• •

–
• –
–
–
–
– !
– "

# $
Accounting Cost estimates/profit projections,
cash management
Finance Cash flow and funding
Human Resources Hiring/recruiting/training
Marketing Pricing, promotion, strategy
MIS IT/IS systems, services
Operations Schedules, MRP, workloads,
inventory, outsourcing
Product/service design New products and services
% &
• 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

Steps in the Forecasting Process Judgmental Forecasts

Types of Forecasts (Qualitative)

• Consumer surveys
“The forecast” • Judgmental - uses subjective inputs
(qualitative) • Delphi method
• Time series - uses historical data assuming
the future will be like the past (quantitative) • Executive opinions
Step 6 Monitor the forecast
Step 5 Make the forecast
• Associative models - uses explanatory variables – Opinions of managers and staff
Step 4 Gather and analyze data
to predict the future
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
• Sales force.
Step 1 Determine purpose of forecast
 Time Series Forecasts Forecast Variations
(Quantitative) Figure 3-1 The Forecast of Forecasts
Irregular
• Trend - long-term movement in data variation • ' (
• Seasonality - short-term regular variations in data
• Irregular variations - caused by unusual Trend • !
circumstances • )
• Random variations - caused by chance cycle
Cycles
• %*!
• CYCLE- wave like variations lasting more than one
year • % + , -
90
89
88
Seasonal variations

Techniques for Averaging

Naïve Forecast
• . /
0 ! +
The forecast for any period equals the •
previous period’s actual value n

• Simple to use •)
i=1
i
• Virtually no cost • %*! =
• Data analysis is nonexistent • .
• Easily understandable + !
• Cannot provide high accuracy

Simple Moving Average Weighted Moving Average %* !

• - ! •
! ) ! +
• 1 ! 2 3 • !! "
α# ! $%
+
1! +
-0 4 0 4 - +5
&
0.6 0.3 0.1 - 966
4 866
4 - :66

, + - 26 7830
4 26 7830 4 - 26 863
 Exponential Smoothing
• ! / 0 / ) %*! 2<=6 >63 %*! 2 3
FORECAST, Ft + 1
α . *! ! 26; α<1) PERIOD MONTH DEMAND (α = 0.3) (α = 0.5)
PERIOD MONTH DEMAND F2 1 Jan 37 – –
= 37 + (0.30)(37-37)
• 1 Jan 37 = 37 2 Feb 40 37.00 37.00
2 Feb 40 3 Mar 41 37.90 38.50
3 Mar 41 4 Apr 37 38.83 39.75
4 Apr 37 5 May 45 38.28 38.37
F3 =37+ (0.30)(40-37) 6 Jun 50 40.29 41.68
5 May 45
6 Jun 50 = 37.9 7 Jul 43 43.20 45.84
7 Jul 43 8 Aug 47 43.14 44.42
8 Aug 47 9 Sep 56 44.30 45.71
9 Sep 56 10 Oct 52 47.81 50.85
10 Oct 52 11 Nov 55 49.06 51.42
11 Nov 55 12 Dec 54 50.84 53.21
12 Dec 54 13 Jan – 51.79 53.61

%* !
• - *! + A %*!
! !
! 5
Period Annual Demand (kgs) 3 ? ! AFt +1 = Ft +1 + Tt +1
1 15 where
3 , T = an exponentially smoothed trend factor
2 20 3 , !
Tt +1 = β(Ft +1 - Ft) + (1 - β) Tt
3 10 3 ) + where
4 20 + 70 >0 8 Tt = the last period trend factor
β = a smoothing constant for trend
5 10 3 %*! + α=6@
6 15

A %*! A %*! 5
Linear Trend Equation
2B=6 >63 %* ! Y
FORECAST TREND ADJUSTED
PERIOD MONTH DEMAND T3 = β(F3 - F2) + (1 - β) T2
= (0.30)(38.5 - 37.0) + (0.70)(0)
PERIOD MONTH DEMAND Ft +1 Tt +1 FORECAST AFt +1
Yt = a + bt
1 Jan 37 1 Jan 37 37.00 – –
2 Feb 40 = 0.45 2 Feb 40 37.00 0.00 37.00 a
3 Mar 41 3 Mar 41 38.50 0.45 38.95
AF3 = F3 + T3 = 38.5 + 0.45 4 Apr 37 39.75 0.69 40.44 0 1 2 3 4 5 t
4 Apr 37
5 May 45 = 38.95 5 May 45 38.37 0.07 38.44 • b is the line slope.
6 Jun 50 6 Jun 50 38.37 0.07 38.44
7 Jul 43 T13 = β(F13 - F12) + (1 - β) T12 7 Jul 43 45.84 1.97 47.82
8 Aug 47 = (0.30)(53.61 - 53.21) + (0.70)(1.77) 8 Aug 47 44.42 0.95 45.37
9 Sep 56 9 Sep 56 45.71 1.05 46.76
= 1.36
10 Oct 52 10 Oct 52 50.85 2.28 58.13
11 Nov 55 11 Nov 55 51.42 1.76 53.19
12 Dec 54 AF13 = F13 + T13 = 53.61 + 1.36 = 54.96 12 Dec 54 53.21 1.77 54.98
13 Jan – 53.61 1.36 54.96
 Calculating a and b Linear Trend Equation Example Linear Trend Calculation

