Forecasting

Dr. Chinmaya Kumar Sahoo

Department of Mechanical Engineering
NIT Silchar

This class notes are only for academic propose and class room circulation
Thi s Photo by Unknown Author i s licensed under CC BY-SA-NC
Forecasting
• It indicate prediction of future event.
• The prediction is one of the first decision making activity used for
production system, material requirement planning, scheduling etc.
Types
• Technology forecast
• Economic forecast: Mostly done by Govt. agencies to predict the
economic activity.
• Demand forecast: Used to predict the expected level of demand for
goods or services
Sources of data
• Forecast is done based on the past data.

• Data could be obtained form the old records, survey journals, Govt.
publication, news paper etc.
Forecasting Models
• Qualitative technique: Where no data are available. E.g. Delphi
method, market survey

• Quantitative technique: It is based on the historical data.

Demand Pattern
• Forecasting is commonly based on the pattern of events in the past.
Few of the common demand pattern is given as follows:

• 1. Historical (Stationary pattern):

This type of pattern exists when means value of the data does not
change over time.
e.g. Product with stable sell, no of defective items.
 Time
Forecast variable
2. Seasonal Demand Pattern
• This demand pattern exists when series fluctuates according to some
seasonal factors. The season may be months, weeks, quarter etc.
e.g. sales of refrigerator, soft drinks, sales of wool etc.

Forecast variable

Time
3. Cyclical pattern:
• In this pattern, length of cycle is more than one year. The cycle does
not repeat at constant interval of time.
e.g. metals, gross national product.

Forecast variable

Time
• 4. Trend pattern
The pattern shows when there is increase or decrease of variable over
time.
e.g. sales of many products, stocks prices, business etc.

Forecast variable
Time
Forecasting Error
• Error = 𝑒𝑡 = 𝐷𝑡 − 𝐹𝑡
𝑒𝑡 = forecast error for time t
𝐷𝑡 = Demand for the period t
𝐹𝑡 =Forecast for period t
• Mean Absolute Deviation (MAD)

Mean Square Error (MSE)

• Mean Forecast Error (MFE)

• Mean Absolute Percentage Error (MAPE)

1 𝑛 𝐷𝑡 −𝐹𝑡
𝑀𝐴𝑃𝐸 = σ𝑖=1 × 100
𝑛 𝐷𝑡
Simple moving average method
• This method considers the most recent data in series are considered.

1
• 𝑀𝑡 = 𝐷𝑡−(𝑛−1) + 𝐷𝑡−(𝑛−2) + 𝐷𝑡−(𝑛−3) … … … . 𝐷𝑡
𝑛

n = number of period included in each average

• A paint shop has recorded the demand for a particular colour during
the past 6 weeks as shown below:
Sl No Weeks Demand 3 week Forecast
in litre moving
average
1 1 19
2 2 17
3 3 22 19.33
4 4 27 19.33
5 5 29
6 6 33
Weighted moving average
• Simple moving average gives equal importance o the past data.
However, in some cases recent data should be given more importance
compared to past data.

• In weighted moving average, different weights are assigned to

different months.

• Ft+1 =
• Calculate a weighted average forecast for the data using a weight of
0.6 for most recent data and weight of 0.3 and 0.1 for successive
older data.
• Calculate the forecast value for the 4th week

Sl No Weeks Demand 3 week

in litre moving
average
1 1 19
2 2 17
3 3 22
Simple Exponential Smoothing method
• 𝐹𝑡 = 𝐹𝑡−1 + 𝛼. 𝐷𝑡−1 − 𝐹𝑡−1
𝐹𝑡−1 = 𝐹𝑜𝑟𝑒𝑐𝑎𝑠𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑡𝑖𝑚𝑒 𝑡 − 1

𝐹𝑡 = forecast for the future period t

𝛼 = smoothing constant
It is one of the useful method considering the latest data.
Least amount of data require compare to the moving average method.
• Q. Using the exponential smoothing method of forecasting, the
forecast for the forth week if the actual and forecast demand for the
third week is 480 and 500 respectively and smoothing constant is 0.2.

• Solution:
F3= 500, D3= 480, 𝛼 = 0.2
F4= F3 + 𝛼 (D3- F3) =

= 496
Question
• A shopkeeper found that Demand and forecast value for the month of
November is 890 and 876 respectively. Find the forecast value for the
month of December.
Use the smoothing constant value as 0.2

Answer: 𝐹𝑡 = 𝐹𝑡−1 + 𝛼. 𝐷𝑡−1 − 𝐹𝑡−1

= 876 + 0.2 (890-876)
=
1. The following data has been collected for 10 consecutive years. Forecast the demand for the
following series by exponential smoothing method taking smoothing constant as 0.3

Year 1 2 3 4 5 6 7 8 9 10
Act. 10 12 8 11 9 10 15 14 16 15
demand
(Lakh)
Regression Analysis (Least Square method)
• Forecast demand could be represented by the equation
• 𝐹𝑡 = 𝑎 + 𝑏. 𝑡; Y = a + b. x

x = independent variable
y = dependent variable
a = intercept
b = slop (trend)
 σ 𝑥.𝑦 −𝑛.𝑥.
ഥ 𝑦ത
• 𝑎 = 𝑦ത − 𝑏. 𝑥ҧ , 𝑏 = σ 𝑥 2 −𝑛.𝑥ҧ 2
,
• A company found that annual profit depends on the expenditures for
research. Information for the least six years is given below. Estimate
the profit when expenditure on research is 6 units.
Year Expenditure for Research Annual Profit (y)
(x)
1 2 20
2 4 30
3 5 40
4 10 60
5 9 55
6 7 43
7 8 ?
Year Annual x.y 𝒙𝟐
Expendit Profit 37
ure for (y) 𝑥ҧ = = 6.16
6
Researc 248
h (x) 𝑦ത = = 41.3
6
ഥ𝑦
σ 𝑥.𝑦 −𝑛.𝑥. ത
1 2 20 40 4 𝑏=
σ 𝑥2 −𝑛.𝑥ҧ 2
= 4.808
2 4 30 120 16
3 5 40 200 25 𝑎 = 𝑦ത − 𝑏. 𝑥ҧ = 11.682

4 10 60 600 100
5 9 55 495 81
6 7 43 301 49 When expenditure is 6 unit
Total 37 248 1754 275 y = a + b.x = 11.68 + (4.808 x 6) = 40.52
Inventory Management
• Inventory management is under the material management.
• The inventory includes Raw material, semi finish materials, products,
packaging etc.
• The materials cost is approximately 60% of the production cost. So
proper management is required.
Type of inventory
• Raw material inventory

• Work process inventory

• Finished Good inventory

Cost associated with inventory
• Carrying Cost

• Ordering Cost

• Stock out cost or shortage cost

• Over stocking cost