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What Is Forecasting?
Process of predicting
a future event
Underlying basis of
all business decisions
Production
Inventory
Personnel
Facilities
Forecasting Approaches
Qualitative Methods
Used when situation
is vague & little data
exist
New products
New technology
Involve intuition,
experience
e.g., forecasting
sales on Internet
Quantitative Methods
Forecasting Approaches
Qualitative Methods
Quantitative Methods
Involve intuition,
experience
Existing products
Quantitative Forecasting
Select several forecasting methods
Forecast the past
Evaluate forecasts
Select best method
Forecast the future
Monitor continuously forecast accuracy
Quantitative Forecasting
Methods
Quantitative
Forecasting
Causal
Models
Time Series
Models
Moving
Average
Exponential
Smoothing
Trend
Models
Regression
Trend
Cyclical
Seasonal
Irregular
Trend Component
Persistent, overall upward or downward
pattern
Due to population, technology etc.
Several years duration
Response
Trend Component
end
r
t
d
r
a
Upw
Time
Cyclical Component
Repeating up & down movements
Due to interactions of factors influencing
economy
Usually 2-10 years duration
Cycle
Response
Cyclical Component
Cycle
Time
Seasonal Component
Regular pattern of up & down fluctuations
Due to weather, customs etc.
Occurs within one year
Summer
Response
1984-1994 T/Maker Co.
Mo., Qtr.
Seasonal Component
Regular Patterns
Winter
Irregular Component
Erratic, unsystematic, residual fluctuations
Due to random variation or unforeseen events
Short duration &
nonrepeating
NAVE MODEL
Uses recent past as the best indicator of
the future.
Yt 1 Yt
computed as: et Yt Yt
Sales (in
$1,000)
9
8
9
12
9
12
11
?
Forecast
9
8
9
12
9
12
11
Sales (in
$1,000)
1
2
3
5
6
7
8
9
8
9
12
9
12
11
Forecast
Error
Absolute
Error
Squared
Error
9
8
9
12
9
12
Sum
Mean
1
1
3
3
3
1
2
0.33
1
1
3
3
3
1
12
2
1
1
9
9
9
1
30
5
Year
Yt 1
Yt
t 1
Moving Average
[An
An Example]
Example]
Moving Average
[Solution]
Year
Sales
MA(3) in 1,000
199520,000 NA
1996
24,000 (20+24+22)/3 = 22
199722,000 (24+22+26)/3 = 24
199826,000 (22+26+25)/3 = 24
199925,000 NA
Moving Average
Year
Response Moving
Ave
Sales
8
1994
NA
1995
1996
1997
3.67
1998
1999
NA
6
4
2
0
94 95 96 97 98 99
Double Moving
Average Model
Week
Sales
(in $1,000)
1
2
3
5
6
7
8
9
11
10
14
18
22
23
Simple
Moving
Average
10
10.5
12
16
20
22.5
Simple
Moving
Average
Forecast
Double
Moving
Average
10
10.5
12
16
20
10.25
11.25
14
18
21.25
No trend or
seasonal
pattern?
Y
Single
Exponential
Smoothing
Method
Linear trend
and no seasonal
pattern?
Y
Holts Trend
Corrected
Exponential
Smoothing
Method
Both trend
and seasonal
pattern?
Holt-Winters
Methods
Use Other
Methods
bt ( Lt Lt 1 ) (1 )bt 1
F t m Lt mbt
period t.
y 4 y1
3
or
b1 0
1
Ls ( y1 y2 y s )
s
1 y y y y2
y ys
bs ( s 1 1 s 2
ss
)
s
s
s
s
S1
y1
y
y
, S 2 2 ,, S s s
Ls
Ls
Ls
MAD
Actual
forecast
n
MSE
( Actual
forecast)
n -1
MAPE =
Actual
forecast / Actual*100)
n