3Examples Predict the next number in the pattern: a) 3.7, , , , , y = 3.7b) 2.5, , , , , y = xc) 5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, 6.5,y = x + cic1 = 0; c2 = 2; c3 = 0; c4 = -2; etc
4Outline What is Forecasting? Types of Forecasts. Time horizons.Life cycle.Types of Forecasts.Eight Steps in the Forecasting System.Forecasting Approaches:Overview of Qualitative Methods.Overview of Quantitative Methods.
5Outline - Continued Time-Series Forecasting: Moving Averages.Exponential Smoothing.Trend Projection.Associative Forecasting Methods: Regression and Correlation Analysis.Monitoring and Controlling Forecasts.Forecasting in the Service Sector.
6What is Forecasting? Art and science of predicting future events. Underlying basis of all business decisions.Production & Inventory.Personnel & Facilities.Focus on forecasting demand.Sales will be $200 Million!
7Types of Forecasts by Time Horizon Short-range forecast: Usually < 3 months.Job scheduling, worker assignments.Medium-range forecast: 3 months to 3 years.Sales & production planning, budgeting.Long-range forecast: > 3 years.New product planning, facility location.At this point, it may be useful to point out the “time horizons” considered by different industries. For example, some colleges and universities look 30 to fifty years ahead, industries engaged in long distance transportation (steam ship, railroad) or provision of basic power (electrical and gas utilities, etc.) also look far ahead (20 to 100 years). Ask them to give examples of industries having much shorter long-range horizons.
8Short- vs. Long-term Forecasting Medium & Long range forecasts:Long range for design of system.Deal with comprehensive issues.Support management decisions regarding planning.Short-term forecasts:To plan detailed use of system.Usually use quantitative techniques.More accurate than longer-term forecasts.At this point it may be helpful to discuss the actual variables one might wish to forecast in the various time periods.
9Influence of Product Life Cycle Stages of introduction and growth require longer forecasts than maturity and decline.Forecasts useful in projecting:staffing levels,inventory levels, andfactory capacity (expansion and contraction),as product passes through life cycle stages.This slide introduces the impact of product life cycle on forecasting The following slide, reproduced from chapter 2, summarizes the changing issues over the product’s lifetime for those faculty who wish to treat the issue in greater depth.
10Forecasting During the Life Cycle Hard to forecast.Need long-range forecasts.Often use qualitative models.IntroductionGrowthMaturityDeclineSalesForecasting critical, both for future magnitude and growth rate.Long-range forecasts still important.Easier to forecast.Use quantitative models.Hard to forecast, but forecasting is less important.Time
11Eight Steps in Forecasting Determine the use of the forecast.Select the items to be forecast.Determine the time horizon of the forecast.Select the forecasting model(s).Gather the data.Make the forecast.Validate and implement results.Monitor forecasts and adjust when needed.A point to be made here is that one requires a forecasting “plan,” not merely the selection of a particular forecasting methodology.
12Realities of Forecasting Assumes future will be like the past (causal factors will be the same).Forecasts are imperfect.Forecasts for groups of product are more accurate than forecasts for individual products.Accuracy decreases with length of forecast.This slide provides a framework for discussing some of the inherent difficulties in developing reliable forecasts. You may wish to include in this discussion the difficulties posed by attempting forecast in a continuously, and rapidly changing environment where product life-times are measured less often in years and more often in months than ever before.One might wish to emphasize the inherent difficulties in developing reliable forecasts.
13Forecasting Approaches Qualitative MethodsQuantitative MethodsUsed when little data or time exist.New products & technology.Long time horizon.Major changes expected.Involves intuition, experience.Example: forecasting for e-commerce sales.Used when situation is ‘stable’ & historical data exist.Existing products & current technology.No significant changes expected.Involves mathematical techniques.Example: forecasting sales of color televisions.This slide distinguishes between Quantitative and Qualitative forecasting. If you accept the argument that the future is one of perpetual, and perhaps significant change, you may wish to ask students to consider whether quantitative forecasting will ever be sufficient in the future - or will we always need to employ qualitative forecasting also. (Consider Tupperware’s ‘jury of executive opinion.’)
