Professional Documents
Culture Documents
Management
Topic 2 Forecasting
UiTM Shah Alam
Lecturer: Pn. Nurul Hayati Binti Abdul Halim
T1-A14-12A
10/10/16
Learning outcomes
At the end of this lesson students should be
able to :
1.Discuss the overview of forecasting techniques
2.Compare and contrast qualitative and quantitative
approaches to forecasting
3.Apply the naive, moving averages, weighted moving
averages and exponential smoothing methods.
4.Compute and analyze three measures of forecast
accuracy; MAD, MSE and MAPE
10/10/16
What is Forecasting?
1. Process of
predicting a future
event
2. Underlying basis
of
all business
decisions
Production
Inventory
Personnel MEM 575: Courtesy of Mc Graw
10/10/16
Hill and Pearson-Prentice Hall
Hmm. you
are going to
get an A for
this subject.
But!!!
2. Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting
3. Long-range forecast
3+ years
New product planning, facility location,
research and development
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Types of Forecasts
1. Economic forecasts
Address business cycle inflation rate,
money supply, housing starts, etc.
2. Technological forecasts
Predict rate of technological progress
Impacts development of new products
3. Demand forecasts
Predict sales of existing products and
services
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Strategic Importance of
Forecasting
1. Human Resources Hiring, training,
laying off workers
2. Capacity Capacity shortages can
result in undependable delivery, loss
of customers, loss of market share
3. Supply Chain Management Good
supplier relations and price
advantages
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The Realities!
1. Forecasts are seldom perfect
2. Most techniques assume an underlying
stability in the system
3. Product family and aggregated forecasts
are more accurate than individual product
forecasts
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Forecasting Methods
Generally there are two types of
forecasting methods; Qualitative and
Quantitative Methods
1. Qualitative methods are based on:
judgment
opinion
past experience
best guesses
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mathematical methods
two traditional types; time series and regression
MEM 575: Courtesy of Mc Graw Hill
and Pearson-Prentice Hall
Forecasting Approaches
Qualitative Methods
Used when situation is vague
and little data exist
New products
New technology
10
Forecasting Approaches
Quantitative Methods
Used when situation is stable
and historical data exist
Existing products
Current technology
Involves mathematical
techniques
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11
Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Weighted Moving
Averages
4. Exponential smoothing
5. Trend projection
6. Linear regression
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Time-Series
Models
Associative
Model
12
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13
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Trend
Cyclical
Seasonal
Random
MEM 575: Courtesy of Mc Graw Hill
and Pearson-Prentice Hall
14
Components of Demand
Trend
component
Seasonal peaks
Actual
demand
Average
demand over
four years
Random
variation
|
1
|
2
|
3
Year
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|
4
Figure 4.1
15
Trend Component
1. Persistent, overall upward or
downward pattern
2. Changes due to population,
technology, age, culture, etc.
3. Typically several years
duration
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16
Seasonal Component
1. Regular pattern of up and
down fluctuations
2. Due to weather, customs, etc.
3. Occurs within a single year
Period
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Length
Week
Day
Month
Week
Month
Day
Year
Quarter
Year
Month
Year
Week
NYMEM 575: Courtesy
of Mc Graw
Hill and Pearson-Prentice Hall
Number of
Seasons
7
4-4.5
28-31
4
12
52
17
Cyclical Component
1. Repeating up and down movements
2. Affected by business cycle, political,
and economic factors
3. Multiple years duration
4. Often causal or
associative
relationships
0
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10
15
20
18
Random Component
1. Erratic, unsystematic, residual
fluctuations
2. Due to random variation or
unforeseen events
3. Short duration and
non-repeating
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F
19
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
20
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21
22
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Actual
Sales
10
12
13
16
19
23
26
3-Month
Moving Average
23
Sales
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30
28
26
24
22
20
18
16
14
12
10
Moving
Average
Forecast
Actual
Sales
|
J
|
F
|
M
|
A
|
M
|
J
|
J
|
A
|
S
|
O
|
N
|
D
24
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25
Weights Applied
Period
3
Last
month
Weighted Moving
Average
2
1
6
Month
Actual
Sales
January
February
March
April
May
June
July
10
12
13
16
19
23
26
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3-Month Weighted
Moving Average
26
30
Sales demand
25
20
Actual
sales
15
Moving
average
10
5
|
Figure 4.2
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|
F
|
M
|
A
|
M
|
J
|
J
|
A
|
S
|
O
|
N
|
D
27
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28
Exponential Smoothing
1. Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
29
Exponential Smoothing
Remember This!!!!!!!!
Ft = Ft 1 + (At 1 - Ft 1)
where
Ft = new forecast
Ft 1 = previous forecast
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30
Choosing
The objective is to obtain the most accurate
forecast no matter the technique; lowest
forecast error indicates better accuracy.
Forecast error = Actual demand - Forecast value
= At - Ft
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31
Forecast Accuracy
(Common Measures of Error)
MAD #1
Error: difference between actual value
and forecast value
1.
32
Forecast Accuracy
(Common Measures of Error)MSE #2
2. Mean Squared Error (MSE)
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(Actual - Forecast )2
n
33
Forecast Accuracy
(Common Measures of Error)MAPE #3
3.
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34
|Actual - Forecast|
n
(Actual - Forecast )2
n
100|Actuali - Forecasti|/Actuali
i=1
35
Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
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36
Exponential Smoothing
Example
Predicted demand = 142 Ford Mustangs
Actual demand = 153
Smoothing constant = .20
New forecast = 142 + .2(153 142)
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37
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
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38
Exponential Smoothing
Example 2
Demand for the last four months
was:
39
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
Absolute
Error
MAD = (2+2+2) /3 = 2
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40
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
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41
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, MSE and
MAPE.
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Period
Demand
24
23
26
36
26
30
32
26
42
Other Examples
Exponential Smoothing
Period
Demand
(Actual)
Forecast
Error
At Ft
error
( At Ft)2
(error) 2
24
28.00
-4
16
100*
100* At Ft / At
100 (
( error
/actual)
16.6 %
23
26.40
-3.40
3.40
11.56
14.78 %
26
25.04
0.96
0.96
0.92
3.69 %
36
25.42
10.58
10.58
111.94
29.39 %
26
29.65
-3.65
3.65
13.32
14.04%
30
28.19
1.81
1.81
3.28
6.03%
32
28.92
3.08
3.08
9.49
9.63 %
26
30.15
-4.15
4.15
17.22
15.96 %
25
28.49
-3.49
3.49
12.18
13.96%
10
28
27.09
0.91
0.91
0.83
3.25%
Total
-1.36
36.03
196.74
127.33 %
Average
-0.14
3.6
19.6
12.73 %
Bias
MAD
MSE
MAPE
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43
Lets Recap
1. Discuss the overview of forecasting techniques
2. Compare and contrast qualitative and
quantitative approaches to forecasting
3. Apply the naive, moving averages, weighted
moving averages and exponential smoothing
methods.
4. Compute and analyze three measures of forecast
accuracy; MAD, MSE and MAPE
10/10/16
44