I see that you will get an A this semester.

Uses of Forecasts
Accounting Finance Human Resources Marketing MIS Operations Product/service design Cost/profit estimates Cash flow and funding Hiring/recruiting/training Pricing, promotion, strategy IT/IS systems, services Schedules, MRP, workloads New products and services

Forecasting Techniques
Judgmental

- uses subjective inputs such as opinion from consumer surveys, sales staff etc..

Time

series - uses historical data assuming the future will be like the past

Executive Opinions

Upper level managers Staff

Forecast Based on Judgement and Opinion

Salesforce Opinions

Sales Staff Costumer Service Staff

Consumer Surveys

Direct Consumers Indirect Consumers

Other Approach

Delphi Method - An alternative process in which managers and staff complete a series of questionnaires, each developed from the previous one, to achieve a consensus forecast.

Forecasting Based on TimeSeries Data

Time Series is a time ordered sequence of observations taken at regular intervals. Data may be measurements of demand, earnings, profits, shipments, accidents, output, precipitation, productivity, or consumer price index.

A time series (naive forecasting) is a set of numbers where the order or sequence of the numbers is important, i.e., historical demand Attempts to forecasts future values of the time series by examining past observations of the data only. The assumption is that the time series will continue to move as in the past Analysis of the time series identifies patterns Once the patterns are identified, they can be used to develop a forecast.

Forecast Horizon

Short term
Up to a year

Medium term
One to five years

Long term
More than five years

Behaviors of the Series

Trend is a long-term upward or downward movement of data. Seasonality refers to short-term regular variations related to the calendar or time of day. Cycles are wavelike variations lasting more than one year. Irregular Variations are caused by unusual circumstances, not reflective of typical behavior. Random Variations are residual variations after all other behaviors are accounted for.

Forecast Variations
Irregular variation

Trend

Cycles
90 89 88 Seasonal variations

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 Naive Methods

It is a forecast for any period that equals the previous periods actual value.

 Techniques for Averaging

Moving average A technique that averages a number of recent actual values, updated as new values become available.

Ft = MAn=

At-n + At-2 + At-1 n

n= number of period

Weighted moving average More recent values in a series are given more weight in computing the forecast. wnAt-n + wn-1At-2 + w1At-1 Ft = WMAn=
n=total amount of number of weights
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Example-Moving Average
Central Call Center (CCC) wishes to forecast the number of incoming calls it receives in a day from the customers of one of its clients, BMI. CCC schedules the appropriate number of telephone operators based on projected call volumes.

CCC believes that the most recent 12 days of call volumes (shown on the next slide) are representative of the near future call volumes.

15

Example-Moving Average

Moving Average

Use the moving average method with an AP = 3 days to develop a forecast of the call volume in Day 13 (The 3 most recent demands) compute a three-period average forecast given scenario above:

F13 = (168 + 198 + 159)/3 = 175.0 calls

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Example-Weighted Moving Average

Weighted Moving Average (Central Call Center ) Use the weighted moving average method with an AP = 3 days and weights of .1 (for oldest datum), .3, and .6 to develop a forecast of the call volume in Day 13. compute a weighted average forecast given scenario above: 1 F13 = .1(168) + .3(198) + .6(159) = 171.6 calls

Note: The WMA forecast is lower than the MA forecast because Day 13s relatively low call volume carries almost twice as much weight in the WMA (.60) as it does in the MA (.33).
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Exponential Smoothing

Ft = Ft-1 + (At-1 - Ft-1)

Ft = forecast for period t Ft-1 = forecast for the previous period = smoothing constant At-1 = actual data for the previous period

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. Weighted averaging method based on previous forecast plus a percentage of the forecast error A-F is the error term, is the % feedback

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Exponential Smoothing Forecasts

The

weights used to compute the forecast (moving average) are exponentially distributed. The forecast is the sum of the old forecast and a portion (a) of the forecast error (A t-1 - Ft-1). The smoothing constant, , must be between 0.0 and 1.0. A large provides a high impulse response forecast. A small provides a low impulse response forecast.
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Example-Exponential Smoothing
Exponential Smoothing (Central Call Center) Suppose a smoothing constant value of .25 is used and the exponential smoothing forecast for Day 11 was 180.76 calls. what is the exponential smoothing forecast for Day 13?