14Overview of Qualitative Methods Jury of executive opinion.Combine opinions from executives.Sales force composite.Aggregate estimates from salespersons.Delphi method.Query experts interatively.Consumer market survey.Survey current and potential customers.This slide outlines several qualitative methods of forecasting. Ask students to give examples of occasions when each might be appropriate.The next several slides elaborate on these qualitative methods.
15Jury of Executive Opinion Seek opinions/estimates from small group of high-level managers working together.Combines managerial experience with statistical models.Relatively quick.‘Group-think’.Leader may dominate.Ask your students to consider other potential disadvantages. (Politics?)
16Sales Force Composite Each salesperson projects their sales. Aggregate projections at district & national levels.Sales rep’s know customers.Must not reward inaccurate forecasts.May over- or under-forecast to acquire more resources.SalesYou might ask your students to consider what problems might occur when trying to use this method to predict sales of a potential new product.
17Delphi Method Iterative group process. 3 types of people: Decision makers.Staff.Respondents.Reduces ‘group-think’.Takes time.RespondentsStaff(Make forecast)(Provide input to decision makers)Decision Makers(Administer)You might ask your students to consider whether there are special examples where this technique is required. ( Questions of technology transfer or assessment, for example; or other questions where information from many different disciplines is required.)
18Consumer Market Survey How many hours will you use the Internet next week?Ask customers about purchasing plans.Relatively simple.What consumers say, and what they actually do are often different.You might discuss some of the difficulties with this technique. Certainly there is the issue that what consumers say is often not what they do. There are other problems such as that consumers sometime wish to please the surveyor; and for unusual, future, products, consumers may have a very imperfect frame of reference within which to consider the question.
19Quantitative Forecasting Methods Time SeriesAssociativeModelsModelsA point you may wish to make here is that only in the case of linear regression are we assuming that we know “why” something happened. General time-series models are based exclusively on “what” happened in the past; not at all on “why.” Does operating in a time of drastic change imply limitations on our ability to use time series models?MovingExponentialTrendLinearAverageSmoothingProjectionRegression
20What is a Time Series? Set of evenly spaced numerical data. From observing response variable at regular time periods.Forecast based only on past values.Assumes that factors influencing past will continue influence in future.Example:Year:Sales:This and subsequent slide frame a discussion on time series - and introduce the various components.
21Time Series Components TrendSeasonalCyclicalRandom
22Product Demand over 4 Years Demand for product or serviceThis slide illustrates a typical demand curve. You might ask students why it is important to know more than simply the actual demand over time. Why, for example, would one wish to be able to break out a “seasonality” factor?Year1Year2Year3Year4
23Product Demand over 4 Years Trend componentSeasonal peaksDemand for product or serviceCyclic componentActual demand lineThis slide illustrates a typical demand curve. You might ask students why it is important to know more than simply the actual demand over time. Why, for example, would one wish to be able to break out a “seasonality” factor?Random variationYear1Year2Year3Year4
24Trend Component Persistent, overall upward or downward pattern. Due to population, technology etc.Several years duration.Time
25Seasonal Component Regular pattern of up & down fluctuations. Due to weather, customs etc.Occurs within 1 year.Quarterly, monthly, weekly, etc.TimeDemandSummer
26Cyclical Component Repeating up & down movements. Due to interactions of factors influencing economy.Usually 2-10 years duration.YearDemandCycle
27Random Component Erratic, unsystematic, ‘residual’ fluctuations. Due to random variation or unforeseen events.Union strikeTornadoShort duration & non-repeating.
28General Time Series Models Any value in a time series is a combination of the trend, seasonal, cyclic, and random components.Multiplicative model: Yi = Ti · Si · Ci · RiAdditive model: Yi = Ti + Si + Ci + RiThis slide introduces two general forms of time series model. You might provide examples of when one or the other is most appropriate.
