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BM2 Chapter 5 Forecasting

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9 views

BM2 Chapter 5 Forecasting

opm

Uploaded by

yasshieedehm
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 5

Forecasting
Forecasting

- It is a statement about
the future value of a
variable of interest.
- It is an art and science
of predicting future
events.
Features Common to
All Forecasts

1. Techniques assume some underlying


causal system that what existed in the
past will persist into the future
2. Forecasts are not perfect
3. Forecasts for groups of items are more
accurate than those for individual
items
4. Forecast accuracy decreases as the
forecasting horizon increases
Elements of a Good
The forecast:
Forecast
should be timely
should be accurate
should be reliable
should be expressed in
meaningful units
should be in writing
technique should be simple
to understand and use
should be cost effective
Approaches to Forecasting

Qualitative Forecasting
•Qualitative techniques permit the inclusion of soft information such as:

Human factors
Personal opinions
Hunches
•These factors are difficult, or impossible, to quantify

Quantitative Forecasting
•Quantitative techniques involve either the projection of historical data or the development of
associative methods that attempt to use causal variables to make a forecast
•These techniques rely on hard data
Forecasting Techniques

I. Judgmental Forecasts
Forecasts that use subjective inputs such as opinions from
consumer surveys, sales staff, managers, executives, and experts.
II. Time-series Forecasts
Forecasts that project patterns identified in recent time-series
observations.
III. Associative Model
Forecasting technique that uses explanatory variables to predict
future demand.
I. Judgmental Forecasts

Executive opinions
Sales-force opinions
Consumer surveys
An interactive process in which managers
Delphi method and staff complete a series of
questionnaires, each developed from the
previous one, to achieve a consensus
II. Time-Series Forecasting - Naïve
Forecast

I. Naïve Forecast - The forecast for a time period is


equal to the previous time period’s value
Forecast for any period = previous period’s actual
value
Ft = At-1
Naïve Forecast
Example
WEEK SALES (ACTUAL) SALES (FORECAST) ERROR

t A F A-F

1 20 - -

2 25 20 5

3 15 25 -10

4 30 15 15

5 27 30 -3
II. Time-Series Forecasting
Averaging - They can handle step changes or gradual
changes in the level of a series.

Techniques:

1. Moving average
2. Weighted moving average
3. Exponential smoothing
II. Time-Series Forecasting – Moving Average
n

It averages the number A t i


Ft MA n  i 1
of recent actual values, n
where
updated as new values
Ft Forecast for time period t
become available. MA n n period moving average
At  1 Actual value in period t  1
n Number of periods in the moving average
II. Time-Series Forecasting – Moving Average

Compute a three-period moving average


forecast given demand for shopping carts for
the last five periods.
Period Actual Demand
1 42
2 40
3 43
4 40
5 41
II. Time-Series Forecasting – Moving Average

F6= (43 + 40 + 41)/3


= 41.33

If actual demand in period 6 turns out to be 38, what is


the moving average forecast for period 7?
II. Time-Series Forecasting – Moving Average

Period Actual Demand


1 42
2 40
3 43
4 40
5 41
6 38

F7= (40 + 41 + 38)/3


= 39.67
II. Time-Series Forecasting – Weighted Moving Average

More recent values in a series are given more weight in


computing a forecast.

Ft wt ( At )  wt  1 ( At  1 )  ...  wt  n ( At  n )
where
wt weight for period t , wt  1 weight for period t  1, etc.
At the actual value for period t , At  1 the actual value for period t  1, etc.
II. Time-Series Forecasting – Weighted Moving Average

a. Compute a weighted average forecast using a


weight of .40 for the most recent period, .30 for the
next most recent, .20 for the next, and .10 for the
next.
b. If the actual demand for period 6 is 38, forecastPeriod Actual Actual
demand for period 7 using the same weights as in Demand Demand
part a. 1 42 42
2 40x.10 40
F6 = .10(40) + .20(43) + .30(40) + .40(41) = 41.0
3 43x.20 43x.10
F7 = .10(43) + .20(40) + .30(41) + .40(38) = 39.8 4 40x.30 40x.20
5 41x.40 41x.30
6 38x.40
II. Time-Series Forecasting – Exponential
Smoothing

Based on previous forecast plus a percentage of the


forecast error.
Ft Ft  1   ( At  1  Ft  1 )
where
Ft Forecast for period t
Ft  1 Forecast for the previous period
 = Smoothing constant
At  1 Actual demand or sales from the previous period
II. Time-Series Forecasting – Exponential
Smoothing
Compute exponential smoothing using smoothing
constant of .10
Period Actual Demand
1 42
2 40
3 42
4 40
5 41
Linear Trend Equation

Ft =a+bt
where
Ft = Forecast for period t
a = Value of Ft at t = 0, which is the y intercept
b = Slope of the line
t = Specified number of time periods from t = 0
Linear Trend
Equation

The coefficients of the


line, a and b, are based
on the following two
equations:
Simple Linear Regression

yc =a+bx

Where:
yc = Predicted (dependent) variable
x = Predictor (independent) variable
b = Slope of the line
a = Value of yc when x = 0
Simple Linear
Regression

The coefficients a and


b of the line are based
on the following two
equations:

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