LE / SU4

Forecasting

Copyright Oxford University Press 2013

 Learning outcomes
 Outline forecasting by defining the term (5.1);
 Identify the features that are common to all forecasts
(5.5);
 Explain the time horizons for doing forecasts (5.6);
 State the requirements of an accurate forecast (5.7);

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 Learning outcomes (cont.)
 Discuss the forecasting steps (5.8) &
 State the reasons for ineffective forecasts (5.10)&
 Discuss the approaches to forecasting (5.11) by:
 distinguishing between the two main types of forecasts
(qualitative and quantitative techniques),
 describing and applying the three averaging techniques and
 Identifying associative forecasting techniques and applying
the simple linear regression method.

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 5.1 Introduction
Forecasting =

 Preface to planning
 Attempt to predict future
value of a changing
variable
 Subjective or objective

 Addresses:
- Macro-circumstance
- Competitiveness
- Market tendencies
- Sourcing funds required.

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5.5 Features common to all forecasts
 Assumptions that past
trends will be present in
future
 No precise prediction can
be made
 Group items more
accurate
 Longer time horizon is
less reliable.

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5.6 Time horizons for doing forecasts

• Short-range (few weeks-12

months)
• Medium-range (12 months
– 5 years)
• Long-range (5 years + )

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5.7 Requirements of an accurate forecast

 Use simple technique

 Accuracy
 Cost effectiveness
 Meaningful units
 Timely
 Reliable
 Should be in writing.

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 5.8 Forecasting steps

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5.10 Reasons for ineffective forecasts

 Failure to select applicable

model
 Inability to recognize that
forecasting must form an
integral part of the business
 Neglecting to monitor the
accuracy of the forecast
 Failure to involve all of the
relevant people
 Inability to realize that the
forecast will be wrong
 Forecasting of incorrect
items is not helpful.
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 5.11 Approaches to forecasting
- Quantitative- calculations
and statistical historical data
are used to project into the
future
- Qualitative- based on
judgement of parties
involved in the forecast

- Causal- try and explain

reasons for changes in
patterns

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5.11 Approaches to forecasting (cont.)

Categories of forecasting
techniques:
 Associative methods
 Judgmental forecasts
 Time series forecasts

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5.11 Approaches to forecasting (cont.)

Qualitative approach:
- Relied upon when hard data
not available
- Used when forecast
required in a hurry
Approaches:
o Consumer surveys
o Jury of executive opinion
o Sales-force opinion
o Delphi method
o Educated guess
o Historical analogy
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5.11 Approaches to forecasting (cont.)

Quantitative approach:
-Time series data
-Trends
-Seasonality
-Cycles
-Irregular variations
-Random variations

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5.11 Approaches to forecasting (cont.)
Quantitative techniques
= Averaging techniques:
• Simple moving average
• Weighted moving average
• Exponential smoothing

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5.11 Approaches to forecasting (cont.)
Quantitative techniques
= Averaging techniques:
• Simple moving average

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 5.11 Approaches to forecasting (cont.)
Simple moving average

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5.11 Approaches to forecasting (cont.)
Quantitative techniques
= Averaging techniques:
• Weighted moving average

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5.11 Approaches to forecasting (cont.)
Quantitative techniques
= Averaging techniques:
• Weighted moving average

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5.11 Approaches to forecasting (cont.)
Quantitative techniques
= Averaging techniques:
• Exponential smoothing

= 198 + 0.2(210 – 198)

= 200.4
= 200 items
= 200 + 0.2(190 – 200)
= 198 items
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5.11 Approaches to forecasting (cont.)
Associative forecasting
techniques
- The simple linear regression
method

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5.11 Approaches to forecasting (cont.)
Associative forecasting
techniques
- The simple linear regression
method

Copyright Oxford University Press 2013

5.11 Approaches to forecasting (cont.)
Associative forecasting
techniques
- The simple linear regression
method

Copyright Oxford University Press 2013