Professional Documents
Culture Documents
Forecasting
Forecasting
What is Forecasting?
Quality Management
Strategic Decisions (some)
Design of Products Process Selection Capacity and
and Services and Design Facility Decisions
Forecasting
Example
Find the mean of the following data set:
56, 35, 45, 67, 12, 24, 48, 55, 58, 30
56+35+45+67+12+24+48+55+58+30/10=430/10
= 43
The Mean is 43
Median
■ 2,5,6,2,2,2,5,6,2
■ The mode=2
Outline
■ What is forecasting?
■ Types of forecasts
■ Time-Series forecasting
✔ Naïve
✔ Moving Average
✔ Exponential Smoothing
✔ Regression
■ Good forecasts
Why do we need to
forecast?
In general, forecasts are mostly wrong. So,
Throughout the day we forecast very different
things such as weather, traffic, stock market, state
of our company from different perspectives.
■ Long-range forecast
✔ > 2 years Design
■ New product planning of
system Qualitativ
e
Forecasting During the Life Cycle
Time
Qualitative Forecasting Methods
Qualitative
Forecasting
Models
Sales Delphi
Executive Market
Force Metho
Judgemen Research
Composit d
t /
e
Survey
Smoothing
Qualitative
Methods
Briefly, the qualitative methods are:
.
■ The Delphi method is a process used to arrive at
a group opinion or decision by surveying a panel of
experts. Experts respond to several rounds of
questionnaires, and the responses are aggregated
and shared with the group after each round.
■ For examples , social media surveys like especially
LinkedIn, Facebook, college groups; while
organising college fests cultural fests, university
fests, sponsor groups.
Quantitative Forecasting
Quantitative
Forecasting
Time Regression
Models
Series Models
2. 3. Exponential
1.
Average
Moving Smoothing
Naive
a) simple a) level
b) weighted b) trend
c) seasonality
1. Naive Approach
Y = 200 + 5X
What this formula is telling you is
that if there is no “x” then Y = 200.
So, historically, when it didn’t rain at
all, you made an average of 200
sales and you can expect to do the
same going forward assuming other
variables stay the same. And in the
past, for every additional inch of rain,
you made an average of five more
sales. “For every increment that x
goes up one, y goes up by five,”
■ Now let’s return to the error term. You might be
tempted to say that rain has a big impact on
sales if for every inch you get five more sales,
but whether this variable is worth your attention
will depend on the error term. A regression line
always has an error term because, in real life,
independent variables are never perfect
predictors of the dependent variables. Rather the
line is an estimate based on the available data.
So the error term tells you how certain you can
be about the formula. The larger it is, the less
certain the regression line.
Time Series Models
Random Trend
Seasonal Composite
Product Demand over Time
Demand for product or
service
Actual
service
Quantitative
Time
Series
Model
s
Models
2. 3. Exponential
1.
Average
Moving Smoothin
Naive
a) simple a)glevel
b) weighted b) trend
c) seasonality
2a. Simple Moving Average
■ Weights
✔ decrease for older data Simple moving
✔ sum to 1.0 average models
weight all
previous
periods equally
2b. Weighted Moving Average: 3/6, 2/6, 1/6
Ft+1 = Ft + α(At -
Ft) e
t
Ft+1 = Forecast value for time t+1 Need
initial
At = Actual value at time t
forecast Ft
α = Smoothing constant to start.
3a. Exponential Smoothing – Example 1
Ft+1 = Ft + α(At -
Ft)
i A
i
Assume F1=D1
3a. Exponential Smoothing – Example 1
Ft+1 = Ft + α(At -
Ft)
i A
i
=
F
i
α
F2 = F1+ α(A1–F1)
=820+.1(820–820)
=820
3a. Exponential Smoothing – Example 1
Ft+1 = Ft + α(At -
Ft)
i A
i
=
F
i
α
F3 = F2+ α(A2–F2)
=820+.1(775–820)
=815.5
3a. Exponential Smoothing – Example 1
Ft+1 = Ft + α(At -
Ft)
i A
i
=
F
i
α
This process
continues
through week
10
3a. Exponential Smoothing – Example 2
Ft+1 = Ft + α(At -
Ft)
i A
i
=
F
i
α α=
What if the
α constant
equals 0.6
3a. Exponential Smoothing – Example 2
Ft+1 = Ft + α(At -
Ft)
i A
i
=
F
i
α α=
What if the
α constant
equals 0.6
3a. Exponential Smoothing – Example 3
What if the
α constant
equals 0.5
3a. Exponential Smoothing
■ How to choose α
✔ depends on the emphasis you want to place
on the most recent data
Weights
α= Prior Period 2 periods ago 3 periods ago
α α(1 - α) α(1 - α)2
α= 0.10
10% 9 8.1
% %
α= 0.90 90% 9 0.9
% %
To Use a Forecasting Method
♦♦HasError
a small error
= Demand - Forecast
Measures of Forecast Error
e
t
■ TS = Tracking Signal
✔ Good tracking signal has low values
MAD
30
Exponential Smoothing (continued)
y=a+bx
where,
Regression Method – Example
y = a+ b
X
General Guiding Principles for
Forecasting