Forecasting

Modelling

Date : 08 June 2024

Time: 9:00 – 12:00 p.m. Using MS Excel
Prof : Rolando A. Austria
Contact Info: and POM-QM
E-mail:rolando.austria@pcu.edu.ph
Mobile#: +639209113581 V5.3
 Outline
◆ Introduction
◆ Forecasting
◆ Reasons why it is essential in OM
◆ Definition of Forecasting
◆ Forecasting Time Horizons
◆ Forecasting Methods
◆ Time Series Analysis
◆Naïve Approach
◆Moving Average Method
◆Trend Projection
◆ Demonstration using Excel and POM
 Learning Objectives
When you complete this module you
should be able to:
1.Understand the three time horizons
and which models apply for each use
2.Explain when to use each of the three
qualitative models
3.Apply the naive, moving average, and
trend methods
 Why Forecasting?
◆ Forecasting lays a ground for
reducing the risk in all decision
making because many of the
decisions need to be made under
uncertainty.
◆ In business applications, forecasting
serves as a starting point of major
decisions in finance, marketing,
productions, and purchasing.
 Decisions Requiring
Forecasting in O.M.
◆ Predicting demands of new and
existing products
◆ Predicting results of new product
research and development
◆ Projecting quality improvement
◆ Anticipating customer’s needs
◆ Predicting cost of materials
 Some Reasons Why
Forecasting is Essential in OM
◆ New Facility Planning – It can take 5 years
to design and build a new factory or design
and implement a new production process.
◆ Production Planning – Demand for products
vary from month to month and it can take
several months to change the capacities of
production processes.
◆ Workforce Scheduling – Demand for
services (and the necessary staffing) can
vary from hour to hour and employees
weekly work schedules must be developed
in advance.
 What is Forecasting?
◆ Process of predicting a future event
◆ Underlying basis
of all business decisions
◆Production
◆Inventory
◆Personnel
◆Facilities
 Forecasting Time Horizons
1. Short-range forecast
– Up to 1 year, generally less than 3 months
– Purchasing, job scheduling, workforce levels,
job assignments, production levels
2. Medium-range forecast
– 3 months to 3 years
– Sales and production planning, budgeting
3. Long-range forecast
– 3+ years
– New product planning, facility location, research and
development
 Forecasting Methods

◆ Qualitative Approaches
◆Executive opinions
◆Sales force surveys
◆Delphi method
◆Customer surveys
◆ Quantitative Approaches
◆Time series methods
◆Associative(causal) methods
 Forecasting Methods
◆ Qualitative Approaches
◆Used when situation is vague and
little data exist
◆New products
◆New technology
◆Involves intuition, experience
◆e.g., forecasting sales on Internet
 Qualitative Methods

◆ Educated guess intuitive hunches

◆ Executive committee consensus

◆ Delphi method
◆ Survey of sales force
◆ Survey of customers
◆ Historical analogy
◆ Market research scientifically conducted surveys
 Forecasting Methods
◆ Quantitative Approaches
◆Used when situation is ‘stable’ and
historical data exist
◆Existing products
◆Current technology
◆Involves mathematical techniques
◆e.g., forecasting sales of color
televisions
 Time Series Analysis

◆ A time series is a set of numbers where

the order or sequence of the numbers
is important, e.g., historical demand
◆ Analysis of the time series identifies
patterns
◆ Once the patterns are identified, they
can be used to develop a forecast
 Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential Time-
smoothing series
models
4. Trend projection
5. Linear regression Associative
model
 Time-Series Forecasting
◆ Set of evenly spaced numerical
data
◆ Obtained by observing response
variable at regular time periods
◆ Forecast based only on past
values, no other variables
important
◆ Assumes that factors influencing
past and present will continue
influence in future
 Naive Approach
• Assumes demand in next
period is the same as
demand in most recent period
– e.g., If January sales were 68, then
February sales will be 68
• Sometimes cost effective and
efficient
• Can be good starting point
 Moving Average Method
► MA is a series of arithmetic means
► Used if little or no trend
► Used often for smoothing
► Provides overall impression of data
over time

