FORECASTING

FORECASTING APPLICATIONS

Marketing.. Demand Forecasting, Market share, Trend in prices Operations.. Material requirements, Material and Labour costs, Idle time, Inventory, Defective parts Finance.. Cash flows, Expenses, Revenues, Costs Personnel.. Labour Turnover, Absenteeism..

Sources of data
Sales force estimates. Point of sales (POS) data systems. Trade /Association Journals. Economic Surveys and indicators.

DEMAND MANAGEMENT

Coordinate and Control all the sources of demand to - Use Production system efficiently - Delivery on Time

Types of Demand

- Dependent Demand : part of a product - Independent Demand : either influence Demand or respond to Demand

Demand Management
Independent Demand

Dependent Demand

B(4)

C(2)

D(2)

E(1)

D(3)

F(2)

Independent demand is uncertain. Dependent demand is certain.

PATTERNS OF DEMAND
Average Demand - steady requirement TREND - LONG-RUN GENERAL MOVEMENTS INCREASING
OR DECREASING

SEASONAL - RECURRENT AND PERIODIC EVERY 12

MONTHS

CYCLICAL - CAUSED BY ECONOMIC EXPANSIONS AND

CONTRACTIONS, TECHNOLOGICAL, DEMOGRAPHICAL, ETC. VERY HARD TO FORECAST

RANDOM - NO DISCERNIBLE PATTERN

Demand Forecasting

Qualitative analysis

Quantitative analysis

Customer survey

Sales force composite Simple moving average

Time series analysis

Causal analysis Trend analysis

Executive opinion

Delphi method

Simple exponential smoothing

Past analogy

Holts double Exponential smoothing

Forecast by linear regression

Winters triple Exponential smoothing

Forecasting methods Qualitative..

Where no data available, useful for new products.

Quantitative
Time series.. Based on past data, use of computers for faster processing Causal.. Based on factors influencing demand e.g. Advertisement, quality, competition, economic factors, Govt policies..

Forecasting...Qualitative Methods Grass Roots - Talk to Sales Force, Talk to Customers Market Research - Surveys of Customers, Experimental Test Markets Panel Consensus - Bring in Experts
Executive Judgment - Surveys or Formal Input from Executives Historical Analogy - For New Products/ Technology, Find a Similar Product Delphi Method - Formal, Sequential Method of Polling and Pooling Expert Opinions
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Forecasting methods... Time series analysis

Simple Moving average : Neither growing nor declining, w/o seasonal characteristics, e.g.items in inventory Weighted Moving Average : More weightage to recent past.. .5/.3/.2, sales in a dept stores Simple exponential smoothing :Accurate, easily understandable, less computation, retail/wholesale trade,services Regression Analysis: useful for long-term forecasting of family of products, past and future fall in a straight line

Casual :
The demand for product or service is dependent on different factors or variables like price, quality, availability of substitute and/or complementary products/ services, income levels of customers, number of competitors, etc. A causal method evaluates the relationship between different variables and their influence on each other. Causal methods include linear regression and multiple regression analysis.

Which Method to Choose ?

Pick a model based on: 1. Time horizon to forecast 2. Data availability 3. Accuracy required 4. Size of forecasting budget 5. Availability of qualified personnel ASSUMPTION: THE PAST WILL REPEAT AND WE HAVE ACCURATELY MODELED IT!

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In-Class Exercise
Week Demand 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1

Develop 3-week and 5week moving average forecasts for demand. Assume you only have 3 weeks and 5 weeks of actual demand data for the respective forecasts

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In-Class Exercise (Solution)

Week Demand 1 -Week 1 -Week 1 11 1 1 11 1 1 11 1 1 1 1 1 11 1 1. 1 1 1 1 1 11 1 1. 1 1 1 1 1 11 1 1 . 1 1 11 1. 1 1 1 1 1 11 1 1 . 1 1 11 1. 1
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Weighted Moving Average

Ft = w 1 t-1+ w 1 t-1+ w 1 t-1 ..+w n A t-n A A A +.

w
i=1

=1

Week Demand 1 11 1 1 66 6 1 11 1 1

Determine the 3-period weighted moving average forecast for period 4. Weights: t-1 .5 t-2 .3 t-3 .2

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Solution
Week Demand Forecast 1 11 1 1 66 6 1 11 1 1 6 66 6.

F1= .1111 ( 1)+.111 ( )+. 111 ( 1)

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In-Class Exercise
Determine the 3-period weighted moving average forecast for period 5. Weights: t-1 .7 t-2 .2 t-3 .1

Week Demand 1 11 1 1 11 1 1 11 1 1 11 1

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Solution
Week Demand Forecast 1 11 1 1 11 1 1 11 1 1 11 1 1 11 1

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Exponential Smoothening Method

The forecast for the next period is computed on the basis of the forecast for the current period and the actual demand during the current period, the difference between forecast and actual demand is incorporated in the next periods forecast Ft+1 = Exponentially smoothened forecast for period t+1 Ft Dt = Exponentially smoothened forecast for period t = Actual demand during period t = Smoothening coefficient

Ft +1 = Ft + ( Dt Ft )

Causal Models for forecasting

A set of independent variables are identified and associated with the dependant variable through a functional relationship In general the forecast for a dependant variable Y using n independent variables X1, X2, X3, , Xn involves developing a functional relationship as follows:

Y = f(X1, X2, X3, , Xn)

There are several computer packages available today such as SPSS to help the forecast designer in this process

A forecasting error is the difference between the forecasted demand for a particular period and the actual demand in that period. To determine how well the forecasts from a forecasting model fit with the actual demand pattern, the average error of the model is calculated.

Measures of Forecasting Accuracy

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Rest in the next