Course Title: Production Planning & Control (TXE-409)

Chapter-05: Forecasting

Forecasting
Forecasting means projecting or estimating some future events or conditions under a proposed
marketing plan or program of an organization. Forecasts are predictions about the future. It is a
statement about the future value of a variable such as demand, sale, etc.

Forecasting Time Horizons

 Short-range forecasting
 Up to 1 year, generally less than 3 months
 Purchasing, job assignments, job sequencing, job scheduling
 Medium-range forecasting
 3 months to 3 years
 Sales and production planning, budgeting
 Long-range forecasting
 More than 3 years
 New product planning, facility location, facility layout

Elements of a Good Forecast

1. The forecast should be timely.
2. The forecast should be accurate and the degree of accuracy should be stated.
3. The forecast should be reliable; it should work consistently.
4. The forecast should be expressed in meaningful units.
5. The forecast should be in writing.
6. The forecasting technique should be simple to understand and use.

Steps in the Forecasting Process

1. Determine the purpose of the forecast.

2. Select the period (time horizon) of forecast.

3. Select a forecasting technique.

4. Data collection.

5. Prepare the forecast use an appropriate technique.

6. Monitor and evaluate the forecast.

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

Forecasting Approaches
 Quantitative methods
 Used when situation is stable and historical data exist
 For example, existing products, current technology
 Involves mathematical techniques
 e.g., forecasting sales of color televisions

 Qualitative Methods
 Used when situation is vague and little data exist
 For example, new products, new technology
 Involves intuition, experience
 e.g., forecasting sales on Internet.

Forecasts Based on Time Series Data

A time series is a time-ordered sequence of observations taken at regular intervals over a period
of time (e.g., hourly, daily, weekly, monthly, quarterly, annually). One or more patterns might
appear: trends, seasonal variations, cycles, a random or irregular variations. These behaviors can
be described as follows:

1. Trend refers to a long-term upward or downward movement in the data. Population growth,
changing incomes, market shares and cultural changes often account for such movements.

2. Seasonality refers to short-term, fairly regular variations generally related to factors such as
the calendar or time of day. Restaurants, supermarkets, and theaters experience weekly and even
daily “seasonal” variations.

3. Cycles are wavelike variations of more than one year’s duration. These are often related to a
variety of economic, political, and even agricultural conditions.

4. Irregular variations/Random variations are due to unusual circumstances such as weather

conditions, strikes or a major change in a product or service. They do not reflect typical behavior,
and inclusion in the series can distort the overall picture. Whenever possible, these should be
identified and removed from the data.

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

NAIVE METHODS
A simple, but widely used approach to forecasting is the naive approach. A naive forecast uses a
single previous value of a time series as the basis of a forecast. The naive approach can be used
with a stable series, with seasonal variations, or with trend.

With a stable series, the last data point becomes the forecast for the next period. Thus, if demand
for a product last week was 20 cases, the forecast for this week is 20 cases.

With seasonal variations, the forecast for this “season” is equal to the value of the series last
“season.” For example, the forecast of the number of checks cashed at a bank on the first day of
the month next month is equal to the number of checks cashed on the first day of this month.

For data with trend, the forecast is equal to the last value of the series plus or minus the
difference between the last two values of the series. For example, suppose the last two values
were 50 and 53:

Period Actual Change from Previous Value Forecast

t -2 50
t-1 53 +3
t (next) 53+3=56

Consider the advantages:

o It has virtually no cost.

o It is quick and easy to prepare.
o It is easily understandable.
o It provides highly accurate forecasts.
o Cost effective and efficient.

Disadvantages:
o Inability to provide highly accurate forecast.

TECNIQUES FOR AVERAGING

Three techniques for averaging are described in this section:

1. Moving average
2. Weighted Moving Average
3. Exponential smoothing

1. Moving Average

A moving average forecast uses a number of the most recent actual data values in generating a
forecast. The moving average forecast can be computed using the following equation:

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

n
∑ At-1
i=1 A t-n + …. +At-2 + At-1
Ft = MAn = =
n n
Where
i = An index that corresponds to periods,
n = Number of periods (data points) in the moving average,
At-1= Actual value in period t-1,
MAn= n period moving average,
Ft = Forecast for time period t.

2. Weighted Moving Average

A weighted moving average is similar to a moving average, except that it assigns more weight to
the most recent values in a time series. It increases the smoothness of data. The weight must sum
to 1.00. More recent values in a series are given more weight in computing a forecast.

The formula for the weighted moving average

Ft = W1 At-1 + W2 At-2 +…..+ Wn At-n

Where
F = Forecast for time period t,
t
n = number of periods in the forecast.
w = the weight to be given to the actual occurrence for the period t-i
i
A = the actual occurrence for the period t-i
i

Choosing Weight: Experience or trial and error are the simplest ways to choose weights. As
a general rule, the most recent past is the most important indicator of what to expect in the
future, and, therefore, it should get higher weighting.

