Professional Documents
Culture Documents
Forecasting
Forecasting
Course
Structure
Introduction
Operations Strategy & Competitiveness
Quality Management
Strategic Decisions (some)
Design of Products
and Services
Process Selection
and Design
Capacity and
Facility Decisions
Forecasting
Forecasting
Predict the next number in the pattern:
a) 3.7,
3.7,
3.7,
3.7,
3.7,
b) 2.5,
4.5,
6.5,
8.5,
10.5,
Forecasting
Predict the next number in the pattern:
a) 3.7,
3.7,
3.7,
3.7,
3.7, 3.7
b) 2.5,
4.5,
6.5,
8.5,
10.5, 12.5
9.0
c) 5.0, 7.5, 6.0, 4.5, 7.0, 9.5, 8.0, 6.5,
Outline
What is forecasting?
Types of forecasts
Time-Series forecasting
Nave
Moving Average
Exponential Smoothing
Regression
Good forecasts
What is Forecasting?
Process of predicting a future
event based on historical data
Educated Guessing
Underlying basis of
all business decisions
Production
Inventory
Personnel
Facilities
Importance of Forecasting in OM
Departments throughout the organization depend on
forecasts to formulate and execute their plans.
Finance needs forecasts to project cash flows and
capital requirements.
Human resources need forecasts to anticipate hiring
needs.
Production needs forecasts to plan production
levels, workforce, material requirements,
inventories, etc.
Importance of Forecasting in OM
Demand is not the only variable of interest to
forecasters.
Manufacturers also forecast worker
absenteeism, machine availability, material
costs, transportation and production lead
times, etc.
Besides demand, service providers are also
interested in forecasts of population, of other
demographic variables, of weather, etc.
Short-range forecast
Usually < 3 months
Job scheduling, worker assignments
Medium-range forecast
Detailed
use of
system
3 months to 2 years
Sales/production planning
Long-range forecast
> 2 years
New product planning
Design
of system
Qualitative
Methods
Qualitative models
- Executive judgment
- Market research
-Survey of sales force
-Delphi method
Sales
Growth
Maturity
Quantitative models
- Time series analysis
- Regression analysis
Time
Decline
Executive
Judgement
Sales
Force
Composite
Market
Research/
Survey
Smoothing
Models
Delphi
Method
Qualitative Methods
Briefly, the qualitative methods are:
Executive Judgment: Opinion of a group of high level
experts or managers is pooled
Sales Force Composite: Each regional salesperson
provides his/her sales estimates. Those forecasts are then
reviewed to make sure they are realistic. All regional
forecasts are then pooled at the district and national levels
to obtain an overall forecast.
Market Research/Survey: Solicits input from customers
pertaining to their future purchasing plans. It involves the
use of questionnaires, consumer panels and tests of new
products and services.
Qualitative Methods
Delphi Method: As opposed to regular panels where the individuals
involved are in direct communication, this method eliminates the
effects of group potential dominance of the most vocal members. The
group involves individuals from inside as well as outside the
organization.
Typically, the procedure consists of the following steps:
Each expert in the group makes his/her own forecasts in form of
statements
The coordinator collects all group statements and
summarizes them
The coordinator provides this summary and gives another set
of questions to each
group member including feedback as to the input of other
experts.
The above steps are repeated until a consensus is reached.
.
Time Series
Models
1. Naive
2. Moving
Average
a) simple
b) weighted
3. Exponential
Smoothing
a) level
b) trend
c) seasonality
Time Series
Models
1. Naive
2. Moving
Average
a) simple
b) weighted
3. Exponential
Smoothing
a) level
b) trend
c) seasonality
Random
Trend
Seasonal
Composite
Year
1
Year
2
Year
3
Year
4
Seasonal peaks
Random
variation
Year
1
Year
2
Actual
demand line
Year
3
Year
4
2. Moving
Average
a) simple
b) weighted
3. Exponential
Smoothing
a) level
b) trend
c) seasonality
1. Naive Approach
Month
1
2
3
4
5
6
Sales
(000)
4
6
5
?
?
?
Month
1
2
3
4
5
6
Sales
(000)
4
6
5
?
?
?
Moving Average
(n=3)
NA
NA
NA
(4+6+5)/3=5
Month
1
2
3
4
5
6
Sales
(000)
4
6
5
3?
?
?
Moving Average
(n=3)
NA
NA
NA
5
Month
1
2
3
4
5
6
Sales
(000)
4
6
5
3
?
?
Moving Average
(n=3)
NA
NA
NA
5
(6+5+3)/3=4.667
Month
1
2
3
4
5
6
Sales
(000)
4
6
5
3
?7
?
Moving Average
(n=3)
NA
NA
NA
5
4.667
Month
1
2
3
4
5
6
Sales
(000)
4
6
5
3
7
?
