Forecasting

BYRON L. DESEMBRANA
FORECAST:
• A statement about the future

• Used to help managers

• Plan the system
• Plan the use of the system
• Plan the system
• Generally involves long-range plans related to:
Forecast Uses
• Types of products and services to offer
• Facility and equipment levels
• Facility location
• Plan the use of the system
• Generally involves short- and medium-range plans
related to:
• Inventory management
• Workforce levels
• Purchasing
• Budgeting
 Common Features
• Assumes causal system
past ==> future
• Forecasts rarely perfect because of
randomness
• Forecasts more accurate for
groups vs. individuals I see that you will
• Forecast accuracy decreases get an A this quarter.
as time horizon increases
Elements of a Good Forecast

Timely

Reliable Accurate

Written
Steps in the Forecasting Process

“The forecast”

Step 6 Monitor the forecast

Step 5 Make 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 (qualitative)
• Time series - uses historical data assuming the
future will be like the past (quantitative)
• Associative models - uses explanatory variables to
predict the future
Time Series Forecasts
(Quantitative)
• Trend - long-term movement in data
• Seasonality - short-term regular variations in data
• Irregular variations - caused by unusual
circumstances
• Random variations - caused by chance

• CYCLE- wave like variations lasting more than one

year
Forecast Variations
Figure 3-1

Irregular
variation

Trend

cycle
Cycles

90
89
88
Seasonal variations
Linear Trend Equation
Y

Y = a + bx
a
0 1 2 3 4 5 t
• b is the line slope.
Calculating a and b

n  xy -  x y
b =
n x2 - (  x)2

 y - b x
a =
n

Yes… Linear Regression!!

 X Y XY X²
Year Years Sales
2006 1 9 9 1
2007 2 12 24 4
2008 3 15 45 9
2009 4 18 72 16
2010 5 21 105 25
2011 6 22 132 36
2012 7 27 189 49
2013 8 29 232 64
2014 9 35 315 81
2015 10 37 370 100
2016 11 39 429 121
Total N=11 ∑X=66 ∑Y=264 ∑XY=1922 ∑X²=506
REQURED: What would be the estimated sales for 2017 using regression analysis?
Show supporting computations.
 FORMULA 1

∑Ү = Na + b∑X
∑XҮ = a∑X + b∑X²
ELIMINATING b
ELIMINATING a
(FORMULA 2)

n  xy -  x y
b =
n x2 - (  x)2

 y - b x
a =
n
Assignment
Forecast the demand for Month 10 using the three methods.

Month Demand
1 44
2 52
3 50
4 54
5 55
6 55
7 60
8 56
9 62
10 ?