Forecasting

AMMARA UMAR AWAN

COMPILED BY TANWEER ASCEM KHARRAL 1

 Food for Thought Forecasting

Overview
 How managers at Disney lands order for new equipment',
instruments & inventory?.

7-Steps of
Forecasting
 Historical data + Mathematics/Projection.

Qualitative
Approaches
 Forecasting is the art and science of predicting future
events.
Quantitativ
e
Approaches
 Apple tracks demand by the hour for each store and
adjusts production forecasts daily.
Time Series
Model

 Walmart collaborates with suppliers to make sure the right

item is available at the right time in the right place and at Measure
Forecast
the right price(CPFR) Error
COMPILED @ AMMARA UMAR AWAN 2
 Forecasting Steps Forecasting

Overview
 Determine the use of the forecast- for SCM,OPS,HR OR
Sales

 Select the items to be forecasted- forecast of daily 7-Steps of

Forecasting
attendance, specific SKUs.

 Determine the time horizon of the forecast- short

Qualitative
(Scheduling), medium(sales), long term(new product) Approaches

 Select the forecasting model(s)-moving averages,

regression analysis Quantitativ
e
Approaches
 Gather the data-Disney’s forecasting team employs 35
analysts and 70 field personnel to survey.
Time Series
Model
 Make the forecast.

 Validate and implement results. forecasts are reviewed Measure

Forecast
daily at the highest level Error
COMPILED @ AMMARA UMAR AWAN 3
 Forecasting Steps Forecasting

Overview

 Determine the time horizon of the forecast- short

(Scheduling), medium(sales), long term(new product)
7-Steps of
Forecasting

Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 4
 Forecasting Approaches Forecasting

Overview
Qualitative-
Used when situation is vague & little data exist-new
product/new tech.
7-Steps of
Forecasting

 Jury of executive opinion-Pool opinions of high-level

executives, sometimes augment by statistical models- Qualitative
(Bristol-Myers use 220 scients. For med. research)
Approaches

 Delphi method-decision makers(group of 5-10 experts), Quantitativ

staff personnel(data sorting), and respondents. e
Approaches

 Sales force composite-Estimates from individual

salespersons(distt. Region, national lvl) are reviewed for Time Series
Model
reasonableness, then aggregated.(PEL)

 Consumer Market Survey-Ask the customer, Measure

purchasing plans, likes/priorities. Forecast
Error
COMPILED @ AMMARA UMAR AWAN 5
 Forecasting Approaches Forecasting

Overview
Quantitative-
Used when situation is ‘stable’ & historical data
exist. Existing Product/Current Tech 7-Steps of
Forecasting

 Time-Series-predict on the assumption that the

future is a function of the past. Qualitative
Approaches

 Associative Models-incorporate the variables

or factors that might influence the quantity being Quantitativ
e
forecast. Budgets/prices Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 6
 Time Series Models Forecasting

A time series is based on a sequence of evenly spaced Overview

(weekly, monthly, quarterly, and soon) data points.

 Trend-gradual upward or downward movement of the

7-Steps of
data over time.(Changes in income, papulation, cultural views) Forecasting

 Seasonality-data pattern that repeats itself after a

period of days, weeks, months, or quarters. Qualitative
Approaches

 Cycles-patterns in the data that occur every several

years.(political events or by international turmoil) Quantitativ
e
Approaches
 Random variations-blips” in the data caused by chance
and unusual situations. they cannot be predicted.
Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 7
 Naïve Approach Forecasting

Assumes demand in next period is the same as demand in

Overview
most recent period.

(If May sales were 48, then June sales will be 48)
7-Steps of
Forecasting

Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

© 1995 Corel Corp.

Measure
Forecast
It is the most cost-effective and efficient objective forecasting Error
model COMPILED @ AMMARA UMAR AWAN 8
 Moving Average Method Forecasting

A moving-average forecast uses a number of historical Overview

actual data values to generate a forecast.
(useful when market demands will stay fairly steady over the time ..)

