Forecasting

Iqra University
By Sikander Burney

FORECAST:
A statement about the future
Used to help managers
Plan the system
Plan the use of the system

Forecast Uses
Plan the system

Generally involves long-range plans related to:

Types of products and services to offer
Facility and equipment levels
Facility location

Plan the use of the system

Generally involves short- and medium-range plans

related to:
Inventory management
Workforce levels
Purchasing
Budgeting

Common Features
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
Fooled by Randomness by Nassim Nicholas Taleb.
I see that you will
get an A/F this quarter.

Elements of a Good Forecast

Timely

Reliable

Accurate

Written

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it v
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ff e
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Steps in the Forecasting Process

The forecast

Step 6 Monitor the forecast

Step 5 Make the forecast
Step 4 Gather and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast

Types of Forecasts
Judgmental - uses subjective inputs (qualitative)
Time series - uses historical data assuming the
future will be like the past (quantitative)
Associative models - uses explanatory variables
to predict the future

Types of Forecasting
Methods
Forecasting methods are classified into two
groups:

Qualitative Methods

Time Series Forecasts

(Quantitative)
Trend - long-term movement in data
Seasonality - short-term regular variations in data
Irregular variations - caused by unusual
circumstances
Random variations - caused by chance
CYCLE- wave like variations lasting more than one
year

Forecast Variations
Irregular
variation

Trend
cycle
Cycles
90
89
88
Seasonal variations

The Forecast of Forecasts

Nave
Simple Moving Average
Weighted Moving Average
Exponential Smoothing
ES with Trend and Seasonality

Forecast Accuracy
Forecast error
difference between forecast and actual
demand
MAD
mean absolute deviation

MAPD
mean absolute percent deviation

Cumulative error
Average error or bias

Forecast Accuracy and

Bias

FA = 1 -

where

e.g.

At = demand in period t
Ft = forecast for period t

F
%
FB =
A

Sources of forecast errors

The model may be inadequate.
Irregular variation may be occur.
The forecasting technique may be used
incorrectly or the results misinterpreted.
There are always random variation in the data.

Selecting the Right Forecasting

Model
1. The amount & type of available data

Some methods require more data than others

2. Degree of accuracy required

Increasing accuracy means more data

3. Length of forecast horizon

Different models for 3 month vs. 10 years

4. Presence of data patterns

Lagging will occur when a forecasting model

meant for a level pattern is applied with a trend

Forecasting Software
Spreadsheets
Microsoft Excel, Quattro Pro, Lotus 1-2-3
Limited statistical analysis of forecast data

Statistical packages
SPSS, SAS, NCSS, Minitab
Forecasting plus statistical and graphics

Specialty forecasting packages

Forecast Master, Forecast Pro, Autobox, SCA

Guidelines for Selecting Software

Does the package have the features you

want?
What platform is the package available for?
How easy is the package to learn and use?
Is it possible to implement new methods?
Do you require interactive or repetitive
forecasting?
Do you have any large data sets?
Is there local support and training available?
Does the package give the right answers?

Collaborative Planning Forecasting & Replenishment

(CPFR)
Establish collaborative relationships between
buyers and sellers
Create a joint business plan
Create a sales forecast
Identify exceptions for sales forecast
Resolve/collaborate on exception items
Create order forecast
Identify exceptions for order forecast
Resolve/collaborate on exception items
Generate order

End Notes
The two most important factors in choosing a
forecasting technique:
Cost
Accuracy

Keep it SIMPLE!
=FORECAST(70,{23,34,12},{67,76,56})
canlet the computer do it)

(if you