Chapter 13

Forecasting
• Demand Management

• Qualitative Forecasting Methods

• Simple & Weighted Moving Average

Forecasts

• Exponential Smoothing

• Simple Linear Regression

2
 Demand Management
Independent
Demand
A Dependent
Demand

B(4) C(2)

D(2) E(1) D(3) F(2)

3
 Independent Demand
• Take an active role to influence demand
- Give pressure, incentive to customer and
workmen, price cut, etc
• Take a passive role and simply respond to
demand
- If a firm is running in full capacity, market
may be fixed in size

4
 Types of Forecasts
• Qualitative (Judgmental)

• Quantitative (Time Series Analysis)

5
 Components of Demand
What’s going on
here?

x
x x
x x
x x
x x
x x x
Sale

xx x x
x xx x x
x
x
x x x x x x
s

x x x x x x
x x x
x xxxxx
x
x x

1 2 3 4
Year 6
 A Trend is Worth Noting
• Start by identifying the trend

• What is the trend in the sales of personal

computers?

• Are there any seasonal effects, cyclical

factors or other predicted events that
might affect the sales of personal
computers?
7
 Qualitative Methods
• Grass Roots
- Customer or end user of product knows best
its demand
• Market Research
- Market survey and interviews of the
consumers
• Panel Consensus
- Panel of people from a verity of position
from management to workmen, open meeting
8
 Qualitative Methods
• Executive Judgment
- higher level strategic decision to introduce
new product line, new marketing area
• Historical Analogy
- Analysis of contemporary products
- CD and CD Player, Stereo VCR and Digital
video disk player
• Delphi Method

9
 Delphi Method
l. Choose the experts to participate. There should be
a variety of knowledgeable people in different
areas.

2. Through a questionnaire (or E-mail), obtain

forecasts (and any premises or qualifications for
the forecasts) from all participants.

3. Summarize the results and redistribute them to the

participants along with appropriate new questions. 10
 Delphi Method
4. Summarize again, refining forecasts and
conditions, and again develop new questions.

5. Repeat Step 4 if necessary. Distribute the final

results to all participants.

11
 Judgmental Forecasting
Applications
Small and Large Firms

Low High
Sales Sales
Technique < >
$100M $500M
Manager’s opinion 40.7% 39.6%
Jury of executive opinion 40.7% 41.6%
Sales force composite 29.6% 35.4%
Number of Firms 27 48

Source: Nada Sanders and Karl Mandrodt (1994) “Practitioners Continue to Rely on Judgmental Forecasting
Methods Instead of Quantitative Methods,” Interfaces, vol. 24, no. 2, pp. 92-100.

12
 Quantitative Forecasting
Applications
Small and Large Firms
Low Hig
Sales Sales
h
Technique < $100M > $500M
Moving 29.6% 29.2%
Straight
average line 14.8% 14.6%
Naive
projection 18.5% 14.6%
Exponential 14.8% 20.8%
Regressio
smoothing 22.2% 27.1%
Simulation
n 3.7% 10.4%
Classical 3.7% 8.3%
Box-
decomposition 3.7% 6.3%
Jenkins of Firms
Number 2 4
7 8
Source: Nada Sanders and Karl Mandrodt (1994) “Practitioners Continue to Rely on Judgmental Forecasting
Methods Instead of Quantitative Methods,” Interfaces, vol. 24, no. 2, pp. 92-100.

13
Simple Moving Average

• Let’s develop 3-week

and 6-week moving
average forecasts for
demand.
• Assume you only have 3
weeks and 6 weeks of
actual demand data for
the respective forecasts 15
16
17
In-Class Exercise
• Develop 3-week
and 5-week moving
average forecasts
for demand.
• Assume you only
have 3 weeks and
5 weeks of actual
demand data for
the respective
forecasts 18
In-Class Exercise (Solution)

19
Weighted Moving Average

Determine the 3-period

weighted moving average
forecast for period 4.
Weights:
t-1 .5
t-2 .3
t-3 .2
20
Solution

21
In-Class Exercise
Determine the 3-period
weighted moving average
forecast for period 5.

Weights:
t-1 .7
t-2 .2
t-3 .1

22
Solution

23
 Exponential Smoothing

Ft = Ft-1 + α(At-1 - Ft-1)

• Premise--The most recent observations

might have the highest predictive value.
• Therefore, we should give more weight to
the more recent time periods when
forecasting

24
Exponential Smoothing
Example
• Determine
exponential
smoothing
forecasts for
periods 2-10 using
α=.10 and α=.60.

• Let F1=D1

25
26
Effect of α on Forecast

27
In-Class Exercise

Determine exponential
smoothing forecasts for
periods 2-5 using α =.50

Let F1=D1

28
In-Class Exercise (Solution)

29
 Forecast Errors

• Study the formula for a moment

• Now, what does MAD tell you?

30
 Example--MAD
Mont Sale Forecas
h 1 s 22 t n/a
2 0
25 25
3 0
21 5
20
4 0
30 5
32
5 0
32 0
31
5 5
Determine the MAD for the four forecast
periods
31
 Solution
Mont Sales Forecast Abs Error
h 1 22 n/a
2 0
25 25 5
3 0
21 5
20 5
4 0
30 5
32 2
5 0
32 0
31 10
5 5 0
4
0

32
 Simple Linear Regression
Model
Yt = a + bx Y

0 1 2 3 4 5 x (weeks)

• b is similar to the slope. However,

since it is calculated with the variability
of the data in mind, its formulation is
not as straight-forward as our usual
notion of slope 35
Calculating a and b

36
Regression Equation Example

Develop a regression equation to predict sales

based on these five points.
37
38
 y = 143.5 + 6.3t
180
175
170
165
160 Sales
Sales

155 Forecast
150
145
140
135
1 2 3 4 5

Period
39