29Naive ApproachDemand in next period is the same as demand in most recent period.e.g., If May sales were 48, then June sales will be 48.Sometimes cost effective & efficient.Usually not good.This slide introduces the naïve approach. Subsequent slides introduce other methodologies.
30 Moving Average Method MA is a series of arithmetic means. Used if little or no trend.Used often for smoothing.MAnDemand inpreviousperiodsAt this point, you might discuss the impact of the number of periods included in the calculation. The more periods you include, the closer you come to the overall average; the fewer, the closer you come to the value in the previous period. What is the tradeoff?
31Moving Average Example You’re manager of a museum store that sells historical replicas. You want to forecast sales (in thousands) for months 4 and 5 using a 3-period moving average.Month 1 4 Month Month 3 5 Month 4 ? Month 5 ?
32Moving Average Forecast MonthResponseYiMovingTotal(n=3)Average14NA2635?4+6+5=1515/3=5
33Moving Average Graph 95 96 97 98 99 00 Sales 2 4 8 Actual Forecast 316This slide shows the resulting forecast. Students might be asked to comment on the useful ness of this forecast.Month
34Actual Demand for Month 4 = 3 ResponseYiMovingTotal(n=3)Average14NA26354+6+5=1515/3 = 5?
35Moving Average Graph 95 96 97 98 99 00 Sales 2 4 8 Actual Forecast 316This slide shows the resulting forecast. Students might be asked to comment on the useful ness of this forecast.Month
36Moving Average Forecast MonthResponseYiMovingTotal(n=3)Average14NA26351576+5+3=1414/3=4.667?
37Moving Average Graph 95 96 97 98 99 00 Sales 2 4 8 Actual Forecast 316This slide shows the resulting forecast. Students might be asked to comment on the useful ness of this forecast.Month
38Actual Demand for Month 5 = 7 ResponseYiMovingTotal(n=3)Average14NA26351576+5+3=1414/3=4.667?
39Moving Average Graph 95 96 97 98 99 00 Sales 2 4 8 Actual Forecast 316This slide shows the resulting forecast. Students might be asked to comment on the useful ness of this forecast.Month
40Moving Average Forecasts MonthResponseYiMovingTotal(n=3)Average14NA26354+6+5=1515/3=5.076+5+3=1414/3=4.667?5+3+7=15
41Moving Average Graph 95 96 97 98 99 00 Sales 2 4 8 Actual Forecast 316This slide shows the resulting forecast. Students might be asked to comment on the useful ness of this forecast.Month
42Weighted Moving Average Method Gives more emphasis to recent data.Weights decrease for older data.Weights sum to 1.0.May be based on intuition.Sum of digits weights: numerators are consecutive.3/6, 2/6, 1/64/10, 3/10, 2/10, 1/10This slide introduces the “weighted moving average” method. It is probably most important to discuss choice of the weights.WMA =Σ [(Weight for period n) (Demand in period n)]ΣWeights
45Moving Average Methods Increasing n makes forecast:Less sensitive to changes.Less sensitive to recent data.Weights control emphasis on recent data.Do not forecast trend well.Require historical data.These points should have been brought out in the example, but can be summarized here.
46Moving Average Graph Demand Time Actual This slide illustrates graphically the results of the example forecast.Time
47Moving Average Graph Large n Small n Demand Time Actual This slide illustrates graphically the results of the example forecast.
48Weighted Moving Average Graph TimeDemandActualLarge weight on recent dataSmall weight on recent dataThis slide illustrates graphically the results of the example forecast.
49Exponential Smoothing Method Form of weighted moving average.Weights decline exponentially.Most recent data weighted most.Requires smoothing constant ().Usually ranges from 0.05 to 0.5Should be chosen to give good forecast.Involves little record keeping of past data.This slide introduces the exponential smoothing method of time series forecasting. The following slide contains the equations, and an example follows.
