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Forecasting
Learning Objectives
• Explore the nature of forecasting.
• Describe the common features of all forecasts.
• Examine the elements of a good forecast.
• Understand the basic steps in the forecasting process.
• Be able to familiarize with the basic forecasting
techniques and solve practical problems.
3-3 Forecasting
FORECAST:
Nature of
FORECAST
▪ Forecasts are basic input in the decision process
▪ Forecast is used for planning the system and
planning the use of system
▪ Forecasts are made with reference
to a specific time horizon
3-7 Forecasting
“The forecast”
Approaches to Forecasting
Qualitative Quantitative
► Decision makers
► Staff
► Respondents Respondents
(People who can make
valuable judgments)
© 2014 Pearson Education 4 - 17
Sales Force Composite
Trend Cyclical
Seasonal Random
0 5 10 15 20
© 2014 Pearson Education 4 - 26
Exponential Smoothing
Random Variation
► Erratic, unsystematic, ‘residual’
fluctuations
► Due to random variation or unforeseen
events
► Short duration
and nonrepeating
M T W T
© 2014 Pearson Education F 4 - 27
Exponential Smoothing
Demand Patttern
Moving Average
Sample Problem
Compute a three-period moving average forecast given demand
for shopping carts for the last five periods.
Ft = Ft – 1 + (At – 1 - Ft – 1)
Actual
Period No. of Forecast Calculations
Orders
2008 60
2009 65 60
2010 55
2011 58
2012 64
© 2014 Pearson Education Exponential Smoothing 4 - 43
Learning Exercise
Given the following data compute the exponential
smoothing forecasts for the periods 2010 through
2012 with smoothing constant .of .40.
Actual
Period No. of Forecast Calculations
Orders
2008 60
2009 65 60
2010 55 62 60+.40(65-60) = 62
2011 58 59.2 62+.40(55-62) = 59.2
2012 64 58.72 59.2+.40(58-59.2) = 58.72
© 2014 Pearson Education Exponential Smoothing 4 - 44
Measuring Forecast Error
Where
t = Any given time period
et = 100 - 90
et = +10