Forecasting

Arief B. Suharko, Ph.D, CPIM

(arief.suharko@bakrie.ac.id)
Forecasting
 Providing Appropriate Forecast Information

Nature of the Decision Strategic Business Sales and Operations Master Production
Planning Planning Scheduling and Control

Level of aggregation Total sales or output Product family units Individual finished goods
volume or components
Top management Intensive When reconciling Very little
involvement functional plans
Forecast frequency Annual or less Monthly or quarterly Constantly
Length of forecast Years by years or Several months to a A few days to weeks
quarters year by months
Management investment Very large Moderate Very little
in the forecast(s)
Cost of data processing High Moderate Minimal
and acquisition
Useful techniques Management judgment, Aggregation of detailed Projection techniques
economic growth forecasts, customer (moving averages,
models, regression plans, regression exponential smoothing)
A Framework for Forecasting
 Regression Analysis and Cyclic Decomposition Techniques

Regression:
A functional relationship between two or more correlated variables that is used to predict
one variable given the other.
Linear regression:
Special class of regression where the relationship between variables forms a straight line,
Y = a + bX, where Y is the value of the dependent variable, a is the Y-intercept, b is the slope,
and X is the independent variable, with the major restriction is that past data and future
projections are assumed to fall about a straight line.
It is used both for time-series forecasting and for causal relationship forecasting.
Regression Analysis and Cyclic Decomposition Techniques
Regression Analysis and Cyclic Decomposition Techniques
Regression Analysis and Cyclic Decomposition Techniques
Regression Analysis and Cyclic Decomposition Techniques
 Regression Analysis and Cyclic Decomposition Techniques
Decomposition of a Time-series

Time-series:
Chronologically ordered data that may contain one or more components of demand: trend,
seasonal, cyclical, autocorrelation, and random.
Time-series Decomposition:
Identifying and separating the time series data into the demand components.
Two types of seasonal variation:
1. Additive: seasonal amount is a constant no matter what the trend or average amount is.
Forecast including trend and seasonal = trend + seasonal
2. Multiplicative: the trend is multiplied by the seasonal factors.
Forecast including trend and seasonal = trend x seasonal factor
Regression Analysis and Cyclic Decomposition Techniques
Decomposition of a Time-series
 Regression Analysis and Cyclic Decomposition Techniques
Seasonal Factor Index

Seasonal Factor:
The amount of correction needed in a time series to adjust for the season of the year.
Seasonal:
A period of the year characterized by some particular acitivity.
Cyclical:
Annual recurrent periods of repetitive activity.
Regression Analysis and Cyclic Decomposition Techniques
Simple Proportion Example
Regression Analysis and Cyclic Decomposition Techniques
Simple Proportion Example (cont’d)
Regression Analysis and Cyclic Decomposition Techniques

Computing Trend and Seasonal Factor

from a Hand-Fit Straight Line Example
Regression Analysis and Cyclic Decomposition Techniques
Computing Trend and Seasonal Factor
from a Hand-Fit Straight Line Example
 Regression Analysis and Cyclic Decomposition Techniques
Decomposition Using Least Squares Regression

1. Decompose the time series into its components.

a. Find seasonal component
b. Deseasonalize the demand
c. Find trend component.
2. Forecast future values of each component:
1. Project trend component into the future
2. Multiply trend component by seasonal component.
Regression Analysis and Cyclic Decomposition Techniques
Decomposition Using Least Squares Regression
Regression Analysis and Cyclic Decomposition Techniques
Error Range
 Short-term Forecasting Techniques

Week Number

24 25 26 27 28 29 30 31 32

Cases shipped 1,600 1,500 1,700 900 1,100 1,500 1,400 1,700 1,200

Demand for Household Cleaning Liquid (Past Nine Weeks)

 Short-term Forecasting Techniques
2,400

Cases of liquid clener shipped

2,000

1,600

1,200

800

400

-
24 25 26 27 28 29 30 31 32
Week Number

Plot of the Past Demand for Household Cleaning Liquid

Short-term Forecasting Techniques
Moving Average Forecasting
Short-term Forecasting Techniques

Moving-Average Calculation Example

 Short-term Forecasting Techniques
Exponential Smoothing Forecasting

• It doesn’t eliminate any past information, but also adjusts the weights given to past data
that older data get increasingly less weight (i.e. exponential smoothing.)
• The proportion of the error that will be incorporated into the forecast is called the
exponential smoothing constant and is identified as α.
Short-term Forecasting Techniques
Exponential Smoothing Forecasting
Short-term Forecasting Techniques

Exponential Smoothing Forecasting

Short-term Forecasting Techniques

Evaluating Forecasts
Short-term Forecasting Techniques

Evaluating Forecasts

Bias Calculation Example

Short-term Forecasting Techniques

Sample MAD Calculation

Short-term Forecasting Techniques

Sample MAD Calculation

Short-term Forecasting Techniques

Evaluating Forecasts
 Using the Forecasts

Considerations for Aggregating Forecasts

Using the Forecasts

Pyramid Forecasting
Using the Forecasts

Pyramid Forecasting
Using the Forecasts
Pyramid Forecasting
Pyramid Forecasting
 Using the Forecasts

Incorporating External Information

• Activities that will influence demand and may invalidate the use of a routine exponential
forecasting include:
• Special promotions
• Product changes
• Competitors’ actions
• Economic changes
•  Change the forecast directly.
• If technology has outlasts the product life, change the parameters in the model that relates
replacement sales to the average life of the products.
Conclusions