Forecasting

Elements of good forecast

Accurate
Timely
Reliable
In writing
Technique should be simple to understand and use

Steps in forecasting process

Determine the purpose of the forecast

Establish a time horizon
Select a forecasting technique
Gather and analyse relevant data
Prepare the forecast
Monitor the forecast

Forecasting
Approaches to Forecasting
1. Based on Judgement and Opinion:
Executive opinion
Sales-force opinion
Consumer surveys
Delphi method

2. Based on Time Series Data:

Trend
Seasonality

Forecasting
Averaging Techniques
Simple moving average

Ft =

Weighted moving average

i =1

Ft =

Aw
i =1
n

w
i =1

Forecasting
Exponential Smoothing

Ft = Ft 1 + ( At 1 Ft 1 )
For smoother demand, is less, the forecasting trend will be smoother
For fluctuating demand, is more, the trend will be less smooth

Exponential Smoothing (with Trend Effect)

FITt = Ft + Tt
Ft = FITt 1 + ( At 1 FITt 1 )
Tt = Tt 1 + ( At 1 FITt 1 )

Forecasting
Simple Linear Regression

y = a + bx

b=

n xy x y
n x ( x )
2

a = y bx

Forecasting
Accuracy of Forecasts

et = At Ft
Two commonly used measures:
Mean absolute deviation (MAD)

Actual Forecast

MAD =
n

( Actual Forecast )

MSE =

Mean squared error (MSE)