Professional Documents
Culture Documents
(ISD 251)
Lecturer: Barima Okyere Anim
Dept: Supply Chain and Information Systems Dept.
Office: FF 24, Inner 1 KSB Undergraduate Block
FORECASTING IN
BUSINESS
Overview
• What Is Forecasting
• Types of Forecasting (Qualitative & Quantitative)
• Qualitative Forecasting
• Quantitative Forecasting
• Simple Moving Averages
• Weighted Moving Averages
• Exponential Smoothing
• Measures of Forecast Accuracy
• MAD
• MSE
• MAPE
• Regression
• Simple & Multiple Regression
What Is Forecasting
• To forecast simply means to predict
• Forecasting is a core concern of every organization
• All decisions become effective at some point in the future.
• Managerial decision should be based on;
• present circumstances
• Conditions that will prevail when the decisions become effective
• Quantitative Forecasting
• Time Series Analysis
• Causal Relationships
• Simulation
Review Question
Qualitative
Methods
Consumer Market
Delphi Method
Survey
Qualitative Methods
Delphi Method:
• An iterative group process that allows experts, who may be
located in different places, to make forecasts.
• Three different types of participants in the Delphi process:
decisions makers, staff personnel, and respondents.
• The decision making group usually consists of 5 to 10
experts who will be making the actual forecast.
• The staff personnel assist the decision makers by preparing,
distributing, collecting, and summarizing a series of
questionnaires and survey results.
• The respondents are a group of people whose judgments
are valued and are being sought. This group provides inputs
to the decision makers before the forecasts are made.
Qualitative Methods
Jury of executive opinion:
• Takes the opinions of a small group of high level managers, and leads
to a group estimate of demand.
950
900
850
d 800 Demand
n
a 750
m 700 3-Week
e 650
D 6-Week
600
550
500
1 2 3 4 5 6 7 8 9 10 11 12
Week
Simple Moving Average Problem (2) Data
• Question: What is the 3
week and 5 week moving
average forecast for this
data?
Week Demand
1 820
2 775
3 680
4 655
5 620
6 600
7 575
Simple Moving Average Problem (2)
Solution
w
i=1
i
w =1 i
F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
Weighted Moving Average Problem
(2) Data
Question: Given the weekly demand information and
weights, what is the weighted moving average
forecast of the 5th period or week?
Note how that the smaller alpha the smoother the line in this
example.
850
800
d 750 Demand
n 700
a 0.1
m 650
e 600 0.6
D
550
500
1 2 3 4 5 6 7 8 9 10
Week
Exponential Smoothing Problem (2) Data
F1=820+(0.5)(820-820)=820 F3=820+(0.5)(775-820)=797.75
MAD
forecast error A
t=1
t - Ft
n MAD =
n
• The ideal MAD is zero. That would mean there is no forecasting
error.
The larger the MAD, the less the desirable the resulting model.
MAD Problem Data
Question: What is the MAD value given
the forecast values in the table below?
40
n
Note that by itself, the MAD
A
t=1
t - Ft
40 only lets us know the mean
MAD = = = 10 error in a set of forecasts.
n 4
The MSE Statistic to Determine Forecasting
Error
• Forecast error = actual value – forecast value
• MSE = Mean Squared Error
• MSE is the average of the squared errors:
Y = a + bx
I
Week Sales
1 150
2 157
3 162
4 166
5 177
42
First, using the linear regression formulas, we can compute “a” and “b”.
b=
xy - n( y)(x) 2499 - 5(162.4)(3) 63
= = 6.3
x - n(x )
2 2
55 5(9 ) 10
180 model
175
170
165
160 Sales
Sales
155 Forecast
150
145
140
135
1 2 3 4 5
Period
Ŷi b0 b1X1 b2 X 2 b k X k e
Basic Biostat 15: Multiple Linear Regression 45
Regression Modeling
• A simple regression model (one
independent variable) fits a
regression line in 2-
Y dimensional space
Ŷ b0 b1X1 b 2 X 2
X1
Multiple Regression Model 2
Formula for multiple linear
•Y = a + b1x1 + b2x2
I regression with two
independent variables
We will be calculating a, b1
and b2 using excel software
Multiple Regression Equation
2 Variable Example
• A distributor of frozen dessert pies wants to evaluate
factors thought to influence demand
Statistics for Managers Using Microsoft Excel, 5e © 2008 Prentice-Hall, Inc. Chap 14-47
Multiple Regression Equation
2 Variable Example
Price Advertising
Week Pie Sales ($) ($100s)
• Excel:
• Tools / Data Analysis... / Regression
Multiple Regression Equation
2 Variable Example, Excel
Regression Statistics
Multiple R 0.72213
R Square 0.52148
Adjusted R Square 0.44172
Standard Error 47.46341
Observations 15
Sales 306.526 - 24.975(X1 ) 74.131(X 2 )
ANOVA df SS MS F Significance F
Regression 2 29460.027 14730.013 6.53861 0.01201
Residual 12 27033.306 2252.776
Total 14 56493.333
• ANY
QUESTIONS?