7-Steps of
A 4-month moving average is found by simply Forecasting

summing the demand during the past 4 months and

MA  
dividing by 4Demand in Previous n Periods
n Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
© 1995 Corel Corp. Forecast
Error
COMPILED @ AMMARA UMAR AWAN 9
 Moving Average Method Forecasting

A 3-month moving average is found by simply summing the

Overview
demand during the past 3 months and dividing by 3
.

Time Response Moving Moving 7-Steps of

Forecasting

Yi Total Average
(n=3) (n=3) Qualitative
Approaches
1998 4 NA NA
1999 6 NA NA Quantitative
Approaches
2000 5 NA NA
2001 3 4+6+5=15 15/3 = 5 Time Series

2002 7 Model

2003 NA
Measure
Forecast Error
COMPILED @ AMMARA UMAR AWAN 10
 Moving Average Method Forecasting

With each passing month, the most recent month’s data are
Overview
added to the sum of the previous 3 months’ data, and the
earliest month is dropped.

7-Steps of
Time Response Moving Moving Forecasting

Yi Total Average
(n=3) (n=3) Qualitative
Approaches

1998 4 NA NA
1999 6 NA NA Quantitative
Approaches

2000 5 NA NA
2001 3 4+6+5=15 15/3 = 5 Time Series
Model
2002 7 6+5+3=14 14/3=4 2/3
2003 NA Measure
Forecast Error
COMPILED @ AMMARA UMAR AWAN 11
 Moving Average Method Forecasting

This practice tends to smooth out short-term irregularities Overview

in the data series..

Time Response Moving Moving 7-Steps of

Forecasting

Yi Total Average
(n=3) (n=3) Qualitative
Approaches
1998 4 NA NA
1999 6 NA NA Quantitative

2000 5 NA NA Approaches

2001 3 4+6+5=15 15/3=5.0

Time Series
2002 7 6+5+3=14 14/3=4.7 Model

2003 NA 5+3+7=15 15/3=5.0

Measure
Forecast Error
COMPILED @ AMMARA UMAR AWAN 12
 Moving Average Method Forecasting

Basheeraa’n s Garden Supply wants a 3-month moving-

Overview
average forecast, including a forecast for next January, for
shed sales...

7-Steps of
Forecasting

Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 13
 Weighted Moving Average Forecasting

-Used when trend is present, Older data usually less Overview

important.

-Weights based on intuition, Often lay between 0 & 9 7-Steps of

Forecasting

Σ(Weight for period n) (Demand in period n)

WMA = Qualitative
ΣWeights Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 14
 Weighted Moving Average Forecasting

If the assigned weights were 0.50, 0.33, and 0.17 (instead of

Overview
3, 2, and 1),what is the forecast for January’s weighted moving
average?

7-Steps of
Forecasting

Qualitative
. Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Why? [Answer: There is no change. These are the same relative weights. Note that g weights = Forecast
1 now, so there is no need for a denominator. When the weights sum to 1, calculations tend to Error
be simpler. COMPILED @ AMMARA UMAR AWAN 15
 Weighted Moving Average Forecasting

Sales of hair dryers at the Walgreens stores in Youngs town, Overview

Ohio, over the past 4 months have been 100, 110, 120, and
130 units (with 130 being the most recent sales).
Develop a moving-average forecast for next month, using
7-Steps of
these three techniques: Forecasting
a) 3-month moving average.
b) 4-month moving average.
c) Weighted 4-month moving average with the most recent Qualitative
Approaches
month weighted 4.

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 16
 Exponential Smoothing Forecasting

-Another weighted-moving-average forecasting method. It Overview

involves very little record keeping of past data.

