Forecast

-Is a prediction and an estimate of the future value of a variable such as demand.

Two Important Aspects of Forecasts:

1) Expected level of demand.
2) The degree of accuracy that can be assigned
to a forecast, i.e., the potential size of forecast error.

Three Components of a Forecast:

1) Time period – in which the forecasted demand is planned to substantiate as customer
demand;
2) Product – that will be requested by the customer;
3) Geographical region – from where the customer demand will originate.

Elements of A Good Forecast:

1) timely.
2) accurate
3) reliable and consistently.
4) expressed in meaningful units.
5) be in writing.
6) simple to understand and use.
7) cost-effective.

Two General Approaches to Forecasting

1) Qualitative methods – consist mainly of subjective inputs, which often defy precise
numerical description. Often called a judgmental method.
2) Quantitative methods – on the other hand, are based on mathematical modelling.
Involve either the projection of historical data or the development of associative models that
attempt to utilize causal (explanatory) variables to make a forecast.

Qualitative Forecasting Techniques:

1) Executive judgement- A small group of upper-level managers (e.g., marketing,

operations, and finance) meet and collectively develop a forecast.
2) Salesforce opinions- Salesforce personnel are asked to give their sales projections
for their area or territory.
3) Market surveys- Uses surveys and interviews from consumers to solicit inputs and
identify customer preferences.
4) Delphi method- Seeks to develop a consensus forecast among a group of experts.

Two Main Approaches of Quantitative Forecasting

1. Time series- examine the pattern of past behavior of a single phenomenon over
time taking into account reasons for variation in the trend in order to use the analysis to
forecast the phenomenon’s future behavior.
 a) Naïve
b) Simple Mean
c) Simple Moving Average
d) Weighted Moving Average
e) Exponential Smoothing
f) Trend-adjusted Exponential Smoothing
g) Linear Trend Line
h) Seasonal Indexes

2. Causal modelling- is an approach which describes and evaluates the complex

cause–effect relationships between the key variables. Sometimes called associative models,
use a very different logic to generate a forecast.

a) Linear Regression
b) Multiple Regression

Five Basic Patterns of Demand In A Time Series Models

1) Trend – refers to a long-term upward or downward movement in the data.
2) Seasonality – refers to short-term, fairly regular variations generally related to factors
such as the calendar or time of day.
3) Cyclical – 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 – are due to unusual circumstances such as severe weather
conditions, strikes, or a major change in a product or service. Whenever possible, these
should be identified and removed from the data.
5) Random variations – are residual variations that remain after all other behaviors have
been accounted for.

Naïve method- is one of the simplest forecasting models. It assumes that the next period’s
forecast is equal to the current period’s actual.

Simple Mean- the mean (average) of a data set is found by adding all numbers in the data
set
and then dividing by the number of values in the set.

A Simple moving average method- used to estimate the average of a demand time series
by averaging the demand for the n most recent time periods. The average of a set of data. A
forecasting method in which only n of the most recent observations

A Weighted moving average method- is a time-series method in which each historical

demand in the average can have its own weight; the sum of the weights equals 1.0.

Exponential smoothing method- is a weighted moving average method that calculates the
average of a time series by implicitly giving recent demands more weight than earlier
demands.