3. Exponential smoothing

Exponential smoothing is a sophisticated weighted averaging method that is still relatively easy
to use and understand. Each new forecast is based on the previous forecast plus a percentage of
the difference between that forecast and the actual value of the series at that point. That is:

Next forecast = Previous forecast + α (Actual - Previous forecast)

Where (Actual - Previous forecast) represents the forecast error and α is the percentage of error
or smoothing constant.

Ft = Ft-1 + α (At-1 – Ft-1)

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

Where
Ft = Forecast for period t
Ft-1 = Forecast for the previous period
α = Smoothing constant
At-1 =Actual demand or sales for the previous period
Exponential smoothing is one of the most widely used techniques in forecasting, partly because
of its ease of calculation, and partly because of the ease with which the weighting scheme can be
altered- simply by changing the value of α.

Evaluating the forecast accuracy:

There are many ways to measure forecast accuracy. Some of these measures are:
MAD (Mean Absolute Deviation), MAPE (Mean Absolute Percent Error) and MSE (Mean
Squared Error).

∑│Actualt - Forecastt│
MAD = n

∑ (Actualt – Forecastt )2
MSE =
n-1

∑│Actual t - Forecastt│
Actualt × 100
MAPE =
n

MAD = the average of the absolute errors

MAPE = the average of the Absolute Percentage Errors
MSE = the average of the squared errors

Techniques for trend

A linear trend equation has the form
Ft = a + bt

Where
t = Specified number of time periods from t = 0
Ft = Forecast for period t
a = Value of Ft at t = 0
b = Slope of the line

n ∑ty - ∑t ∑y ∑y – b ∑t
b= a=
2 2
n ∑t – (∑t) n

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

Where
n= number of periods
y= Value of the time series
y

Ft = a + bt

∆y ∆y
b=---------
∆t ∆t

0 t
For example, consider the trend equation Ft = 45 + 5t. The value of Ft , when t=0 is 45 and the slope
of the line is 5, which means that, on the average, the value of Ft will increase by five units for each time
period . If t = 10, the forecast, Ft, is 45 + 5(10) = 95 units. T he equation can be plotted by finding two
points on the line. One can be found by substituting some value of t into the equation (e.g., t =10) and
then solving for Ft. The other point is a (i.e., Ft at t = 0). Plotting those two points and drawing a line
through them yields a graph of the linear trend line.

The coefficient of the line, a and b, can be computed from historical data using the above two equation.

Mathematics
1. Compute a three-period moving average forecast given demand for shopping carts. Find
the forecast for period 6.

Period Demand
1 42
2 40
3 43
4 40
5 41

2. Given the following data:

Number of
Period Complaints
1 60
2 65
3 55
4 58
5 64

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

Prepare a forecast using each of these approaches:

a. The appropriate naive approach.
b. A three-period moving average.
c. A weighted moving average using weights of 0.50, .30, and .20.
d. Exponential smoothing with a smoothing constant of .40.

3. Develop a line trend equation for the following data. Then use the equation to predict the
next two values of the series.

Period Demand
1 44
2 52
3 50
4 54
5 55
6 55
7 60
8 56
9 62

th
4. Forecast the sales for the 13, 14, 15 and 16 quarters for the data given using trend
equation.
t Y
1 600
2 550
3 500
4 520
5 400
6 100
7 600
8 900
9 800
10 500
11 400
12 450

5. Data regarding the sales of a particular item in the 12 time periods is given below.
Determine the forecasts using Naïve method and also compute the errors MAD, MAPE,
and MSE to check the forecasting accuracy for the last six periods.

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

Period Actual
demand
1 28
2 27
3 33
4 25
5 34
6 33
7 35
8 30
9 33
10 35
11 27
12 29

6. Data regarding the sales of a particular item in the 12 time periods is given below.
Determine the forecasts using 3 period moving average method and also compute the
errors MAD, MAPE, and MSE to check the forecasting accuracy.

Period Actual
demand
1 28
2 27
3 33
4 25
5 34
6 33
7 35
8 30
9 33
10 35
11 27
12 29

7. Given the following data:

Months Demand
January 12
February 11
March 15
April 12
May 16
June 15

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

Prepare a forecast using each of these approaches

a. Using a simple four months moving average, Find the July forecast.
b. Using a weighted moving average method with weights of 0.60, .30, and .10. Find the
July forecast.
c. Exponential smoothing with a smoothing constant of 0.30.
8. Historical data for a product is:
t y

1 65
2 55
3 75
4 60
5 80
6 75
7 63
8 72

Determine forecast using linear trend technique.

9. Historical data for a product are given below:

Week Forecast Actual

1 800 900
2 850 1000
3 950 1050
4 950 900
5 1000 900
6 975 1100

Compute MAD, MAPE, MSE

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering

 Course Title: Production Planning & Control (TXE-409)
Chapter-05: Forecasting

10. Compute MAD, MAPE, MSE for the following data

Period Actual Forecast

1 217 215
2 213 215
3 216 215
4 210 214
5 213 211
6 219 214
7 216 217
8 212 216

Prepared by: Mayesha Maliha, Lecturer, Department of Textile Engineering