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Bharti Vidyapeeth College of Engineering Navi Mumbai: Forecasting
Bharti Vidyapeeth College of Engineering Navi Mumbai: Forecasting
Bharti Vidyapeeth College of Engineering Navi Mumbai: Forecasting
What is Forecasting?
FORECAST:
A statement about the future value of a variable of interest such as demand. Forecasts affect decisions and activities throughout an organization Accounting, finance Human resources Marketing MIS Operations Product / service design
Uses of Forecasts
Accounting Finance Human Resources Marketing MIS Operations Product/service design Cost/profit estimates Cash flow and funding Hiring/recruiting/training Pricing, promotion, strategy IT/IS systems, services Schedules, MRP, workloads New products and services
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
I see that you will get an A this semester.
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The forecast
Step 6 Monitor the forecast Step 5 Prepare 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 Time series - uses historical data assuming the future will be like the past Associative models - uses explanatory variables to predict the future
Judgmental Forecasts
Trend - long-term movement in data Seasonality - short-term regular variations in data Cycle wavelike variations of more than one years duration Irregular variations - caused by unusual circumstances Random variations - caused by chance
Naive Forecasts
Uh, give me a minute.... We sold 250 wheels last week.... Now, next week we should sell....
The forecast for any period equals the previous periods actual value.
Naive Forecasts
Simple to use Virtually no cost Quick and easy to prepare Easily understandable Can be a standard for accuracy Cannot provide high accuracy
Review: forecast
Nave technique
Averaging
Develop an equation that will suitably describe trend, when trend is present. The trend component may be linear or nonlinear We focus on linear trends
CASE STUDY
The manager of a seafood restaurant was asked to establish a pricing policy on lobster dinners. Experimenting with prices produced the following data:
Sold (y) 200 190 188 180 170 162 160 155 156 148 140 133
Price (x) 6.00 6.50 6.75 7.00 7.25 7.50 8.00 8.25 8.50 8.75 9.00 9.25
Create the scatter plot and determine if a linear relationship is appropriate. Determine the correlation coefficient and interpret it Obtain the regression line and interpret its coefficients.
Forecast Accuracy
Model may be inadequate Irregular variations Incorrect use of forecasting technique Random variation
Error measures
Error - difference between actual value and predicted value Mean Absolute Deviation (MAD)
Average absolute error Average of squared error Average absolute percent error
MAPE =
Example
Period 1 2 3 4 5 6 7 8 Actual 27 1 23 1 26 1 20 1 23 1 29 1 26 1 22 1 Forecast 25 1 26 1 25 1 24 1 21 1 24 1 27 1 26 1 (A-F) 2 -3 1 -4 2 5 -1 -4 -2 |A-F| 2 3 1 4 2 5 1 4 2 2 (A-F)^2 (|A-F|/Actual)*1 00 4 0. 9 2 9 141 . 1 0. 46 1 6 19 . 0 4 0. 9 4 2 5 22 . 8 1 0. 46 1 6 18 . 9 76 1 .2 0 6
275 . 1 .8 0 6 12 . 8
Control chart A visual tool for monitoring forecast errors Used to detect non-randomness in errors
Forecasting errors are in control if All errors are within the control limits No patterns, such as trends or cycles, are present
Control charts
Control charts are based on the following assumptions: when errors are random, they are Normally distributed around a mean of zero. Standard deviation of error is 95.5% of data in a normal distribution is within 2 MSE standard deviation of the mean 99.7% of data in a normal distribution is within 3 standard deviation of the mean Upper and lower control limits are often determine via 02 MSE or0 3 MSE
Cost Accuracy
Historical data Computers Time needed to gather and analyze the data Forecast horizon
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