Professional Documents
Culture Documents
Management
Topic 6 Forecasting
What is Forecasting?
Process of
predicting a future
event
Underlying basis
of
all business
decisions
Hmm. you
gonna get an A for
this subject
Production
Inventory
Personnel
Facilities
2
Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting
Long-range forecast
3+ years
New product planning, facility location,
research and development
3
Types of Forecasts
Economic forecasts
Address business cycle inflation rate,
money supply, housing starts, etc.
Technological forecasts
Predict rate of technological progress
Impacts development of new products
Demand forecasts
Predict sales of existing products and
services
5
Strategic Importance of
Forecasting
Human Resources Hiring, training,
laying off workers
Capacity Capacity shortages can
result in undependable delivery, loss
of customers, loss of market share
Supply Chain Management Good
supplier relations and price
advantages
6
The Realities!
Forecasts are seldom perfect
Most techniques assume an
underlying stability in the system
Product family and aggregated
forecasts are more accurate than
individual product forecasts
Forecasting Approaches
Qualitative Methods
Used when situation is vague
and little data exist
New products
New technology
Forecasting Approaches
Quantitative Methods
Used when situation is stable
and historical data exist
Existing products
Current technology
Involves mathematical
techniques
e.g., forecasting sales of color
televisions
Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential
smoothing
4. Trend projection
5. Linear regression
Time-Series
Models
Associative
Model
10
11
Components of Demand
Trend
component
Seasonal peaks
Actual
demand
Average
demand over
four years
Random
variation
|
1
|
2
|
3
Year
|
4
Figure 4.1
12
Trend Component
Persistent, overall upward or
downward pattern
Changes due to population,
technology, age, culture, etc.
Typically several years
duration
13
Seasonal Component
Regular pattern of up and
down fluctuations
Due to weather, customs, etc.
Occurs within a single year
Period
Week
Month
Month
Year
Year
Year
Length
Number of
Seasons
Day
Week
Day
Quarter
Month
Week
7
4-4.5
28-31
4
12
52
14
Cyclical Component
Repeating up and down movements
Affected by business cycle, political,
and economic factors
Multiple years duration
Often causal or
associative
relationships
0
10
15
20
15
Random Component
Erratic, unsystematic, residual
fluctuations
Due to random variation or
unforeseen events
Short duration and
nonrepeating
16
Naive Approach
Assumes demand in next
period is the same as
demand in most recent period
e.g., If January sales were 68,
then February sales will be 68
18
Actual
Shed Sales
10
12
13
16
19
23
26
3-Month
Moving Average
20
Shed Sales
Moving
Average
Forecast
Actual
Sales
|
J
|
F
|
M
|
A
|
M
|
J
|
J
|
A
|
S
|
O
|
N
|
D
21
22
Weights Applied
Period
3
Last
month
Weighted Moving
Average
2
1
6
Month
Actual
Shed Sales
January
February
March
April
May
June
July
10
12
13
16
19
23
26
3-Month Weighted
Moving Average
30
Sales demand
25
20
Actual
sales
15
Moving
average
10
5
|
Figure 4.2
|
F
|
M
|
A
|
M
|
J
|
J
|
A
|
S
|
O
|
N
|
D
24
25
Exponential Smoothing
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
Exponential Smoothing
Remember This!!!!!!!!
Ft = Ft 1 + (At 1 - Ft 1)
where
Ft = new forecast
Ft 1 = previous forecast
= smoothing (or weighting)
constant (0 1)
27
Choosing
The objective is to obtain the most
accurate forecast no matter the
technique
We generally do this by selecting the
model that gives us the lowest forecast
error
Forecast error = Actual demand - Forecast value
= At - Ft
28
Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
30
Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
New forecast = 142 + .2(153 142)
31
Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
New forecast = 142 + .2(153 142)
= 142 + 2.2
= 144.2 144 cars
32
Exponential Smoothing
Example 2
Demand for the last four months
was:
Exponential Smoothing
Example 2
A) 1.
2.
B)
Deman
d
Forecast
March
April
May
10
June
6 + 0.2(8 6) = 6.4
6.4 + 0.2(10 6.4) = 7.12
7.12 + 0.2(8 7.12) = 7.296
Month
March
April
May
June
Demand
10
Nave
10
Error
+2
+2
-2
MAD
6/3
= 2.0
34
Exponentially
smoothed (Ft) + (Tt)
forecast
Exponentially
smoothed
trend
35
Other Examples
Moving Average
Weekly sales of ten-grain bread at the local organic food
market are in the table below. Based on this data,
forecast week 9 using a five-week moving average.
Wee
k
Sale
s
415
389
420
382
410
432
405
421
(382+410+432+405+421)/5 = 410.0
37
Other Examples
Exponential Smoothing & MAD
Jim's department at a local department store has tracked the sales of a product
over the last ten weeks. Forecast demand using exponential smoothing with
an alpha of 0.4, and an initial forecast of 28.0. Calculate MAD.
Period
Demand
24
23
26
36
26
30
32
26
25
38
Other Examples
Exponential Smoothing
Period
Demand
Forecast
Error
Absolute
24
28.00
23
26.40
-3.40
3.40
26
25.04
0.96
0.96
36
25.42
10.58
10.58
26
29.65
-3.65
3.65
30
28.19
1.81
1.81
32
28.92
3.08
3.08
26
30.15
-4.15
4.15
25
28.49
-3.49
3.49
10
28
27.09
0.91
0.91
Total
2.64
32.03
Average
0.29
3.56
39