New forecast =
7-Steps of
Last period’s forecast + a (Last period’s actual demand − Last period’s forecast) Forecasting

-where a is a weight, or smoothing constant

Qualitative
Approaches
-value of ()greater than or equal to 0 and less than or equal
to 1.(0.5 to .50)
Quantitativ
e
Approaches

Ft = Ft-1 + (At-1 - Ft-1)

Time Series
Model

Ft = Forecast value
Measure
At = Actual value Forecast
 = Smoothing constant Error
COMPILED @ AMMARA UMAR AWAN 17
 Exponential Smoothing Forecasting

Ft = Ft-1 + (At-1 - Ft-1) Overview

Ft = Forecast value
At = Actual value 7-Steps of
 = Smoothing constant Forecasting

In January, a car dealer predicted February demand for 142

Ford Mustangs. Actual February demand was 153 autos. Qualitative
Approaches

Using a smoothing constant chosen by management of a = .20,

the dealer wants to forecast March demand using the Quantitativ
exponential smoothing model. e
Approaches

.
Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 18
 Exponential Smoothing Forecasting

Ft = Ft-1 + (At-1 - Ft-1)

Overview

Ft = Forecast value
At = Actual value
 = Smoothing constant 7-Steps of
Forecasting

In January, a car dealer predicted February demand for 142 Ford

Mustangs. Actual February demand was 153 autos. Using a smoothing
constant chosen by management of a = .20, the dealer wants to forecast Qualitative
March demand using the exponential smoothing model. Approaches

.
Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 19
 Exponential Smoothing Forecasting

Ft = Ft-1 + (At-1 - Ft-1)

Overview
Ft = Forecast value
At = Actual value
 = Smoothing constant

7-Steps of
In January, a car dealer predicted February demand for 142 Ford Mustangs. Actual Forecasting
February demand was 153 autos. Using a smoothing constant chosen by management of a
= .20, the dealer wants to forecast
March demand using the exponential smoothing model.

. Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ TANWEER ASCEM KHARRAL 20
 Exponential Smoothing Forecasting

Ft = Ft-1 + (At-1 - Ft-1) Overview

Ft = Forecast value
7-Steps of
At = Actual value/Actual demand Forecasting
 = Smoothing constant i-e 0.4

Qualitative
Approaches
.
Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 21
 Exponential Smoothing Forecasting

Ft = Ft-1 + (At-1 - Ft-1) Overview

Ft = Forecast value
7-Steps of
At = Actual value Forecasting
 = Smoothing constant

Qualitative
Approaches
.
Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 22
Effect of Exponential Smoothing Forecasting

Overview

7-Steps of
Forecasting

Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 23
 Mean Absolute Deviation-MAD Forecasting

• Deviation in Data
Overview
• MAD helps us to evaluate the accuracy of each
smoothing constant.

7-Steps of
Ft = At-1 - Ft-1 Forecasting

Forecast error = Actual demand - Forecast value

Qualitative
Approaches

. Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
=41
COMPILED @ AMMARA UMAR AWAN 24
Mean Absolute Deviation-MAD Forecasting

Overview

.
7-Steps of
Forecasting

Qualitative
Approaches

Quantitativ
e
Approaches
=41

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 25
Mean Absolute Deviation-MAD Forecasting

Overview

7-Steps of
Forecasting

Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 26
 Mean Squared Error-MSE Forecasting

MSE is the average of the squared differences between the

forecasted and observed values. Overview

Lower the MSE, better would be the Forecasting

7-Steps of
Forecasting

Qualitative
Approaches

Quantitative
Approaches

. Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 27
 Mean Absolute Percent Error-MAPE Forecasting

The average of the absolute difference between the forecasted

and actual values, expressed as a percentage of the actual
Overview
values.

