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Forecasting
Predicting the Future
Qualitative forecast methods
subjective
Quantitative forecast
methods
based on mathematical
formulas
Qualitative Methods
Executive Judgment
Historical analogy
Grass Roots
Qualitative
Market Research
Methods
Delphi Method
Panel Consensus
Delphi Method
l. Choose the experts to participate representing a variety
of knowledgeable people in different areas
2. Through a questionnaire (or E-mail), obtain forecasts
(and any premises or qualifications for the forecasts)
from all participants
3. Summarize the results and redistribute them to the
participants along with appropriate new questions
4. Summarize again, refining forecasts and conditions, and
again develop new questions
5. Repeat Step 4 as necessary and distribute the final
results to all participants
quick response
JIT (just-in-time)
VMI (vendor-managed inventory)
stockless inventory
time frame
demand behavior
causes of behavior
Time Frame
Indicates how far into the future is
forecast
Long-range forecast
usually
Demand Behavior
Trend
Random variations
Cycle
Seasonal pattern
Demand
Demand
Random
movement
Time
(b) Cycle
Demand
Demand
Time
(a) Trend
Time
(c) Seasonal pattern
Time
(d) Trend with seasonal pattern
Forecasting Methods
Qualitative
Time series
Regression methods
Qualitative Methods
Management, marketing, purchasing,
and engineering are sources for internal
qualitative forecasts
Delphi method
Forecasting Process
1. Identify the
purpose of forecast
2. Collect historical
data
6. Check forecast
accuracy with one or
more measures
5. Develop/compute
forecast for period of
historical data
4. Select a forecast
model that seems
appropriate for data
7.
Is accuracy of
forecast
acceptable?
No
Yes
8a. Forecast over
planning horizon
Time Series
Assume that what has occurred in the past will
continue to occur in the future
Relate the forecast to only one factor - time
Include
moving average
exponential smoothing
linear trend line
Moving Average
Naive forecast
Moving Average:
Nave Approach
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90
-
FORECAST
120
90
100
75
110
50
75
130
110
90
i = 1 Di
MAn =
where
n
Di
= number of periods
in the moving
average
= demand in period i
PER
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
MOVING
AVERAGE
103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0
i=1
MA3 =
=
Di
3
90 + 110 + 130
3
= 110 orders
for Nov
PER
120
Feb
90
Mar
100
Apr
75
May
110
June
50
July
75
MOVING
AVERAGE
99.0
85.0
82.0
88.0
95.0
91.0
i=1
MA5 =
=
Di
90 + 110 + 130+75+50
5
= 91 orders
for Nov
Smoothing Effects
150
125
5-month
Orders
100
75
50
3-month
25
Actual
0
|
Jan
|
Feb
|
Mar
|
|
Apr May
|
|
June July
Month
|
|
Aug Sept
|
Oct
|
Nov
WMAn = Wi Di
i=1
i=1
where
W = 1.00
i
WEIGHT
DATA
17%
33%
50%
130
110
90
August
September
October
November Forecast
WMA3 = i
= 1 Wi Di
Exponential Smoothing
Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
MONTH
Jan
37
Feb
40
Mar
41
Apr
37
May
45
F2 = D1 + (1 - )F1
= (0.30)(37) + (0.70)(37)
= 37
F3 = D2 + (1 - )F2
= (0.30)(40) + (0.70)(37)
= 37.9
F13 = D12 + (1 - )F12
= (0.30)(54) + (0.70)(50.84)
= 51.79
Jun
50
Jul
43
Exponential Smoothing
(cont.)
