Operations Management

GM - 4081

Forecasting

Dr. Abher RASHEED

Week 3
 Forecasting …
► What is forecasting?
▪ Predicting the future
► Why forecasting?
▪ Today’s decisions affect the future of the
company
► Examples
▪ forecast demand for products and services
▪ forecast availability of manpower
▪ forecast inventory and materiel needs daily
Forecasting horizons …
 Forecasting methods …
► Qualitative/subjective forecasting methods
▪ Measures individual or group opinion
► Quantitative/objective forecasting methods
▪ Time Series Models: use only past history.
►Easy to incorporate into computer models.
▪ Regression: Models to predict
 Qualitative forecasting methods …
► Jury of Executive Opinion
► Maybe there is a new product etc.
► The Delphi Method
▪ Individual opinions are compiled and reconsidered.
Repeat until and overall group consensus is (hopefully)
reached
► Sales Force Composites
▪ Aggregation of sales personnel estimates
► Customer Surveys
► To understand future trends, change in customer view
Quantitative forecasting methods …

► There are two basic models

▪ Time series models
► Trend projection
►Naive approach
► Moving averages
► Exponential smoothing

▪ Regression
 Time series models …
► Trend projection
▪ Cyclic trend
► Repeating up and down
► Affected by business cycle, political or economical factors
▪ Seasonal trend
► Regular pattern of up and down fluctuation
► Due to weather, customs etc
► Occur within a single year
▪ Random trend
► Erratic,
unsystematic fluctuation
► Due to unforeseen events
► Short duration and non-repeating
 Time series models …
► Naive approach
▪ Simplest approach
▪ We assume that the demand of the next period
will be equal to the demand of the most recent
period
▪ Cost effective and efficient
▪ Good starting point
 Time series models …
► Moving averages
▪ Historical actual data is used
▪ Used if little or no trend
▪ Used often for smoothing
▪ Arithmetic mean
▪ MA = Sum (demand in previous n period) / n
▪ Weighted moving averages are also used
sometimes
 Example …
Month Actual export Moving average
(Thousands)
June 10
July 12
August 13
September 16 (10+12+13)/3
October 19 (12+13+16)/3
Novembe 23 (13+16+19)/3
 Example …
Weighted Moving Average:
Month Actual export Weight
(Thousands)
June 10 1
July 12 2
August 13 3
September 16
October 19
Novembe 23
 Time series models …
► Problems with moving average
▪ Smoothes the forecast but makes it less
sensitive to changes
▪ Do not forecast trends well
▪ Requires extensive historical data
 Time series models …
► Exponential smoothing
▪ Form of weighted moving average
►Weights decline exponentially
►Most recent data is weighted the most

▪ Requires smoothing constant

►Ranges from 0 to 1
►Subjectively chosen
 Time series models …
► Exponential smoothing
▪ A type of weighted moving average

▪ Ft = Ft-1+ alfa (At-1 – Ft-1)

▪ Ft = new forecast
▪ Ft-1 = previous forecast
▪ At-1 = last period’s actual demand
▪ Alfa = smoothing constant (0<alfa<1)
 Example …
► Previous forecast = 142,000
► Previous actual demand = 153,000
► Smoothing constant = 0.2

<< Example >>

 Adaptive forecasting …
► Itis possible to use the computers to
monitor the forecast error continuously
► The value of smoothing constant can, then,
be adjusted to minimize the forecast error
► This technique is called adaptive smoothing
 Regression …
► Used when changes in one or more
independent variables can be used to
predict the changes in the dependent
variable

Y = aX + b
 Regression …
► Linear regression
▪ Let Y be the quantity to be forecasted and (X1,
X2, . . . , Xn) be n variables that have predictive
power for Y.
A causal model is Y = f (X1, X2, . . . , Xn).
“Y depends on X1, X2, . . . , Xn”
A typical relationship is a linear one. That is,
Y = a0 + a1X1 + . . . + an Xn.
Example …
 Focus forecasting …
► Developed at American Hardware Supply, focus
forecasting is based on two principles
▪ Sophisticated forecast models are not always better
than the simple ones
▪ There is no single technique that should be used for all
products and services
► The approach uses historical data to test multiple
forecasting models for individual items
► The forecasting model with the lowest error is
then used to forecast the next demand
Thank you