Professional Documents
Culture Documents
Types of Forecasts
Demand
Firm-level
Market-level
Supply
Materials
Labor supply
Price
Cost of supplies and services
Cost of money interest rates, currency
rates
Market price for firms product or service
Forecast Laws
Forecasting Approaches
Qualitative Methods
Quantitative Methods
New products
New technology
Involves intuition,
experience
************************
*****
E.g., forecasting sales
to a new market
Existing products
Current technology
Heavy use of
mathematical
techniques
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*****
E.g., forecasting sales of
a mature product
Qualitative Forecasting
Executive opinions
Sales force composite
Consumer surveys
Outside opinions
Delphi method
Life cycle analogy*
Demand Forecasting
Uses historical data
Basic time series models
Linear regression
For time series or causal
modeling
Demand
12
15
11
9
10
8
14
12
What assumptions
must we make to
use this data to
forecast?
. . . randomness
Time
Time
May
May
May
May
Averaging Methods
generates a forecast for a particular
time period by averaging the
observed data values(that is the
actual values of the dependent
variable) for the most recent n time
periods.
Two versions of this method are:
simple moving averages and
weighted moving averages.
data
Ft 1 i 1
n
Best for short term forecasts
in the
absence of seasonal or cyclical
variations
Demand
12
15
11
9
10
8
14
12
Ft 1
Dt 1i
i 1
(14 + 8 + 10) / 3
10.67
Wt 1i Dt 1i
Ft 1 i 1
Wt 1i
i 1
Actual
Demand
Two-Period
Moving
Average
Forecast
Three-Period Weighted
Moving Average
Forecast Weights = 0.5,
0.3, 0.2
12
15
11
13.5
13
12.4
10
10
10.8
9.5
9.9
14
8.8
12
11
11.4
13
11.8
Exponential Smoothing
Sophisticated weight averaging model
In fact, exponential smoothing is a short
name for an exponentially weighted
moving average that require only three
pieces of data:
Ft = Forecast for the current period t
Dt = Actual demand for the current period t
= Weight between 0 and 1 (smoothing constant)
Simple Exponential
Smoothing
Formula
Ft+1
+ (1
= Ft + (Dt Ft) = Dt
Ft
Exponential Smoothing
Forecast with = 0.3
Period
Actual
Demand
Exponential
Smoothing
Forecast
12
11.00
15
11.30
11
12.41
11.99
10
11.09
10.76
14
9.93
12
11.15
11.41
F2 = 0.312 + 0.711
= 3.6 + 7.7
= 11.3
F3 = 0.315 + 0.711.3
= 12.41
Resulting Graph
Trends
Actual
Demand
Exponential
Smoothing
Forecast
11
11.00
12
11.00
13
11.30
14
11.81
15
12.47
16
13.23
17
14.06
18
14.94
15.86
Measuring Forecast
Accuracy
How do we know:
If a forecast model is best?
If a forecast model is still working?
What types of errors a particular
forecasting model is prone to make?
Need measures of forecast accuracy
Measures of Forecast
Accuracy
Error = Actual demand Forecast
or
Et = Dt Ft
MFE
Ei
i 1
MAD
Ei
i 1
Example
Period Demand Forecast
3
4
5
6
7
8
11
9
10
8
14
12
13.5
13
10
9.5
9
11
Error
-2.5
-4.0
0
-1.5
5.0
1.0
Absolute
Error
2.5
4.0
0.0
1.5
5.0
1.0
An Analogy (continued)
Low MFE, but high
MAD:
On average, the
darts hit the
bulls eye (so much
for averages!)
An Analogy (concluded)