FORECAST, F
t+1
PERIOD
MONTH
DEMAND
( = 0.3)
( = 0.5)
1
2
3
4
5
6
7
8
9
10
11
12
13
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.90
38.83
38.28
40.29
43.20
43.14
44.30
47.81
49.06
50.84
51.79
37.00
38.50
39.75
38.37
41.68
45.84
44.42
45.71
50.85
51.42
53.21
53.61
= 0.50
Actual
50
Orders
40
30
= 0.30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
6
Month
|
7
|
8
|
9
|
10
|
11
|
12
|
13
Adjusted Exponential
Smoothing (=0.30)
T3
PERIOD
DEMAND
MONTH
Jan
37
Feb
40
Mar
41
= (F3 - F2) + (1 - ) T2
= (0.30)(38.5 - 37.0) + (0.70)(0)
= 0.45
Apr
37
May
45
= 1.36
Jun
50
MONTH
DEMAND
FORECAST
Ft +1
1
2
3
4
5
6
7
8
9
10
11
12
13
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
37
40
41
37
45
50
43
47
56
52
55
54
37.00
37.00
38.50
39.75
38.37
38.37
45.84
44.42
45.71
50.85
51.42
53.21
53.61
TREND
Tt +1
ADJUSTED
FORECAST AFt +1
0.00
0.45
0.69
0.07
0.07
1.97
0.95
1.05
2.28
1.76
1.77
1.36
37.00
38.95
40.44
38.44
38.44
47.82
45.37
46.76
58.13
53.19
54.98
54.96
60
Actual
50
Demand
40
30
Forecast ( = 0.50)
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
xy - nxy
b = x2 - nx2
a = y-bx
where
n = number of periods
x
x = n = mean of the x values
y
y = n = mean of the y values
y(DEMAND)
xy
x2
1
2
3
4
5
6
7
8
9
10
11
12
73
40
41
37
45
50
43
47
56
52
55
54
37
80
123
148
225
300
301
376
504
520
605
648
1
4
9
16
25
36
49
64
81
100
121
144
78
557
3867
650
a = y - bx
= 46.42 - (1.72)(6.5) = 35.2
50
40
30
20
10
0
|
1
|
2
|
3
|
4
|
5
|
|
6
7
Period
|
8
|
9
|
10
|
11
|
12
|
13
Seasonal Adjustments
Repetitive increase/ decrease in demand
Use seasonal factor to adjust forecast
Seasonal factor = Si =
Di
D
D1
42.0
S1 =
=
= 0.28
D 148.7
D2
29.5
S2 =
=
= 0.20
148.7
D
8.6
10.3
10.6
29.5
6.3
7.5
8.1
21.9
17.5
18.2
19.6
55.3
45.0
50.1
53.6
148.7
D3
21.9
S3 =
=
= 0.15
D 148.7
D4
55.3
S4 =
=
= 0.37
148.7
D
Forecast Accuracy
Forecast error
MAPD
Cumulative error
Average error or bias
t = period number
Dt = demand in period t
Ft = forecast for period t
n = total number of periods
= absolute value
MAD Example
PERIOD
1
2
3
4
5
6
7
8
9
10
11
12
DEMAND, Dt
37
40
41
37
MAD
45
50
43
47
56
52
55
54
557
=
=
=
Ft ( =0.3)
37.00
37.00
37.90
D38.83
t - Ft
n38.28
40.29
53.39
43.20
1143.14
44.30
4.85 47.81
49.06
50.84
( Dt - F t )
|Dt - Ft|
3.00
3.10
-1.83
6.72
9.69
-0.20
3.86
11.70
4.19
5.94
3.15
3.00
3.10
1.83
6.72
9.69
0.20
3.86
11.70
4.19
5.94
3.15
49.31
53.39
|Dt - Ft|
Dt
Cumulative error
E = et
Average error
et
E= n
Comparison of Forecasts
FORECAST
MAD
MAPD
(E)
4.85
4.04
3.81
9.6%
8.5%
7.5%
49.31
33.21
21.14
4.48
3.02
1.92
2.29
4.9%
Forecast Control
Tracking signal
DEMAND
Dt
1
2
3
4
5
6
7
8
9
10
11
12
37
40
41
37
45
50
43
47
56
52
55
54
FORECAST,
Ft
ERROR
Dt - Ft
E =
(Dt - Ft)
37.00
37.00
3.00
3.00
37.90
3.10
6.10
38.83
-1.83
4.27
38.28
6.72 for period
10.99 3
Tracking
signal
40.29
9.69
20.68
43.20
-0.20
6.10 20.48
43.14
TS3 = 3.86 =24.34
2.00
3.05
44.30
11.70
36.04
47.81
4.19
40.23
49.06
5.94
46.17
50.84
3.15
49.32
MAD
3.00
3.05
2.64
3.66
4.87
4.09
4.06
5.01
4.92
5.02
4.85
TRACKING
SIGNAL
1.00
2.00
1.62
3.00
4.25
5.01
6.00
7.19
8.18
9.20
10.17
3
2
1
0
-1
-2
-3
|
0
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
UCL = +3
Errors
6.12
0
-6.12
-12.24
-18.39
LCL = -3
|
0
|
1
|
2
|
3
|
4
|
5
|
6
Period
|
7
|
8
|
9
|
10
|
11
|
12
Regression Methods
Linear regression
Correlation
Linear Regression
y = a + bx
