3-1 Forecasting
CHAPTER
3
Forecasting
3-2 Forecasting
FORECAST:
A statement about the future value of a variable of
interest.
Forecasts affect decisions and activities throughout
an organization
Accounting
Finance
Human resources
Marketing
MIS
Operations
Product / service design
3-3 Forecasting
Assumes causal system
past ==> future
Forecasts are not perfect because of
randomness
Forecasts more accurate for
groups vs. individuals I see that you will
get an A this semester.
Forecast accuracy decreases
as time horizon increases
3-4 Forecasting
Elements of a Good Forecast
Timely
Reliable Accurate
Written
3-5 Forecasting
Steps in the Forecasting Process
“The forecast”
Step 6 Monitor the forecast
Step 5 Make the forecast
Step 4 Select a forecasting technique
Step 3 Obtain, clean and analyze data
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast
3-6 Forecasting
Forecasting techniques
Judgmental - uses subjective inputs
Time series - uses historical data
assuming the future will be like the past
Associative models - uses explanatory
variables to predict the future
3-7 Forecasting
Judgmental Forecasts
Executive opinions
Sales force opinions
Consumer surveys
Delphi method
Opinions of managers and staff
Achieves a consensus forecast
3-8 Forecasting
Time Series Forecasts
Trend - long-term upward or downward
movement in data
Seasonality - short-term regular variations
related to the calendar or time of the day
Cycle – wavelike variations lasting more than
one year
Irregular variations - caused by unusual
circumstances, not reflective of typical
behavior
Random variations – residual variations after
all other behaviors are accounted for
3-9 Forecasting
Forecast Variations
Figure 3.1
3-10 Forecasting
Naive Forecasts
Uh, give me a minute....
We sold 250 wheels last
week.... Now, next week
we should sell....
The forecast for any period equals
the previous period’s actual value.
3-11 Forecasting
Naïve Forecasts
Simple to use
Virtually no cost
Quick and easy to prepare
Data analysis is nonexistent
Easily understandable
Cannot provide high accuracy
Can be a standard for accuracy
3-12 Forecasting
Techniques for Averaging
Moving average
Weighted moving average
Exponential smoothing
3-13 Forecasting
Moving Average
Moving average – A technique that averages a
number of recent actual values, updated as new
values become available.
3-14 Forecasting
Weighted moving average
Weighted moving average – More recent values in a
series are given more weight in computing the
forecast.
3-15 Forecasting
Exponential Smoothing
• a sophisticated weighted averaging method that is
still relatively easy to use and understand.
• each new forecast is based on the previous forecast
plus a percentage of the difference between that
forecast and the actual value of the series at that
point.
3-16 Forecasting
Other Forecasting Methods
Focus Forecasting - using the forecasting method
that demonstrates the best recent success
Diffusion Models - based on rates of product
adoption and usage spread from other established
products, using mathematical diffusion models
3-17 Forecasting
Linear Trend Equation
Ft
Ft = a + bt
Ft = Forecast for period t 0 1 2 3 4 5 t
t = Specified number of time periods
a = Value of Ft at t = 0
b = Slope of the line
3-18 Forecasting
Calculating a and b
n (ty) - t y
b =
2
n t - ( t) 2
y - b t
a =
n
3-19 Forecasting
Linear Trend Equation Example
t y
2
Week t Sales ty
1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885
t = 15 t = 55 y = 812 ty = 2499
2
2
(t) = 225
3-20 Forecasting
Linear Trend Calculation
5 (2499) - 15(812) 12495-12180
b = = = 6.3
5(55) - 225 275 -225
812 - 6.3(15)
a = = 143.5
5
y = 143.5 + 6.3t
3-21 Forecasting
Associative Forecasting
Predictor variables - used to predict values of
variable interest
Regression - technique for fitting a line to a set
of points
Least squares line - minimizes sum of squared
deviations around the line
3-22 Forecasting
Forecast Accuracy
Error - difference between actual value and predicted
value
Mean Absolute Deviation (MAD)
Average absolute error
Mean Squared Error (MSE)
Average of squared error
Mean Absolute Percent Error (MAPE)
Average absolute percent error
3-23 Forecasting
MAD, MSE, and MAPE
Actual forecast
MAD =
n
2
( Actual forecast)
MSE =
n -1
( Actual forecas / Actual*100)
MAPE =
t
n
3-24 Forecasting
Monitoring Forecast Error
Control chart
A visual tool for monitoring forecast errors
Used to detect non-randomness in errors
Tracking signal
The ratio of cumulative forecast error to the
corresponding value of MAD, used to monitor
a forecast.
3-25 Forecasting
Choosing a Forecasting Technique
No single technique works in every situation
Two most important factors
Cost
Accuracy
Other factors include the availability of:
Historical data
Computers
Time needed to gather and analyze the data
Forecast horizon
3-26 Forecasting
Thank you