FORECASTING

FORECASTING

Forecast
prediction of what will occur in the future

FORECASTING
Time Frames

Short-range forecasts daily operations

Medium-range forecasts 1 month to 1 year
Long range forecasts more strategic and longer than 1 year

FORECASTING
Methods
Time Series statistical techniques that use historical data
Regression mathematical relationship between the

forecasted item and factors that cause it to behave the way it

does.
Qualitative judgment, expertise, and opinion

TIME SERIES

Use historical data accumulated over a period of time

Relate to only one factor time
Most useful for short-range forecasting, though can be used
for all time frames

TIME SERIES
1.
Moving
Average
Uses several values during the recent past to develop a

forecast
Tends to dampen or smooth out random increases and
decreases of data
Good for stable demand with no pronounced behavioral
patterns
Computed for specific periods such as 3 months or 5 months
Formula for computing simple moving average:

Moving Average Sample Problem

A manager of Office Supplies Company has accumulated

records of delivered orders for the past 10 months. He wants to
be able to forecast the number of orders that will occur during
the next month.

Moving Average Sample Problem

MONTH
JANUARY
FEBRUARY
MARCH
APRIL

ORDERS DELIVERED PER MONTH

120
90
100
75

MAY

110

JUNE

50

JULY

75

AUGUST

130

SEPTEMBER

110

OCTOBER

90

Moving Average Solution

Moving Average Solution

MA3 = 90 + 110 + 130 = 110 orders
3
MA5 = 90 + 110 + 130 + 75 + 50 = 91 orders
5

Moving Average Sample Problem

MONTH

JANUARY

ORDERS
DELIVERED PER
MONTH

3-MONTH
MOVING AVERAGE

5-MONTH
MOVING AVERAGE

120

---

---

90

---

---

100

---

---

75

103.3

---

MAY

110

88.3

---

JUNE

50

95.0

99.0

JULY

75

78.3

85.0

AUGUST

130

78.3

82.0

SEPTEMBER

110

85.0

88.0

OCTOBER

90

105.0

95.0

NOVEMBER

---

110.0

91.0

FEBRUARY
MARCH
APRIL

TIME SERIES
2. Weighted Moving Average
Adjusted to reflect more recent fluctuations in data and

seasonal effects
Weights are assigned to the most recent data according to
the following formula:

Weighted Moving Average Example

WMA3 = (.50) (90) + (.33) 110 + (.17) 130 = 103.4 orders =

103 orders
3

FORECAST ACCURACY

Forecast Error
the difference between the forecast and actual
demand

Mean Absolute Deviation

Mean Absolute Deviation (MAD)
- most popular and simplest-to-use measure of forecast error
- average of the difference between the forecast and actual demand, as computed
by the following formula:
MAD = I Dt Ft I
n

where
t = the period number
Dt = demand in period t
Ft = the forecast for period t
n = the total number of

periods
II = the absolute value

COMPARE ACCURACY OF DIFFERENT FORECASTS

MONTH

JANUARY

ORDERS
DELIVERED
PER MONTH

3-MONTH
MOVING
AVERAGE

I Dt Ft I

5-MONTH
MOVING
AVERAGE

I Dt Ft I

120

---

---

---

---

90

---

---

---

---

100

---

---

---

---

75

103.3

28.3

---

---

MAY

110

88.3

21.7

---

---

JUNE

50

95.0

45.0

99.0

49.0

JULY

75

78.3

3.3

85.0

10.0

AUGUST

130

78.3

51.7

82.0

48.0

SEPTEMBER

110

85.0

25.0

88.0

22.0

90

105.0

15.0

95.0

5.0

FEBRUARY
MARCH
APRIL

OCTOBER
I Dt Ft I
MAD

190

134

27.14

26.8