5 (2499) - 15(812) 12495-12180

b = = = 6.3
n (ty) 1 t y 5(55) - 225 275 -225
b =
n t 7 1 2 t) 7

812 - 6.3(15)
a = = 143.5
y 1 b t 5
a =
n
y = 143.5 + 6.3t
Yes… Linear Regression!!
C !
• 1 !
@1 !! - - !+
• 0 / / 5
!
• 1 / - = D 2*3
71
! + 0
!2 763
• 1 / -= 2 ! 3
>1 + / -
*= 2 ! 3
= !
=E -0 + *=6 2 - !3

? F -
• % 1 + !
$ !
, 0 !
• C 2 C3
–

• / % 2 %3
– /
• % 2 %3
– !
A straight line is fitted to a set of sample points.
 C0 %0 %
- C 2 C3
−
C =
•
– + Σ| At - Ft |
2 MAD =
( − ) – C n
% =
•
-@ where
– C t = period number
• !
At = demand in period t
–$ Ft = forecast for period t
( − " G@663
% = – n = total number of periods
= absolute value

%*! 2<=6 >63 MAD Example MAD Example

PERIOD DEMAND, At Ft (α =0.3) (At - Ft) |At - Ft| PERIOD DEMAND, At Ft (α =0.3) (At - Ft) |At - Ft|
1 37 37.00 – – 1 37 37.00 – –
PERIOD MONTH DEMAND F2 37 + (0.30)(37-37)
= 2 40 37.00 3.00 3.00 2 40 37.00 3.00 3.00
1 Jan 37 = 37 3 41 37.90 3.10 3.10 3 41 37.90 3.10 3.10
2 Feb 40 4 37 38.83 -1.83 1.83 4 37 Σ| 138.83| -1.83 1.83
3 Mar 41 5 45 38.28 6.72 6.72 5 C45 = 38.28 6.72 6.72
4 Apr 37 6 50 40.29 9.69 9.69 6 50 40.29 9.69 9.69
F3 =37+ (0.30)(40-37)
5 May 45 7 43 43.20 -0.20 0.20 7 43 8> >I43.20 -0.20 0.20
6 Jun 50 = 37.9 8 47 43.14 3.86 3.86 8 47 = 43.14 3.86 3.86
7 Jul 43 9 56 44.30 11.70 11.70 9 56 @@ 44.30 11.70 11.70
8 Aug 47 10 52 47.81 4.19 4.19 10 52 47.81 4.19 4.19
9 Sep 56 11 55 49.06 5.94 5.94 11 55 = 9 H8 49.06 5.94 5.94
10 Oct 52 12 54 50.84 3.15 3.15 12 54 50.84 3.15 3.15
11 Nov 55 557 49.31 53.39 557 49.31 53.39
12 Dec 54

- $ ! $
• ,
Mean absolute percent deviation (MAPD) –
|At - Ft| + (At - Ft)
FORECAST MAD MAPD E (E) E
MAPD = Tracking signal = =
At Exponential smoothing (α = 0.30) 4.85 9.6% 49.31 4.48 MAD MAD
Exponential smoothing (α = 0.50) 4.04 8.5% 33.21 3.02
Cumulative error Adjusted exponential smoothing 3.81 7.5% 21.14 1.92
E = et (α = 0.50, β = 0.30)

Average error
et
(E )= n
 , E % '
DEMAND FORECAST, ERROR E= TRACKING
PERIOD At Ft At - Ft (At - Ft) MAD SIGNAL • , - / • , + !
1 37 37.00 – – – – • - / 5
2 40 37.00 3.00 3.00 3.00 1.00
3 41 37.90 3.10 6.10 3.05 2.00 • , / - –$
4 37 38.83 -1.83 4.27 2.64 1.62
5 45 38.28 6.72 ! 10.99> 3.66 3.00 - ! – -
,
6
7
50
43
40.29
43.20
9.69
-0.20
20.68
20.48
4.87
4.09
4.25
5.01 • , + - • ! '&() J
: @6
8
9
47
56
43.14 ,
44.30
> = 3.86 = 724.34
66
> 68 36.04
11.70
4.06
5.01
6.00 • = F%$ ,2K60L7>0>90@7M0L:K0K:08:M3 2
7.19
10 52 47.81 4.19 40.23 4.92 8.18 - N 3
11 55 49.06 5.94 46.17 5.02 9.20
12 54 50.84 3.15 49.32 4.85 10.17