Forecasting
Analytics
• Descriptive
• Basic Statistic (Mean, Variance, Standard Deviation)
• Statistical Distributions
• Statistical Process Control
• Predictive
• Forecasting
• Markov
• Queuing Theory
• Prescriptive
• Inventory Management Models
• Logistic Models
• Network Models
Factors
• Nature Of Product
• Distribution Method
• Company’s Position In The Market
• Level Of Competition
• Historical Data
• Others
Types of Forecasting
• Time Based
• Function Based
• Data Based
• Nature of Arrangement
Exponential Smoothing
• A weighted average method that includes all past data in the forecasting
calculation
• More recent results weighted more heavily
• The most used of all forecasting techniques
• An integral part of computerized forecasting
• Well accepted for six reasons
1. Exponential models are surprisingly accurate
2. Formulating an exponential model is relatively easy
3. The user can understand how the model works
4. Little computation is required to use the model
5. Computer storage requirements are small
6. Tests for accuracy are easy to compute
18-5
Exponential Smoothing Model
• Only three pieces of data are required:
1. Most recent forecast
2. Actual demand for the forecast period
3. Smoothing constant alpha ()
• Determines the level of smoothing and speed of reaction
• Ft = The exponentially smoothed forecast for period t
• Ft-1 = The exponentially smoothed forecast made for the prior
period
• At-1 = The actual demand in the prior period
• = The desired response rate, or smoothing constant
18-6
Exponential Smoothing Example
(=0.20)
Week Demand Forecast
1 820 820
2 775 820
3 680 811
4 655 785
5 750 759
6 802 757
7 798 766
8 689 772
9 775 756
10 760
18-7
First Forecast
• No way to find F1 since Ft is a function of Ft-1
• When exponential smoothing is first used for an item, an initial
forecast may be obtained by using a simple estimate
• Like the first period’s demand
• Or by using an average of preceding periods, such as the average of the first
two or three periods
• For working homework, assume F1 = A1
18-8
Exponential Forecasts vs. Actual Demand for
Product over Time Showing Forecast Lag
18-9
Exhibit 18.5
Exponential Smoothing with Trend
• An trend in data causes the exponential forecast to always lag the
actual data
• Can be corrected somewhat by adding in a trend adjustment
• To correct the trend, we need two smoothing constants
• Smoothing constant alpha ()
• Trend smoothing constant delta (δ)
18-10
Trend Effects Equations
Ft = The exponentially smoothed forecast that does not include trend for period t
Tt = The exponentially smoothed trend for period t
FITt = The forecast including trend for period t
FITt-1 = The forecast including trend made for the prior period
At-1 = The actual demand for the prior period
δ = Smoothing constant (delta)
= Smoothing constant (alpha)
18-11
Example 18.1: Forecast Including
Trend
• Previous forecast including trend of 110 units
• Previous trend estimate of 10 units
• Alpha of 0.20
• Delta of 0.30
• Actual demand of 115
• If actual 120, instead of 121.3, forecast for next period is…
• .26
18-12
Choosing Alpha and Delta
• Exponential smoothing requires that the smoothing constants be
given a value between 0 and 1
• Typically fairly small values are used for alpha and delta in the range
of .1 to .3
• The values depend on how much random variation there is in demand
and how steady the trend factor is
18-13
Linear Regression Analysis
• Regression is used to identify the functional relationship between two or more
correlated variables, usually from observed data
• Dependent variable is predicted for given values of the independent variable
• Linear regression is special case that assumes the relationship between the
variables can be explained with a straight line
• Useful for long-term forecasting
• Y = a + bt
• Y = Dependent variable computed by the equation
• y = The actual dependent variable data point
• a = Y intercept
• b = Slope of the line
• t = Time period
18-14
Example 18.2: Least Squares
Method
Quarter Sales Quarter Sales
1 600 7 2,600
2 1,550 8 2,900
3 1,500 9 3,800
4 1,500 10 4,500
5 2,400 11 4,000
6 3,100 12 4,900
18-15
Exhibit 18.6
Durbin Watson Statistic