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Forecasting
Learning Objectives
List the elements of a good forecast.
Outline the steps in the forecasting process.
Compare qualitative and quantitative approaches to
forecasting.
Quantitative- Naïve Forecasts, Averaging Forecasts,
Exponential Smoothing, Linear Trend Forecasts
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Forecasting
Process of predicting a future event, scientifically &
with base
Taking historical data & projecting them into the
future
I see that you will
get an A this semester.
Forecasting Time Horizons
Short-range forecast
Up to 1 year, generally less than 3 months
Purchasing, job scheduling, workforce levels, job assignments, production
levels
Medium-range forecast
3 months to 3 years
Sales and production planning, budgeting
Long-range forecast
3+ years
New product planning, facility location, research and development
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Types of Forecasts
Economic forecasts
Address business cycle – inflation rate, money supply, housing
starts, etc.
Technological forecasts
Predict rate of technological progress
Impacts development of new products
Demand forecasts
Predict sales of existing product
Strategic Importance of
Forecasting
Human Resources – Hiring, training, laying off
workers
Capacity – Capacity shortages can result in
undependable delivery, loss of customers, loss of
market share
Supply-Chain Management – Good supplier relations
and price advance
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Forecasting Approaches
Quantitative Methods (Calculation)
Used when situation is ‘stable’ and historical
data exist
Existing
products
Current technology
Involves mathematical techniques
e.g., forecasting sales of color televisions
Forecasting Approaches
Qualitative Methods
Used when situation is vague and little data exist
New products
New technology
Involves intuition, experience
Panel of experts, queried iteratively
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Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages Time-Series
Models
3. Exponential
smoothing
Associative
4. Linear Trend Model
5. Linear regression
Time Series Forecasting
Set of evenly spaced numerical data
Obtained by observing response variable at
regular time periods
Forecast based only on past values
Assumes that factors influencing past and
present will continue influence in future
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Trend Component
Persistent, overallupward or downward pattern
Changes due to population, technology, age, culture, etc.
Typically several years duration
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Seasonal Component
Regularpattern of up and down fluctuations
Due to weather, customs, etc.
Occurs within a single year
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Cyclical Component
Repeating up and down movements
Affected by business cycle, political, and economic factors
Multiple years duration
Often causal or
associative
relationships
0 5 10 15 20
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Random Component
Erratic, unsystematic, ‘residual’
fluctuations
Due to random variation or unforeseen events
Short duration and
non repeating
M T W T F
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1. NAIVE APPROACH
Assumes demand in next period is the
same as demand in most recent period
e.g., If May sales were 48, then June sales will be 48
Sometimes cost effective and efficient
Cannot provide high accuracy
Quick and easy to prepare
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TECHNIQUES FOR AVERAGING
Moving average
Weighted moving average
Exponential smoothing
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2. Moving Average Method (MA)
A technique that averages a number of recent actual
values, updated as new values become available.
Used if little or no trend
∑ demand in previous n periods
Moving average = n
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3 Month Moving Average Example
Actual 3-Month
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11.67 ~12
May 19 (12 + 13 + 16)/3 = 13.67~14
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19.33~20
ROUND UP
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3. Weighted Moving Average (WMA)
Used when trend is present
Weights based on experience and intuition
More recent values in a series are given more weight in
computing the forecast
∑ (weight for period n)
Weighted x (demand in period n)
moving average = ∑ weights
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Weighted Moving Average
Example Weights Applied Period
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights
Actual 3-Month Weighted
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (1x10)]/6 = 12.16~13
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 14.33~15
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 20.5~21
ROUND UP
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Potential Problems With
Moving Average