50Exponential Smoothing Equation Ft = Ft-1 + (At-1 - Ft-1)Ft = Forecast value for time tAt-1 = Actual value at time t-1 = Smoothing constantNeed initial forecast Ft-1 to start.Could be given or use moving average.You may wish to discuss several points:- this is just a moving average wherein every point in included in the forecast, but the weights of the points continuously decrease as they extend further back in time.- the equation actually used to calculate the forecast is convenient for programming on the computer since it requires as data only the actual and forecast values from the previous time point.- we need a formal process and criteria for choosing the “best” smoothing constant.
51Exponential Smoothing Example You want to forecast product demand using exponential smoothing with = Suppose in the most recent month (month 6) the forecast was 175 and the actual demand was 180.Month Month 7 ? Month 8 ? Month 9 ? Month 10 ?This slide begins an exponential smoothing example.
54Exponential Smoothing Solution Ft = Ft-1 + α (At-1 - Ft-1)ActualForecast,Ft(α= .10)180(Given)168( ) =159( ) =?( ) =Month67891011This slide illustrates the result of the steps used to make the forecast desired in the example. In the PowerPoint presentation, there are additional slides to illustrate the individual steps.
55Exponential Smoothing Solution Ft = Ft-1 + α (At-1 - Ft-1)ActualForecast,Ft(α= .10)180(Given)168( ) =159( ) =175( ) =190?( ) =Month67891011This slide illustrates the result of the steps used to make the forecast desired in the example. In the PowerPoint presentation, there are additional slides to illustrate the individual steps.( ) =
56Exponential Smoothing Graph MonthSales14015016017018019067891011ActualForecastThis slide illustrates graphically the results of the example forecast.
57Exponential Smoothing Methods Increasing α makes forecast:More sensitive to changes.More sensitive to recent data.α controls emphasis on recent data.Do not forecast trend well.Trend adjusted exponential smoothing - pThese points should have been brought out in the example, but can be summarized here.
58Exponential Smoothing Graph TimeDemandActualThis slide illustrates graphically the results of the example forecast.
59Exponential Smoothing Graph TimeDemandActualLarge αSmall αThis slide illustrates graphically the results of the example forecast.
60Forecast Effects of Smoothing Constant Ft = At (1- )At (1- )2AtWeightsPrior Period2 periods ago(1 - )3 periods ago(1 - )2== 0.10= 0.90This slide illustrates the decrease in magnitude of the smoothing constant. In the Power Point presentation, the several previous slides show the steps leading to this slide.10%9%8.1%90%9%0.9%
61Choosing - Comparing Forecasts A good method has a small error.Choose to produce a small error.Error = Demand - ForecastError > 0 if forecast is too lowError < 0 if forecast is too highMAD = Mean Absolute Deviation: Average of absolute values of errors.MSE = Mean Squared Error: Average of squared errors.MAPE = Mean Absolute Percentage Error: Average of absolute value of percentage errors.This slide indicates one method of selecting .
62Forecast Error Equations Mean Absolute Deviation (MAD)Mean Squared Error (MSE)This slide illustrates the equations for two measures of forecast error. Students might be asked if there is an occasion when one method might be preferred over the other.
63Forecast Error Equations Mean Absolute Percentage Error (MAPE)This slide illustrates the equations for two measures of forecast error. Students might be asked if there is an occasion when one method might be preferred over the other.
64Forecast Error Example ActualF1F2F1 errorF2 error201911821015-513-3242222132021-1182MAD F1 = 9/4 = F2 = 10/4 = 2.5MSE F1 = 31/4 = F2 = 26/4 = 6.5MAPE F1 = = 17.1% F2 = = 15.6%This slide indicates one method of selecting .
65Which Forecast is Best? MAD F1 = 9/4 = 2.25 F2 = 10/4 = 2.5 MSE F1 = 31/4 = F2 = 26/4 = 6.5MAPE F1 = = 17.1% F2 = = 15.6%This slide indicates one method of selecting .