If the forecast item is measured in

thousands, the MAD and MSE values can be very large. 7-Steps of
Forecasting

Qualitative
Approaches

.
Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 28
MAD,MSE & MAPE Forecasting

Overview

7-Steps of
. Forecasting

Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 29
 Exponential Smoothing with Trend Adjustment Forecasting

Forecast including trend (FITt)

= Exponentially smoothed forecast average (Ft) + Exponentially smoothed trend (Tt)
Overview

Two smoothing constants:

a for the average and b for the trend.
7-Steps of
Forecasting
Ft = a(Actual demand last period) + (1 - a)(Forecast last
period + Trend estimate last period)
or: Qualitative
Ft = a(At - 1) + (1 - a)(Ft - 1 + Tt - 1) Approaches

Quantitativ
Tt = b(Forecast this period - Forecast last period) + (1 - b) e
(Trend estimate last period) Approaches

or:
Tt = b(Ft - Ft - 1) + (1 - b)Tt – 1) Time Series
Model

FIT t = F t + T t
Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 30
 Exponential Smoothing with Trend Adjustment Forecasting

Ft = a(At - 1) + (1 - a)(Ft - 1 + Tt - 1) Tt = b(Ft - Ft - 1) + (1 - b)Tt – 1)

FIT t = F t + T t Overview

a = .2 and b = .4.
initial forecast average for month 1 ( F 1 ) was 11 units and 7-Steps of
Forecasting
the trend over that period ( T 1 ) was 2 units.

Qualitative
Step 1: Forecast average for month 2: Approaches
F2 = (.2)(12) + (1 - .2)(11 + 2)
= 2.4 + (.8)(13) = 2.4 + 10.4 = 12.8 units
Quantitativ
e
Approaches

Step 2: Compute the trend in period 2:

= .4(12.8 - 11) + (1 - .4)(2) Time Series
= (.4)(1.8) + (.6)(2) = .72 + 1.2 = 1.92 Model

Compute the ( FIT t ): Measure

= 12.8 + 1.92 Forecast
Error
COMPILED @ AMMARA UMAR AWAN = 14.72 unit 31
 Exponential Smoothing with Trend Adjustment Forecasting

Ft = a(At - 1) + (1 - a)(Ft - 1 + Tt - 1) Tt = b(Ft - Ft - 1) + (1 - b)Tt – 1)

FIT t = F t + T t Overview

7-Steps of
Forecasting
Step 1: Forecast average for month 3:
F3 = (.2)(17) + (1 - .2)(12.8 + 1.92)
= 3.4 + (.8)(14.72) = 3.4 + 11.78 = 15.18 Qualitative
Approaches

Quantitativ
e
Step 2: Compute the trend in period 2: Approaches
= (.4)(15.18 - 12.8) + (1 - .4)(1.92)
= (.4)(2.38) + (.6)(1.92) = .952 + 1.152 = 2.10
Time Series
Model

Measure
Compute the ( FIT t ): Forecast
Error
= 15.18 + 2.10 = 17.28.
COMPILED @ AMMARA UMAR AWAN 32
Exponential Smoothing with Trend Adjustment Forecasting

Overview

7-Steps of
Forecasting

Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 33
 Trend Projections Forecasting

This technique fits a trend line to a series of historical Overview

data points and then projects the slope of the line into the
future for medium- to long-range forecasts.
7-Steps of
Forecasting

Qualitative
Approaches

Quantitativ
e
Approaches

Time Series
Model

Measure
Forecast
Error
.
COMPILED @ AMMARA UMAR AWAN 34
 Trend Projections Forecasting

This technique fits a trend line to a series of Overview

historical
Years(x) Sales(y) X=(x-2003 x2 XY Trend
values( Yt
7-Steps of
Forecasting

Qualitative
Approaches

Quantitativ
N-7 ∑Y=316 X=0 ∑X= ∑XY=29 ∑Tt=316 e
28 Approaches

Y = a+bX;
Y = 45.143 + 1.036 (x-2003) Time Series
Model

When X = 2000 , Yt = 45.143 + 1.036(2000–2003) = 42.035

When X = 2001, Yt = 45.143 + 1.036(2001–2003) = 43.071, Measure
Forecast
Error
.
COMPILED @ AMMARA UMAR AWAN 35
Hard Rock Café-Forecasting Forecasting

Overview

7-Steps of
. Forecasting

Qualitative
Approaches

Quantitative
Approaches

Time Series
Model

Measure
Forecast
Error
COMPILED @ AMMARA UMAR AWAN 36