Moving Average
(n=3)
NA
NA
NA
5
4.667
(5+3+7)/3=5
FFtt11 == w
w11A
Att ++ w
w22A
Att-1-1 ++w
w33A
Att--22 ++...
...++w
wnnA
Att--nn11
Weights
decrease for older data
sum to 1.0
Simple
Simple moving
moving
average
average models
models
weight
weight all
all previous
previous
periods
periods equally
equally
Sales
(000)
4
6
5
?
?
?
Weighted
Moving
Average
NA
NA
NA
31/6 = 5.167
Sales
(000)
4
6
5
3
7
Weighted
Moving
Average
NA
NA
NA
31/6 = 5.167
25/6 = 4.167
32/6 = 5.333
FFt+1
=
F
+
(A
F
)
=
F
+
(A
F
t
t
t
t+1
t
t
t)
et
Ft+1
At
Need
Needinitial
initial
forecast
forecastFFt
= Smoothing constant
to
tostart.
start.
FFt+1
=
F
+
(A
F
)
=
F
+
(A
F
t
t
t
t+1
t
t
t)
i
Ai
Given
Given the
the weekly
weekly demand
demand
data
data what
what are
are the
the exponential
exponential
smoothing
smoothing forecasts
forecasts for
for
periods
periods 2-10
2-10 using
using =0.10?
=0.10?
Assume
Assume FF11=D
=D11
FFt+1
=
F
+
(A
F
)
=
F
+
(A
F
t
t
t
t+1
t
t
t)
i
Ai
Fi
FFt+1
=
F
+
(A
F
)
=
F
+
(A
F
t
t
t
t+1
t
t
t)
i
Ai
Fi
FFt+1
=
F
+
(A
F
)
=
F
+
(A
F
t
t
t
t+1
t
t
t)
i
Ai
Fi
This process
continues
through week
10
FFt+1
=
F
+
(A
F
)
=
F
+
(A
F
t
t
t
t+1
t
t
t)
i
Ai
Fi
What if the
constant
equals 0.6
FFt+1
=
F
+
(A
F
)
=
F
+
(A
F
t
t
t
t+1
t
t
t)
i
Ai
Fi
What if the
constant
equals 0.6
FFt+1
=
F
+
(A
F
)
=
F
+
(A
F
t
t
t
t+1
t
t
t)
i
Ai
Fi
What if the
constant
equals 0.5
Forecast Effects of
Smoothing Constant
or
w2
w3
Weights
=
= 0.10
= 0.90
Prior Period
(1 - )
(1 - )2
10%
9%
8.1%
90%
9%
0.9%
Exponential smoothing
Select
A Good Forecast
Has a small error
Error = Demand - Forecast
et
nn
MAD
MAD==
AA --FF
t=1
t=1
tt
tt
nn
nn
22
A
F
At t - Ft t
t=
t =11
MSE
=
MSE =
nn
nn
MAD Example
MAD
MAD==
AA --FF
t=1
t=1
tt
nn
What
What isis the
the MAD
MAD value
value given
given the
the
forecast
forecast values
values in
in the
the table
table below?
below?
At
Month
1
2
3
4
5
Ft
Sales Forecast
220
n/a
250
255
210
205
300
320
325
315
|At Ft|
5
5
20
10
= 40
tt
= 40 =10
4
nn
MSE/RMSE Example
22
A
F
At t - Ft t
t =t =11
MSE
=
MSE =
What
What isis the
the MSE
MSE value?
value?
nn
= 550 =137.5
4
RMSE = 137.5
=11.73
At
Month
1
2
3
4
5
Ft
Sales Forecast
220
n/a
250
255
210
205
300
320
325
315
25
25
400
100
= 550
Measures of Error
1. Mean Absolute Deviation
(MAD)
At
Ft
et
|et|
et2
Jan
120
100
20
20
400
Feb
90
106
-1
256
1
Mar
101
102
April
91
101
May
115
98
June
83
103
-16
-10
16
MAD
84
6
= 14
10
100
17
17
289
-20
20
400
-10
84
1,446
MSE
2
e
t
1
1,446
= 241
6
RMSE MSE
= SQRT(241)
=15.52
Forecast Bias
How can we tell if a forecast has a positive or
negative bias?
TS = Tracking Signal
Good tracking signal has low values
(actual
forecast t )
RSFE
TS =
= t
MAD Mean absolute
deviation
MAD
30
Time Series
Models
1. Naive
2. Moving
Average
a) simple
b) weighted
3. Exponential
Smoothing
a) level
b) trend
c) seasonality
Formulas
y
where,
x
xy n x y
b
x nx
2
x
y
a y bx
Regression Example
yy == aa++ bb X
X
xy n x y
b
x nx
2
a y bx