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A planning tool that helps
management in its attempt
to cope with uncertainties
Enables manager to
anticipate the future so they
can plan accordingly
2 Uses of Forecasting
Timely
Accurate
Reliable
Meaningful units
Writing
Simple to understand and use
Cost effective
Steps in Forecasting Process
Qualitative Quantitative
techniques techniques
Judgmental forecast
Time series forecast
Associative models
Variety of Forecasting
Techniques
a. Executive Opinion
- directors of various operational
function gather together to generate their
own predictions on prospective sales
estimates.
c. Consumer Survey
- this method removes any internal bias
within the company from the forecast results.
d. Delphi Method
- series of questionnaires submitted to
panel of industry experts.
Variety of Forecasting
Techniques
Time series Associative
forecast models
TAFt+1 = St +Tt
Techniques for seasonal variation
2 Modes of Seasonality:
Additive
Multiplicative
SeasonalRelative seasonal
percentages in the multiplicative
model.
1. Deseasonalize Data
2. Incorporate Seasonality
Centered Moving Average
50
40
Units Sold (y)
30
20
10
0
3 4 5 6 7 8 9 10
Level of Unemployment (x)
CORRELATION COEFFICIENT
REGRESSION EQUATION
y= 71.85 6.9x
CURVILINEAR AND MULTIPLE
REGRESSION OF ANALYSIS
e t = A t - Ft
MEASURES FOR SUMMARIZING
HISTORICAL ERRORS
Mean Absolute Deviation (MAD)-
the average absolute forecast
error.
MAD=
MEASURES FOR SUMMARIZING
HISTORICAL ERRORS
Mean Squared Error (MSE)- the
average of squared forecast
errors.
MSE=
MEASURES FOR SUMMARIZING
HISTORICAL ERRORS
MeanAbsolute Percent Error
(MAPE)- the average absolute
percent error
MAPE=
Example:
Compute the MAD, MSE, and MAPE for the ff. data,
showing actual and predicted number of accounts service.
PERIOD ACTUAL FORECAST (A-F) |ERROR| ERROR 2
(|ERROR\
ERRO ACTUAL) X
R 100
1 217 215 2 2 4 .92%
2 213 216 -3 3 9 1.41%
3 216 215 1 1 1 .46%
4 210 214 -4 4 16 1.9%
5 213 211 2 2 4 .94%
6 219 214 5 5 25 2.28%
7 216 217 -1 1 1 .46%
8 212 216 -4 4 16 1.89%
-2 22 76 10.96%
SOLUTION:
range of
error of zero
random
variability
Cost
Accuracy
Other factors
Reactive Approach
-it views forecasts as probable future demand ,
and a manager react to meet that demand.
Proactive Approach
- it seeks to actively influence demand. it requires
either an explanatory model or a subjective
assessment of the influence on demand.
Forecasting Amount of Data Pattern Forecast Preparation Personnel Background
Method Historical Data Horizon Time
Trend models 10-20; for Trend short to medium short moderate sophistication
seasonality at
least 5 per
season
Seasonal enough to see 2 Handles cyclical short to medium short to little sophistication
peaks and and seasonal moderate
troughs patterns