights given to historical data forecast
future demand or sales. Smoothing Constant is a weighting is a
weighting factor used in the exponential smoothing forecasting
technique. Mathematically, the weighted moving average is computed as
follows:
Example: The WSS motorcycle dealer in Quezon Avenue area wants to
accurately forecast the demand forthe WSS hybrid motorcycle during the
next month. Because the distributor is in Germany, it is difficult to send
motorcycle back or recorded if the proper number of motorcycles is not
ordered a month ahead. From sales records, the dealer has accumulated
the following data for the past 11 months. Determine the weighted moving
averages forecast on demand with the following weights (a) 20%, 30%, and
50% (b) 15%, 25%, and 60%.
(a) 20%, 30%, and 50%
April = (0.20)(60)+ (0.30)(70)+ (0.50)(50)=12+21+25= 58
May = (0.20)(70)+ (0.30)(50)+ (0.50)(90)=14+15+45=74
June = (0.20)(50)+ (0.30)(90)+ (0.50)(10)=10+27+5=42
July = (0.20)(90)+ (0.30)(10)+ (0.50)(80)=18+3+40=61
August =(0.20)(10)+ (0.30)(80)+ (0.50)(150)=2+24+75=101
September =(0.20)(80)+ (0.30)(150)+ (0.50)
(70)=16+45+35=96
October =(0.20)(150)+ (0.30)(70)+ (0.50)
(110)=30+21+55=106
November =(0.20)(70)+ (0.30)(110)+ (0.50)
b) 15%, 25%, and 60%.
April = (0.15)(60) + (0.25)(70) + (0.60)(50) = 9.0 + 17.5 + 30 = 56.5
May = (0.15)(70) + (0.25)(50) + (0.60)(90) = 10.5 + 12.5 + 54 = 77.0
June = (0.15)(50) + (0.25)(90) + (0.60)(10) = 7.5 + 22.5 + 6 = 36.0
July = (0.15)(90) + (0.25)(10) + (0.60)(80) = 13.5 + 2.5 + 48 = 64.0
August = (0.15)(10) + (0.25)(80) + (0.60)(150) = 1.5 + 20.0 + 90 = 111
September = (0.15)(80) + (0.25)(150) + (0.60)(70) = 12.0 + 37.5 + 42
91.5
October = (0.15)(150) + (0.25)(70) + (0.60)(110) = 22.5 + 17.5 + 66 =
106.0
November = (0.15)(70) + (0.25)(110) + (0.60)(150) = 10.5 + 27.5 + 90 =
128.0