McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. 3 Forecasting
3-2 Learning Objectives List the elements of a good forecast. Describe at least three qualitative forecasting techniques and the advantages and disadvantages of each. Briefly describe averaging techniques, trend and seasonal techniques, and regression analysis, and solve typical problems. Describe two measures of forecast accuracy.
3-3 FORECAST: A statement about the future value of a variable of interest such as demand. Forecasting is used to make informed decisions. Long-range Short-range
3-4 Forecasts Forecasts affect decisions and activities throughout an organization Accounting, finance Human resources Marketing MIS Operations Product / service design
3-5 Assumes causal system past ==> future Forecasts rarely perfect because of randomness Forecasts more accurate for groups vs. individuals Forecast accuracy decreases as time horizon increases I see that you will get an A this semester. Features of Forecasts
3-6 Elements of a Good Forecast Timely Accurate Reliable Meaningful Written Easy to use
3-7 Types of Forecasts Judgmental - uses subjective inputs Time series - uses historical data assuming the future will be like the past Associative models - uses explanatory variables to predict the future
3-8 Judgmental Forecasts Executive opinions Sales force opinions Consumer surveys Outside opinion Delphi method Opinions of managers and staff Achieves a consensus forecast
3-9 Time Series Forecasts Trend - long-term movement in data Seasonality - short-term regular variations in data Cycle – wavelike variations of more than one year’s duration Irregular variations - caused by unusual circumstances Random variations - caused by chance
3-10 Forecast Variations Trend Irregular variatio n Seasonal variations Figure 3.1 Cycles
3-11 Naive Forecasts Uh, give me a minute.... We sold 250 wheels last week.... Now, next week we should sell.... The forecast for any period equals the previous period’s actual value.
3-12 Stable time series data F(t) = A(t-1) Seasonal variations F(t) = A(t-n) Data with trends F(t) = A(t-1) + (A(t-1) – A(t-2)) Uses for Naïve Forecasts
3-13 Techniques for Averaging Moving average Weighted moving average Exponential smoothing
3-14 Moving Averages Moving average – A technique that averages a number of recent actual values, updated as new values become available. Weighted moving average – More recent values in a series are given more weight in computing the forecast. F t = MA n = n A t-n + … A t-2 + A t-1 F t = WMA n = n w n A t-n + … w n-1 A t-2 + w 1 A t-1
3-15 Moving Average Example n = 3 tAtAt FtFt
3-16 Weighted Moving Average Moving Average Example n = 3 w t w t w t tAtAt FtFt
3-17 Exponential Smoothing Premise--The most recent observations might have the highest predictive value. Therefore, we should give more weight to the more recent time periods when forecasting. F t = (1- )F t-1 + ( A t-1 ) F t = F t-1 + ( A t-1 - F t-1 )
3-18 Weighted Moving Average Exponential Smoothing Example =.7 tAtAt FtFt
3-19 Linear Trend Equation F t = Forecast for period t t = Specified number of time periods a = Value of F t at t = 0 b = Slope of the line F t = a + bt t FtFt
3-20 Calculating a and b b = n(ty) - ty nt 2 - ( t) 2 a = y - bt n
3-21 Linear Trend Equation Example
3-22 Linear Trend Calculation y = t a= (15) 5 = b= 5 (2499)- 15(812) 5(55)- 225 = =
3-23 Techniques for Seasonality Seasonal variations Regularly repeating movements in series values that can be tied to recurring events. Seasonal relative Percentage of average or trend Centered moving average A moving average positioned at the center of the data that were used to compute it.
3-24 Forecast Accuracy Error - difference between actual value and predicted value Mean Absolute Deviation (MAD) Average absolute error Mean Squared Error (MSE) Average of squared error Mean Absolute Percent Error (MAPE) Average absolute percent error
3-25 MAD, MSE, and MAPE MAD = Actualforecast n MSE = Actualforecast ) n ( MAPE = Actualforecas t n / Actual*100)
3-26 Example 10
3-27 Sources of Forecast errors Model may be inadequate Irregular variations Incorrect use of forecasting technique
3-28 Choosing a Forecasting Technique No single technique works in every situation Two most important factors Cost Accuracy Other factors include the availability of: Historical data Computers Time needed to gather and analyze the data Forecast horizon