a = y-bx
xy - nxy
b = x2 - nx2
where
a = intercept
b = slope of the line
x
x = n = mean of the x data
y
y = n = mean of the y data
y
(ATTENDANCE)
xy
x2
4
6
6
8
6
7
5
7
36.3
40.1
41.2
53.0
44.0
45.6
39.0
47.5
145.2
240.6
247.2
424.0
264.0
319.2
195.0
332.5
16
36
36
64
36
49
25
49
49
346.7
2167.7
311
xy - nxy2
b=
x2 - nx2
(2,167.7) - (8)(6.125)(43.36)
=
(311) - (8)(6.125)2
= 4.06
a = y - bx
= 43.36 - (4.06)(6.125)
= 18.46
y = 18.46 + 4.06x
y = 18.46 + 4.06(7)
= 46.88, or 46,880
60,000
50,000
Attendance, y
40,000
30,000
20,000
10,000
|
0
|
1
|
2
|
3
|
4
|
5
Wins, x
|
6
|
7
|
8
|
9
|
10
Yt = a + bx
a
0 1 2 3 4 5
(Time)
Is
Isthe
thelinear
linearregression
regressionmodel
model
Week
1
2
3
4
5
Sales
150
157
162
166
177
59
Answer:
Answer: First,
First, using
using the
the linear
linear regression
regressionformulas,
formulas, we
we
can
cancompute
computea
aand
andb
b
Week Week*Week
Sales Week*Sales
1
1
150
150
2
4
157
314
3
9
162
486
4
16
166
664
5
25
177
885
3
55
162.4
2499
Average
Sum Average
Sum
xy
--5(162.4)(3)
63
xy--n(y)(x)
n(y)(x) 2499
2499
5(162.4)(3)
63= 6.3
bb==
=
=
10 = 6.3
22
22
55
5
(
9
)
x
n(x
)
55 5(9 )
10
x - n(x )
aa== yy--bx
bx==162.4
162.4--(6.3)(3)
(6.3)(3)==143.5
143.5
60
Yt = 143.5 + 6.3x
Sales
Coefficient of determination, r2
Percentage of variation in dependent
variable resulting from changes in the
independent variable
Computing Correlation
r=
n xy - x y
[n x2 - ( x)2] [n y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
r=
Multiple Regression
Study the relationship of demand to two or
more independent variables
y = 0 + 1x1 + 2x2 + kxk
where
0
= the intercept
1, , k = parameters for the
independent variables
x1, , xk = independent variables
Question Bowl
Which of the following is a classification of a
basic type of forecasting?
a. Transportation method
b. Simulation
c. Linear programming
d. All of the above
e. None of the above
Answer: b. Simulation (There are four types including
Qualitative, Time Series Analysis, Causal
Relationships, and Simulation.)
Question Bowl
Which of the following is an example of a
Qualitative type of forecasting technique
a.
b.
c.
d.
e.
or model?
Grass roots
Market research
Panel consensus
All of the above
None of the above
Question Bowl
Question Bowl
Which of the following is a reason why a
firm should choose a particular forecasting
model?
a. Time horizon to forecast
b. Data availability
c. Accuracy required
d. Size of forecasting budget
e. All of the above
Answer: e. All of the above (Also should include
availability of qualified personnel .)
Question Bowl
Which of the following are ways to
choose weights in a Weighted Moving
a.
b.
c.
d.
e.
Question Bowl
Which of the following are reasons why the
Exponential Smoothing model has been a well
a.
b.
c.
d.
e.
Question Bowl
a.
b.
c.
d.
e.
Answer: c. 0 to 1
Question Bowl
Which of the following are sources of error in
forecasts?
a. Bias
b. Random
c. Employing the wrong trend line
d. All of the above
e. None of the above
Question Bowl
Which of the following would be the
best MAD values in an analysis of the
accuracy of a forecasting model?
a. 1000
b. 100
c. 10
d. 1
e. 0
Answer: e. 0
Question Bowl
If a Least Squares model is: Y=25+5x, and x is
equal to 10, what is the forecast value using
this model?
a. 100
b. 75
c. 50
d. 25
e. None of the above
Answer: b. 75 (Y=25+5(10)=75)