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Actual - of Forecast % |Error| Deviation of Time series -The repeated observations of demand for a service or
Forecast Error /Actual Errors product in their order of occurrence Demand Pattern
Horizontal, Trend, Seasonal, Cyclical, Random
Blank Actual Forecast Error E |Error| Error 2 % Error Error - (Error - )2 Type of Forecasting Technique -Judgment methods, Causal
Period 1 39 41 −2 2 4 5.13% methods, Time-series analysis’ Trend projection using regression
Period n 37 43 −6 6 36 16.22%
Average Σ Actual / n Forecast Error Et = Dt - Ft (D Actual demand and F Forecasted
CFC Cumulative Forecast Error or Bias Error Σ Error Demand in period t)
Σ Error / n or The MSE, σ, MAD statistics provide measures of forecast error
AFE Avg Forecast Error or Mean Bias
CFE / n variability. IF MSE, MAD or σ small->forecast close to actual
MAD Mean Absolute Deviation (Error) Σ |Error| / n demand
MSE Mean Squared Error Σ Error 2 / CFE<0 => Forecast Over (Et = Dt - Ft)
Σ % Error / CFE>0 => Forecast Under (Et = Dt - Ft)
MAPE Mean Absolute Percent Error MAPE-forecast error was % of actual demand.
n
These measures become more reliable as the number of periods of
2
Et E data increases
σ Standard Deviation of Errors
n 1
Judgmental forecasts use contextual knowledge gained through
SE Standard Error experience. Salesforce estimates, Executive opinion, Market
research, Delphi method
Dependent variable – The variable that one wants to forecast
Independent variable – The variable that is assumed to affect
the dependent variable and thereby “cause” the results observed
in the past
∆y y2-y1
Slope = or
∆x x2-x1
Average
Seasonal Seasonal Year 3
Seasonal
Quarter Year 1 Factor Year 2 Factor Expected Year 3 Forecast
Factor
SF1 SF2 Sales
Avg SF
1 45 45/Avg 67 67/280.75 (SF1+SF2) / 2 Avg SF* Year3 Avg
Total 45 67 1,850
Naïve forecast -The forecast for the next period equals the demand for the
Average 11.25 16.75 462.50
current period (Forecast = Dt)
Ft=Dt-1
Simple moving avg, Weighted moving avg, Exponential smoothing Exponential Smoothing weighted moving Multiplicative seasonal method - Calculate for each
average that calculates the average of a time Annual Demand of Sum of all demands for all
series by implicitly giving recent demands more an year= seasons for that year
weight than earlier demands Average demand for Annual Demand
Note: If F1 , Ft-1 ….Ft is not given then use F1 =D1 each season= # of seasons/year
Actual Demand for the
Seasonal Factor
season
(Index) for a season= Avg demand for the season
Σ Seasonal Factors for the
Avg Seasonal Factor
Ft 1 W1D1 W2D2 Wn Dt n 1 season over the year
(Index) for a season=
Highest weight goes to most recent data; sum of the weights=1 # of years (for the season)
Avg Forecast for Yearly forecast
Linear trent regression equation is Yt = a + bt each season= # of seasons per year
Replace x by time period t in SLR model Avg Forecast for each season
Seasonal Forecast
* Avg Seasonal Factor (Index)
Dynamic demand--use higher α or smaller n
for a season=
for a season
Stable demand-use lower α or larger n
Core Competencies -Technical knowhow, Reliable internal process, Closed external relationships