Forecasting enables managers to anticipate future demand, sales, or production. It assumes past trends will continue and is rarely perfect. Forecasts are more accurate for groups than individuals and accuracy decreases over longer time horizons. Elements of a good forecast include being timely, accurate, reliable, simple, meaningful, and in writing. The forecasting process involves determining purpose and time horizon, gathering data, selecting a technique, making the forecast, and monitoring performance. Common techniques are judgmental, associative, time-series, and Delphi methods. Time-series components are trend, seasonality, cycles, and irregular variations. Averaging/smoothing methods include moving averages. Common accuracy measures are mean absolute deviation, mean squared error,
Forecasting enables managers to anticipate future demand, sales, or production. It assumes past trends will continue and is rarely perfect. Forecasts are more accurate for groups than individuals and accuracy decreases over longer time horizons. Elements of a good forecast include being timely, accurate, reliable, simple, meaningful, and in writing. The forecasting process involves determining purpose and time horizon, gathering data, selecting a technique, making the forecast, and monitoring performance. Common techniques are judgmental, associative, time-series, and Delphi methods. Time-series components are trend, seasonality, cycles, and irregular variations. Averaging/smoothing methods include moving averages. Common accuracy measures are mean absolute deviation, mean squared error,
Forecasting enables managers to anticipate future demand, sales, or production. It assumes past trends will continue and is rarely perfect. Forecasts are more accurate for groups than individuals and accuracy decreases over longer time horizons. Elements of a good forecast include being timely, accurate, reliable, simple, meaningful, and in writing. The forecasting process involves determining purpose and time horizon, gathering data, selecting a technique, making the forecast, and monitoring performance. Common techniques are judgmental, associative, time-series, and Delphi methods. Time-series components are trend, seasonality, cycles, and irregular variations. Averaging/smoothing methods include moving averages. Common accuracy measures are mean absolute deviation, mean squared error,
projection, Trend projection adjusted for Seasonal influence, etc.), Delphi, etc.
Naive Method: Simplest, but widely used approach. Uses a
single previous value of time-series as the basis of Example: forecast. Period Actual Change from Previous Value Forecast Previous, t-1 40 Current, t 60 +20 Next, t+1 60 + 20 = 80 Time-Series Components
Trend: A long-term upward/downward movement in data;
Seasonality: Short-term, fairly regular variations related to
the time of the calendar day, or week, month, quarter, etc.
Cycles: Wave-like variations, lasting for more than a year;
Irregular Variations: Caused by unusual circumstances
not reflective of typical behaviour, e.g. strike, weather, etc;
Random Variations: The residual variations that remain
after all other behaviours have been accounted for. Averaging/Smoothing Methods Moving Average: A method that averages a number of recent actual values, updated as new values are available.
Thus, the forecast for time-period t, Ft = MAn = (At-1)/n,
where, Ft = Forecast value for time period t;
MAn = moving average for n no. of periods;
i = index corresponding to time-period (i = 1~n);
n = no. of periods in moving averages;
At-1 = actual value in period t-1.
Moving Average (continued) Examples: Compute a three-period moving average forecast, given the demand for shopping carts for the last five periods.
Period Demand Solution:
t y 1 44 Taking the three most recent demands, 2 42 F6 = (41 + 40 + 43) / 3 = 124 / 3 = 41.333 nos. 3 43 Again, if the actual demand in period 6 turns out to be 38, 4 40 F7 = (38 + 41 + 40) / 3 = 119 / 3 = 39.667 nos. 5 41 Ft updated, as the new actual value found. Forecast Accuracy Three common measures for summing historical errors are:
A. Mean Absolute Deviation (MAD): The average
absolute forecast error;
MAD = [Actualt - Forecastt] / n, where Et = At Ft;
B. Mean Squared Error (MSE): The average of the
squared forecast errors;
MSE = [Actualt - Forecastt] / (n 1), where n = pds;
C. Mean Absolute Percentage Error (MAPE): The
average absolute percentage error;
MAPE = [Actualt - Forecastt/ Actualt * 100]% / n.
Forecast Accuracy Example: Compute MAD, MSE and MAPE for the following data: Period Actual Forecast E=A-F E E/A*100 Solution: t A F 1 217 215 2 4 0.922% A. MAD 2 213 216 3 9 1.408 = E/ n 3 216 215 1 1 0.463 = 22 / 8 = 2.750 4 210 214 4 16 1.905 B. MSE 5 213 211 2 4 0.939 = E / (n - 1) 6 219 214 5 25 2.283 = 76 / 7 = 10.857 7 216 217 1 1 0.463 C. MAPE 8 212 216 4 16 1.887 =[E/A*100]/n = - - 22 76 10.27% =10.27/8 =1.284%