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events.

Forecast may involve taking historical data and

projecting them into the future with some sort of

mathematical model.

It may be subjective or intuitive prediction. Or may be

involve a combination of these.

Forecasting Time Horizons

but is generally less than 3 months. It is used for planning purchasing,

job scheduling, workforce levels, job assignment and production

levels.

Medium range forecast: A medium-range forecast generally spans

from 3 months to 3 years. It is useful in sales planning, production

planning and budgeting, cash budgeting and analysis of various

operating plans.

Long range forecast: Generally 3 years or more in time span, long

range forecasts are used in planning for new products, capital

expenditures, facility location or expansion and research and

development.

Types of Forecast

predicting inflation rates, money supplies, housing starts and

other planning indicators.

Technology forecasts are concerned with rate of

technological progress, which can result in the birth of

exciting new product, requiring new plants and equipment.

Demand Forecasts are projection of demand for a

company’s products or services. These forecasts, also sales

forecasts, drive a company’s production, capacity and

scheduling systems and serves as inputs to financial,

marketing and personnel planning.

Forecasting Approaches

models that rely on historical data.

Qualitative forecasts: incorporate such factors as the

decisions makers intuition, emotions, personal

experience, and value system in reaching.

Quantitative Methods

Naïve approach

Moving average

Exponential smoothing

Trend projection

Associative Model

Linear regression

Time Series Forecasting

A forecasting techniques that uses a series of past data points to

make a forecast.

A time series has four components:

Trends: the gradual upward or downward movement of data

over time. Changes in income, population, age distribution, or

cultural views may account for movement in trend.

Seasonality:data pattern that repeats itself after a period of

days, weeks, months or quarters.

Cycles: Pattern in data that occurs every several years.

Random variations: ‘blip’ in the data caused by chance and

unusual situation.

Naive Approach

the next period is equal to demand in the most recent

period.

Moving Average

most recent periods of data to forecast the next period.

𝑀𝑜𝑣𝑖𝑛𝑔 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 =

𝑛

Weighted moving average

σ(𝑊𝑒𝑖𝑔ℎ𝑡 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝑛)(𝐷𝑒𝑚𝑎𝑛𝑑 𝑖𝑛 𝑝𝑒𝑟𝑖𝑜𝑑 𝑛)

=

σ 𝑊𝑒𝑖𝑔ℎ𝑡

Problems faced by Moving Average

Technique

Increase the size of n does smooth out fluctuations

better, but it makes the method less sensitive to real

change in data.

Moving average cannot pick up trend very well.

Because they are average, they are always stay within

past levels and will not predict changes to either higher

or lower levels.

Moving average requires extensive use of past data.

Exponential Smoothing

which data points are weighted by an exponential

function.

𝑁𝑒𝑤 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 = 𝐿𝑎𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑′ 𝑠 𝑓𝑜𝑟𝑒𝑐𝑎𝑠𝑡 +

𝛼(𝐿𝑎𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑′ 𝑠 𝑎𝑐𝑡𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 − Last period′ s forecast

𝛼 = 𝑠𝑚𝑜𝑜𝑡ℎ𝑖𝑛𝑔 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡

𝐹𝑡 = 𝐹𝑡−1 + 𝛼 𝐴𝑡−1 − 𝐹𝑡−1 = α 𝐴𝑡−1 + (1 − 𝛼)𝐹𝑡−1

The old forecast for May was 220, and the actual

demand for May was 190. If alpha (𝛼) is 0.15, calculate

the forecast for June. If June demand turns out to be

218, calculate the forecast for July.

July forecast = 0.15(218) + (0.85)215.5 = 215.9

Forecast Error

3 popular measures for calculating the forecast error are

Mean Absolute Deviation (MAD)

Mean Squared Error (MAE)

Mean Absolute Percent Error (MAPE)

Mean Absolute Deviation

σ 𝐴𝑐𝑡𝑢𝑎𝑙 − 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡

𝑀𝐴𝐷 =

𝑛

Quarter 1 2 3 4 5 6 7 8 9

Demand 180 168 159 175 190 205 180 182

Mean Squared Error

the forecasted and observed values.

σ 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝐸𝑟𝑟𝑜𝑟 2

𝑀𝑆𝐸 =

𝑛

Compute the MSE for 𝛼 = 0.1

Mean Absolute Percentage Error

forecast and actual values, expressed as a percent of

actual values.

𝑖

𝑀𝐴𝑃𝐸 =

𝑛

Exponential Smoothing with Trend

Adjustment

Step 1: Compute 𝐹𝑡 , the exponentially smoothed

forecast for period t, using the following equation:

𝐹𝑡 = 𝛼 𝐴𝑡−1 + (1 − 𝛼)(𝐹𝑡−1 + 𝑇𝑡−1 )

equation

𝑇𝑡 = 𝛽 𝐹𝑡 − 𝐹𝑡−1 + (1 − 𝛽)𝑇𝑡−1

Step 3: Calculate the forecast including trend, 𝐹𝐼𝑇𝑡 =

𝐹𝑡 + 𝑇𝑡

The monthly sales for Telco Batteries, Inc., were as follows

Trend Projection

a series of historic data points and then project the line

into the future for forecasts.

𝑦ො = 𝑎 + 𝑏𝑥

a= y axis intercept

b= slope of the regression line

x= independent variable

σ 𝑥𝑦 − 𝑛𝑥ҧ 𝑦ത

Slope 𝑏 =

σ 𝑥 2 − 𝑛𝑥 2

𝑎 = 𝑦ത − 𝑏𝑥ҧ

Seasonal Variations in Data

If we expected the 2010 annual demand to be 1200 units.

Associative Forecasting Method:

Regression Analysis

Linear Regression Analysis: A straight-line mathematical

model to describe the functional relationship between

independent and dependent variables.

𝑦ො = 𝑎 + 𝑏𝑥

a= y axis intercept

b= slope of the regression line

x= independent variable

Standard Error of the Estimate

standard deviation.

σ(𝑦 − 𝑦𝑐 )2

𝑆𝑦,𝑥 =

𝑛−2

σ(𝑦 − 𝑦𝑐 )2 σ 𝑦 2 − 𝑎 σ 𝑦 − 𝑏 σ 𝑥𝑦

𝑆𝑦,𝑥 = =

𝑛−2 𝑛−2

Correlation Coefficient for

Regression Lines

A measure of the strength of the relationship between

two variables.

𝑛 σ 𝑥𝑦 − σ 𝑥 σ 𝑦

𝑟=

[𝑛 σ 𝑥 2 − σ 𝑥 2 ][𝑛 σ 𝑦 2 − σ 𝑦 2 ]

Room registration in the Toronto Towers Plaza Hotel have

been recorded for the past 9 years. To project future

occupancy, management would like to determine the

mathematical trend of guest registration. This estimate

will help the hotel determine whether future expansion

will be needed. Given the following time series data,

develop a regression equation relating registrations to

time. Then forecast 2011 registrations. Room registrations

are in thousands:

2001:17 2002:16 2003:16 2004:21 2005:20

2006: 20 2007:23 2008: 25 2009: 24

Qualitative Method

uses the opinion of a small group of high-level managers

to form a group estimate of demand.

Delphi Method: A forecasting techniques using a group

process that allows experts to make forecasts

Sales force composite: A forecasting technique based

on sales persons’ estimates of expected sales.

Consumer Market Survey: A forecasting method that

solicits input from customers regarding future purchasing

plans.

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