1. Chapter 3 Forecasting Car buyer- Models & Option Does the dealer know!
Basic Managerial function- Planning

2. Forecast Traffic Weather
A statement about the future value of a variable of interest such as demand.
Forecasting is used to make informed decisions.
Long-range (Plan system)
Short-range (Plan use of system)
I see that you will get an A this semester.
Traffic
Weather

3. Uses of Forecasts Example! Accounting Cost/profit estimates Finance
Cash flow and funding
Human Resources
Hiring/recruiting/training
Marketing
Pricing, promotion, strategy
MIS
IT/IS systems, services
Operations
Schedules, MRP, workloads
Product/service design
New products and services

4. Elements of a Good Forecast
Features of Forecasts
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
Elements of a Good Forecast
Timely
Reliable
Accurate
Meaningful
Written
Easy to use

5. Steps in the Forecasting Process
Traffic
Weather
Steps in the Forecasting Process
Step 1 Determine purpose of forecast
Step 2 Establish a time horizon
Step 3 Select a forecasting technique
Step 4 Obtain, clean and analyze data
Step 5 Make the forecast
Step 6 Monitor the forecast

6. Types of Forecast Judgmental Time series Associative models
Quantitative
Qualitative

7. 1. Judgmental Forecasts Executive opinions Sales force opinions
Subjective/
Qualitative inputs
Executive opinions
Sales force opinions
Consumer surveys
Outside opinion
Delphi method
Opinions of managers and staff (Experts)
Anonymous, encourage honesty,
Questionnaire sequence
Achieves a consensus forecast
Other usage of this method

8. 2. Time Series Forecasts Uses historical data
Trend - long-term movement in data
Seasonality - short-term regular variations in data
Specific dates, days, times
Cycle – wavelike variations of more than one year’s duration
Economic, political, GDP …
Irregular variations - caused by unusual circumstances
Atypical- remove from analysis
Random variations - caused by chance
Include?

9. Forecast Variations Trend Cycles Figure 3.1 Irregular variation 90 8988
Seasonal variations
Figure 3.1

10. 2. Time Series Forecasts 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.

11. Naïve Forecasts Simple to use Virtually no cost
Quick and easy to prepare
Data analysis is nonexistent
Easily understandable
Cannot provide high accuracy
Can be a standard for accuracy

12. Uses for Naïve Forecasts
Stable time series data
F(t) = A(t-1) | Forecast(Feb) = Actual (Feb -1=Jan)
Seasonal variations
F(t) = A(t-n) |
Forecast(July) = Actual (July -4=Mar)
Data with trends
F(t) = A(t-1) + (A(t-1) – A(t-2))

13. Techniques for Averaging
Moving average
Weighted moving average
Exponential smoothing

14. 2. Time Series Forecasts 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.
Ft = MAn= n
At-n + … At-2 + At-1
Ft = WMAn= n
wnAt-n + … wn-1At-2 + w1At-1

15. Simple Moving Average
Actual
MA5
MA3
Ft = MAn= n
At-n + … At-2 + At-1

16. At-n + … At-2 + At-1 Ft = MAn= n At-3 + At-2 + At-1 Ft = MA3= 35
At-5 + At-4 + At-3 + At-2 + At-1

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.
Weighted averaging method based on previous forecast plus a percentage of the forecast error
A-F is the error term, α is the % feedback
Ft = Ft-1 + (At-1 - Ft-1)

18. Example 3 - Exponential Smoothing
Ft = Ft-1 + (At-1 - Ft-1)

19. Picking a Smoothing Constant
 .1
.4
Actual

20. Time series forecasting Common Nonlinear Trends
Parabolic
Exponential
Growth
Figure 3.5

21. Linear Trend Equation Ft = a + bt Ft = Forecast for period t
t = Specified number of time periods
a = Value of Ft at t = 0
b = Slope of the line Ft
Ft = a + bt t

23. Calculating a and b b = n
(ty) - t y 2 ( t) a 

24. Linear Trend Equation Example
Week t2 y
Sales ty 1
150 2 4
157
314 3 9
162
486 16
166
664 5 25
177
885
S t = 15
S t2 = 55
S y = 812
S ty = 2499
(S t)2 = 225

25. Linear Trend Calculation
y = t a =
812 -
6.3(15) 5 b
5 (2499)
15(812)
5(55)
225
12495
12180
275
6.3
143.5

26. 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.

27. Types of Forecasts 3. Associative Forecasting
Predictor variables - used to predict values of variable interest
Regression - technique for fitting a line to a set of points
Least squares line - minimizes sum of squared deviations around the line

28. Linear Model Seems Reasonable
Computed relationship
A straight line is fitted to a set of sample points.

29. Linear Regression Assumptions
Variations around the line are random
Deviations around the line normally distributed
Predictions are being made only within the range of observed values
For best results:
Always plot the data to verify linearity
Check for data being time-dependent
Small correlation may imply that other variables are important

30. 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
MAD
Easy to compute
Weights errors linearly
MSE
Squares error
More weight to large errors
MAPE
Puts errors in perspective

31. MAD, MSE, and MAPE  | Actual – forecast | MAD = n
( | Actual – forecast | / Actual )*100
MAPE = n

32. Example 10

33. Controlling the Forecast
Control chart
A visual tool for monitoring forecast errors
Used to detect non-randomness in errors
Forecasting errors are in control if
All errors are within the control limits
No patterns, such as trends or cycles, are present
Sources of Forecast errors
Model may be inadequate
Irregular variations
Incorrect use of forecasting technique

34. Tracking Signal (Actual - forecast) Tracking signal = MAD
Ratio of cumulative error to MAD
Bias – Persistent tendency for forecasts to be Greater or less than actual values.
Tracking signal =
(Actual - forecast)
MAD

35. 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

36. Operations Strategy Forecasts are the basis for many decisions
Work to improve short-term forecasts
Accurate short-term forecasts improve
Profits
Lower inventory levels
Reduce inventory shortages
Improve customer service levels
Enhance forecasting credibility

37. Supply Chain Forecasts
Sharing forecasts with supply can
Improve forecast quality in the supply chain
Lower costs
Shorter lead times

39. Learning Objectives List the elements of a good forecast.
Outline the steps in the forecasting process.
Describe at least three qualitative forecasting techniques and the advantages and disadvantages of each.
Compare and contrast qualitative and quantitative approaches to forecasting.

40. Learning Objectives
Briefly describe averaging techniques, trend and seasonal techniques, and regression analysis, and solve typical problems.
Describe two measures of forecast accuracy.
Describe two ways of evaluating and controlling forecasts.
Identify the major factors to consider when choosing a forecasting technique.

41. Exponential Smoothing

42. Linear Trend Equation

43. Simple Linear Regression