BUS309

Handout # 4:

Forecasting

CLO # 4: Discuss and employ qualitative and quantitative forecasting

approaches and measure the forecast accuracy.

https://lms.ectmoodle.ae
Chapter Outline

 Definition of Forecasting
 Strategic Role of Forecasting in Supply Chain
Management
 Components of Forecasting Demand
 Time Series Methods
 Forecast Accuracy
 Regression Methods
Definition of Forecasting
 Forecast: Prediction of what will occur in the Future.

 Forecasting : is an uncertain process.

 It is not possible to predict consistently what the

future will be.

 Management hopes to forecast demand with as much

accuracy as possible, which is becoming increasingly
difficult to do.
Definition of Forecasting
Companies sometimes use:

 Qualitative forecast methods based on judgment,

opinion, past experience to make forecasts
(subjective).

 Quantitative forecast methods are also available to

aid management in making planning decisions
(based on mathematical formulas).
Forecasting and Supply Chain
Management
 Accurate forecasting determines how much inventory a
company must keep at various points along its supply
chain

 In Continuous replenishment, the supplier and customer

share continuously updated data

 Forecasting customer demand is a key to providing good

quality service.
◦ quick response
◦ JIT (just-in-time)
◦ stockless inventory
Forecasting and Supply Chain
Management
 Successful strategic planning requires accurate
forecasts of future products and markets.
 The type of forecasting method depends on:
- Time frame: indicate how far into the future is
forecast.
- Demand behavior: demand sometimes behaves in a
random, irregular way (behavior are trends, cycles and
seasonal patterns).
- Causes of behavior: the type of forecasting method
that can or should be used. Three basic types of
forecasting:
Forecasting Methods
 Qualitative
◦ use management judgment, expertise, and opinion
to predict future demand
 Time series
◦ statistical techniques that use historical demand
data to predict future demand
 Regression methods
◦ attempt to develop a mathematical relationship
between demand and factors that cause its behavior
Qualitative Methods

 Management, marketing, purchasing, and

engineering are sources for internal qualitative
forecasts

 Delphi method
◦ involves soliciting forecasts about technological
advances from experts
Time Series
 Assume that what has occurred in the past will
continue to occur in the future
 Relate the forecast to only one factor - time
 Include
◦ moving average

◦ exponential smoothing

◦ linear trend line

Moving Average
 Naive forecast
◦ demand the current period is used as next period’s
forecast
 Simple moving average
◦ stable demand with no pronounced behavioral
patterns
 Weighted moving average
◦ weights are assigned to most recent data
Moving Average: Naïve Approach

ORDERS
MONTH PER MONTH FORECAST

Jan 120 -
Feb 90 120
Mar 100 90
Apr 75 100
May 110 75
June 50 110
July 75 50
Aug 130 75
Sept 110 130
Oct 90 110
Nov - 90
Simple Moving Average

n

i=1
Di
MAn =
n
where

n = number of
periods in the
moving average
Di = demand in period
i
3-month Simple Moving Average

3
ORDERS MOVING
AVERAGE
 Di
i=1
MONTH PER MONTH MA3 =
Jan 120 – 3
–
Feb 90 – 90 + 110 + 130
103.3 = 3
Mar 100 88.3
95.0
Apr 75 78.3 = 110 orders
78.3 for Nov
May 110 85.0
105.0
June 50 110.0

July 75
Weighted Moving Average

 Adjusts WMAn = i= 1Wi Di

moving
where
average
method to Wi = the weight for period i,
between 0 and 100
more closely percent
reflect data
fluctuations  W = 1.00
i
Weighted Moving Average

Example

MONTH WEIGHT DATA

August 17% 130
September 33% 110
October 50% 90
3
November Forecast WMA3 =  Wi Di
i=1

= (0.50)(90) + (0.33)(110) + (0.17)(130)

= 103.4 orders
Exponential Smoothing

 Averaging method
 Weights most recent data more strongly
 Reacts more to recent changes
 Widely used, accurate method
Exponential Smoothing

Ft +1 = Dt + (1 - )Ft
where:
Ft +1 = forecast for next period
Dt = actual demand for present period
Ft = previously determined forecast for present
period
=weighting factor, smoothing constant
Effect of Smoothing Constant
Ft +1 = Dt + (1 - )Ft

0.0  1.0

If = 0.20, then Ft +1 = 0.20Dt + 0.80 Ft

If = 0, then Ft +1 = 0Dt + 1 Ft = Ft

Forecast does not reflect recent data

If = 1, then Ft +1 = 1Dt + 0 Ft =Dt

Forecast based only on most recent data
Exponential Smoothing (α=0.30)

PERIOD MONTH
F2 = D1 + (1 - )F1
DEMAND
= (0.30)(37) + (0.70)(37)
1 Jan 37
= 37
2 Feb 40
F3 = D2 + (1 - )F2
3 Mar 41 = (0.30)(40) + (0.70)(37)
= 37.9
4 Apr 37
F13 = D12 + (1 - )F12
5 May 45
= (0.30)(54) + (0.70)(50.84)
6 Jun 50 = 51.79

7 Jul 43
Exponential Smoothing
FORECAST, Ft + 1
PERIOD MONTH DEMAND ( = 0.3) ( = 0.5)
1 Jan 37 – –
2 Feb 40 37.00 37.00
3 Mar 41 37.90 38.50
4 Apr 37 38.83 39.75
5 May 45 38.28 38.37
6 Jun 50 40.29 41.68
7 Jul 43 43.20 45.84
8 Aug 47 43.14 44.42
9 Sep 56 44.30 45.71
10 Oct 52 47.81 50.85
11 Nov 55 49.06 51.42
12 Dec 54 50.84 53.21
13 Jan – 51.79 53.61
Forecast Accuracy
 Forecast error
◦ difference between forecast and actual demand
◦ MAD
 mean absolute deviation

◦ MAPD
 mean absolute percent deviation

◦ Cumulative error
◦ Average error or bias
Mean Absolute Deviation (MAD)

S Dt - Ft 
MAD = n
where
t = period number
Dt = demand in period t
Ft = forecast for period t
n = total number of periods
 = absolute value
MAD Example
PERIOD DEMAND, Dt Ft ( =0.3) (Dt - Ft) |Dt - Ft|
1 37 37.00 – –
2 40 37.00 3.00 3.00
3 41 37.90 3.10 3.10
4 37 38.83 -1.83 1.83
5 45 38.28 6.72 6.72
6 50 40.29 9.69 9.69
7 43 43.20 -0.20 0.20
8 47 43.14 3.86 3.86
9 56 44.30 11.70 11.70
10 52 47.81 4.19 4.19
11 55 49.06 5.94 5.94
12 54 50.84 3.15 3.15
557 49.31 53.39
MAD Example

S Dt - Ft 
MAD = n

= 53.39
11
= 4.85
Other Accuracy Measures

Mean absolute percent deviation (MAPD)

|Dt - Ft|
MAPD =
Dt
Cumulative error
E = et
Average error
et
E=
n
Comparison of Forecasts

FORECAST MAD MAPD E (E)

Exponential smoothing (= 0.30) 4.85 9.6% 49.31 4.48
Exponential smoothing (= 0.50) 4.04 8.5% 33.21 3.02
Adjusted exponential smoothing 3.81 7.5% 21.14 1.92
(= 0.50, = 0.30)