Moving average =
å demand in previous n periods
n
 Moving Average Example
MONTH ACTUAL SHOE SALES 3-MONTH MOVING AVERAGE
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3
August 30 (19 + 23 + 26)/3 = 22 2/3
September 28 (23 + 26 + 30)/3 = 26 1/3
October 18 (29 + 30 + 28)/3 = 28
November 16 (30 + 28 + 18)/3 = 25 1/3
December 14 (28 + 18 + 16)/3 = 20 2/3
 Potential Problems With
Moving Average

► Increasing n smooths the forecast

but makes it less sensitive to
changes
► Does not forecast trends well
► Requires extensive historical data
Common Measures of Error

Mean Absolute Deviation (MAD)

MAD =
å Actual - Forecast
n
Common Measures of Error

Mean Squared Error (MSE)

å (Forecast errors)
2

MSE =
n
 Common Measures of Error

Mean Absolute Percent Error (MAPE)

n

å100 Actual -Forecast

i i
/ Actuali
MAPE = i=1
n
 Trend Projections
Fitting a trend line to historical data points
to project into the medium to long-range
Linear trends can be found using the least
squares technique

y^ = a + bx
where y = computed value of the variable to be predicted
(dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
 Least Squares Method
Values of Dependent Variable (y-values)

Actual observation Deviation7

(y-value)

Deviation5 Deviation6

Deviation3
Least squares method minimizes the
sum of Deviation
the squared
4
errors (deviations)

Deviation1
(error) Deviation2
Trend line, y^ = a + bx

| | | | | | |
1 2 3 4 5 6 7
Time period
 Least Squares Method
Equations to calculate the regression variables

ŷ = a + bx

b=
å xy - nxy
å x - nx
2 2

a = y - bx
 Least Squares Example

ELECTRICAL ELECTRICAL
YEAR POWER DEMAND YEAR POWER DEMAND
1 74 5 105
2 79 6 142
3 80 7 122
4 90
 Least Squares Example
ELECTRICAL POWER
YEAR (x) DEMAND (y) x2 xy
1
1 74 74
4
2 79 158
9
3 80 240

4 90 16 360

5 105 25 525

6 142 36 852

7 122 49 854

Σx = 28 Σy = 692 Σx2 = 140 Σxy = 3,063

x=
å x 28
= =4 y=
å y 692
= = 98.86
n 7 n 7
 Least Squares Example

å xy - nxy 3,063 - ( 7) ( 4) (98.86) 295

b= = POWER = = 10.54
å x - nxDEMAND (y)140 - (7) ( 4 ) x 28
ELECTRICAL
2 2 2 2
YEAR (x) xy
1
1 74 74

2 79
()
a = y - bx = 98.86 -10.54 4 = 56.70
4
158
9
3 80Thus, ŷ = 56.70 +10.54x 240

4 90 16 360

5 105 25 525

6 Demand
142in year 8 = 56.70 + 36
10.54(8) 852
= 141.02, or 141 megawatts
7 122 49 854

Σx = 28 Σy = 692 Σx2 = 140 Σxy = 3,063

 Least Squares Example
Trend line,
160 – y^ = 56.70 + 10.54x
150 –
Power demand (megawatts)

140 –
130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
1 2 3 4 5 6 7 8 9
Year
 Least Squares
Requirements
1. We always plot the data to insure a
linear relationship
2. We do not predict time periods far
beyond the database
3. Deviations around the least
squares line are assumed to be
random
 Computer Software for
Forecasting
Examples of computer software with
forecasting capabilities
❖ Forecast Pro
Primarily for
❖ Autobox
forecasting
❖ SmartForecasts for Windows
❖ SAS
Have
❖ SPSS
Forecasting
❖ SAP modules
❖ POM Software Library
 Forecasting
Modelling

Date : 08 June 2024

Time: 9:00 – 12:00 p.m. Using MS Excel
Prof : Rolando A. Austria
Contact Info: and POM-QM
E-mail:rolando.austria@pcu.edu.ph
Mobile#: +639209113581 V5.3