Increasing n smooths the forecast but makes it less
sensitive to changes
Do not forecast trends well
Require extensive historical data
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Common Measures of Error
1. Mean Absolute Deviation (MAD)
∑ |actual - forecast|
MAD =
ne
2. Mean Squared Error (MSE)
MSE = ∑ (|actual - forecast|)2
ne-1
3. Mean Absolute Percentage Error (MAPE)
( |actual - forecast| / actual*100)
MAPE =
ne
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MAD, MSE & MAPE Example
Period Actual Forecast A-F |A-F| |A-F|^2 (|A-F|/Actual)*100
1 217 215 2
2 213 216 -3
3 216 215 1
4 210 214 -4
5 213 211 2
6 219 214 5
7 216 217 -1
8 212 216 -4
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Tutorial 1
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Actual WMA Naïve
Sep 230
Oct 304
Nov 415
Dec 420
|AD|
Sep
Oct
Nov
Dec
Sum
MAD
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4. Exponential Smoothing
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
Requires smoothing constant ()
Ranges from 0 to 1
Subjectively chosen
Involves little record keeping of past data
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Formula Provided
Ft = Ft-1 + (At-1-Ft-1)
where Ft = new forecast
Ft – 1 = previous forecast
At-1 = previous actual demand
= smoothing (or weighting)
constant (0 a 1)
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Choosing
• The objective is to obtain the most accurate forecast
no matter the technique
• We generally do this by selecting the model that
gives us the lowest forecast error
Forecast error = Actual demand – Forecast value
= At - Ft
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Exponential Smoothing Example
Port of Baltimore has unloaded large quantities of grains
from ships during the past eight quarters. The port’s
operation manager wants to test he use of exponential
smoothing to see how well the technique works in
predicting tonnage unloaded. He assumes that the
forecast in the first quarter was 175 tons. Two value of
for 0.1 and 0.5 are examined.
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Information given for past 8 Quarters
Quarter Actual Tonnage
Unloaded
1 180
2 168
3 159
4 175
5 190
6 205
7 180
8 182
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Calculate Forecast using = 0.1
Q At Ft = Ft-1 + (At-1-Ft-1) AD=|At-Ft |
1 180
2 168
3 159
4 175
5 190
6 205
7 180
8 182
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Calculate Forecast using = 0.5
Q At Ft = Ft-1 + (At-1-Ft-1) AD=|At-Ft |
1 180
2 168
3 159
4 175
5 190
6 205
7 180
8 182
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Mean Absolute Deviation (MAD)
∑ |actual - forecast|
MAD =
n
Which one is more accurate? More preferable?
MAD0.1 = =
MAD0.5 = =
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Tutorial 2 Sep 2013
Assume 3MA
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Actual Naïve 3MA α=0.3
1 370
2 310
3 450
4 290
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Actual-Forecast=|AD|
1
2
3
4
Sum
MAD
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5. Linear Trend Equation
Ft
Ft = a + bt
0 1 2 3 4 5 t
Ft = Forecast for period t
t = Specified number of time periods
a = Value of Ft at t = 0
b = Slope of the line
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Calculating a and b; Formula Provided
n (ty) - t y
b =
n t 2 - ( t) 2
y - b t
a =
n
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Linear Trend Equation Example
Week (t) Sales (y)
1 150
2 157
3 162
4 166
5 177
6 ??
Find forecast for week 6
40
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Linear Trend Equation Example
Week (t) Sales (y) t2 ty
1 150
2 157
3 162
4 166
5 177
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n (ty) - t y
b =
n t 2 - ( t) 2
b = = =
a =
y - b t
n
a = =
Ft = a + bt Ft = +
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Find forecast for week 6
F6 =
=
=
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Tutorial 3 Sept 2014
Canggih computer services and repairs personal computer at
its store. It primarily uses part time UiTM students as
technicians thus, they need a good forecasting of demand of
repairs so that they will know how many technicians to hire.
The company has accumulated the demand data in table
below.
Month Demand
Jan 37
Feb 40
Mac 41
Apr 37
May 45
Jun 50
July ??
Develop a linear trend line to forecast demand for July.
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Linear Trend Calculation
Month Demand t t2 ty
(t) (y)
Jan 37
Feb 40
Mac 41
Apr 37
May 45
Jun 50
45
b=
a=
Ft = a + bt Ft =
Find forecast for July
F7 =
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Tutorial 4
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Tutorial 5
48
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Tutorial 6
Assume 3 month Moving Average
Mac 2017
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Semester Enrollment α=0.4 3MA
1
2
3
4
5
6
AD/Actual*100
1 - -
2
3
4
5
Sum
MAPE
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Jun 2018
51
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