BHARTI VIDYAPEETH COLLEGE OF ENGINEERING NAVI MUMBAI FORECASTING SUBMITTED BY
SANJAY SOPAN MORE ROLL NO-4745
What is Forecasting?
FORECAST:
A statement about the future value of a variable of interest such as demand. Forecasts affect decisions and activities throughout an organization Accounting, finance Human resources Marketing MIS Operations Product / service design
Uses of Forecasts
Accounting Finance Cost/profit estimates Cash flow and funding
Human Resources Marketing
MIS Operations Product/service design
Hiring/recruiting/training Pricing, promotion, strategy
IT/IS systems, services Schedules, MRP, workloads New products and services
Common in all forecasts
Assumes causal system past ==> future Forecasts rarely perfect because of randomness
Forecasts more accurate for groups vs. individuals
Forecast accuracy decreases as time horizon increases
I see that you will get an A this semester.
Elements of a Good Forecast
Timely
Reliable
Accurate
Written
Steps in the Forecasting Process
The forecast
Step 6 Monitor the forecast
Step 5 Prepare the forecast Step 4 Gather and analyze data Step 3 Select a forecasting technique
Step 2 Establish a time horizon Step 1 Determine purpose of forecast
Types of Forecasts
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
Judgmental Forecasts
Executive opinions
Sales force opinions Consumer surveys Outside opinion
Time Series Forecasts
Trend - long-term movement in data Seasonality - short-term regular variations in data Cycle wavelike variations of more than one years duration Irregular variations - caused by unusual circumstances Random variations - caused by chance
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 periods actual value.
Naive Forecasts
Simple to use Virtually no cost Quick and easy to prepare Easily understandable Can be a standard for accuracy Cannot provide high accuracy
Review: forecast
Nave technique
Stable time series data Seasonal variations Data with trends
Averaging
Moving average Weighted moving average Exponential smoothing
Techniques for Trend
Develop an equation that will suitably describe trend, when trend is present. The trend component may be linear or nonlinear We focus on linear trends
CASE STUDY
The manager of a seafood restaurant was asked to establish a pricing policy on lobster dinners. Experimenting with prices produced the following data:
Sold (y) 200
Price (x) 6.00
190
188 180
6.50
6.75 7.00
Create the scatter plot and determine if a linear relationship is appropriate.
170
162 160 155
7.25
7.50 8.00 8.25
Determine the correlation coefficient and interpret it
Obtain the regression line and interpret its coefficients.
156
8.50
8.75 9.00 9.25
148 140 133
Forecast Accuracy
Source of forecast errors:
Model may be inadequate Irregular variations Incorrect use of forecasting technique Random variation
Key to validity is randomness
Accurate models: random errors Invalid models: nonrandom errors
Key question: How to determine if forecasting errors are random?
Error measures
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
MAD, MSE, and MAPE
MAD = Actual forecast
n
MSE = ( Actual forecast)
2
n -1
MAPE
Actual Forecast 100 Actual n
Example
Period 1 2 3 4 5 6 7 8 Actual 217 213 216 210 213 219 216 212 Forecast 215 216 215 214 211 214 217 216 (A-F) 2 -3 1 -4 2 5 -1 -4 -2 |A-F| 2 3 1 4 2 5 1 4 22 (A-F)^2 4 9 1 16 4 25 1 16 76 (|A-F|/Actual)*100 0.92 1.41 0.46 1.90 0.94 2.28 0.46 1.89 10.26
MAD= MSE= MAPE=
2.75 10.86 1.28
Controlling the Forecast
Control chart A visual tool for monitoring forecast errors Used to detect non-randomness in errors
Forecasting errors are in control if All errors are within the control limits No patterns, such as trends or cycles, are present
Controlling the forecast
Control charts
Control charts are based on the following assumptions: when errors are random, they are Normally distributed around a mean of zero. Standard deviation of error is MSE 95.5% of data in a normal distribution is within 2 standard deviation of the mean 99.7% of data in a normal distribution is within 3 standard deviation of the mean Upper and lower control limits are often determine via 0 2 MSE or 0 3 MSE
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
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