F12 = 180.76 + .25(198 180.76) = 185.07 F13 = 185.07 + .25(159 185.07) = 178.55

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Example 2-Exponential Smoothing

Period Actual Alpha = 0.1 Error 42 41.8 41.92 41.73 41.66 41.39 41.85 42.07 42.36 41.92 41.73 1 2 3 4 5 6 7 8 9 10 11 12 42 40 43 40 41 39 46 44 45 38 40 -2.00 1.20 -1.92 -0.73 -2.66 4.61 2.15 2.93 -4.36 -1.92

Alpha = 0.4 Error 42 41.2 41.92 41.15 41.09 40.25 42.55 43.13 43.88 41.53 40.92 -2 1.8 -1.92 -0.15 -2.09 5.75 1.45 1.87 -5.88 -1.53

Exponential Smoothing (Actual Demand forecasting ) Suppose a smoothing constant value of .10 is used and the exponential smoothing forecast for the previous period was 42 units (actual demand was 40 units). what is the exponential smoothing forecast for the next periods? F3 = 42 + .10(40 42) = 41.8 F4 = 41.8 + .10(43 41.8) = 41.92
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Example 2-Exponential Smoothing Graphical presentation

Actual

50
Demand

= .4

45 40 35 1 2 3 4 5 6 7 8

= .1

9 10 11 12

Period

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Techniques for Trend

The simplest form of time series is projecting the past trend by fitting a straight line to the data either visually or more precisely by regression analysis. Linear regression analysis establishes a relationship between a dependent variable and one or more independent variables. In simple linear regression analysis there is only one independent variable. If the data is a time series, the independent variable is the time period. The dependent variable is whatever we wish to forecast.

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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Trend Projection- Calculating a and b

Or If formula b is used first, it may be used formula a in the following format:

b=

n xy- x y n x -( x)
2 2

Y b X a= n

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Example1 for Trend Projection

TP 1997Q1 1997Q2 1997Q3 1997Q4 1998Q1 1998Q2 1998Q3 1998Q4 1999Q1 1999Q2 1999Q3 1999Q4 2000Q1 2000Q2 2000Q3 2000Q4 T 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 x 136 Q 11 15 12 14 12 17 13 16 14 18 15 17 15 20 16 19 y 244 sq ( T ) 1 4 9 16 25 36 49 64 81 100 121 144 169 196 225 256 sq x 1496 QxT 11 30 36 56 60 102 91 128 126 180 165 204 195 280 240 304 xy 2208 sq sum x 18496

a=

2 x y- x xy

n x2 -( x)2

b=

n xy- x y n x2 -( x)2

a. 11.9 b. 0.394118

sum

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Trend-Adjusted Exponential Smoothing

Variation of exponential smoothing used when a time series exhibits a linear trend. The trend adjusted forecast (TAF) is composed of two elements: a smoothed error and a trend factor.

TAFt1 St Tt (36) where St Smoothed forecast Tt Current trend estimate and St TAFt (At TAFt ) (37) Tt Tt1 (TAFt TAFt1 Tt1 )TAFt+1= St + Tt Where S1= Previous forecast plus smoothed error Tt= Current trend estimate

Trend-Adjusted Exponential Smoothing

Variation of exponential smoothing used when a time series exhibits a linear trend. The trend adjusted forecast (TAF) is composed of two elements: a smoothed error and a trend factor.

TAFt1 St Tt (36) where St Smoothed forecast Tt Current trend estimate and St TAFt (At TAFt ) (37) Tt Tt1 (TAFt TAFt1 Tt1 )TAFt+1= St + Tt Where S1= Previous forecast plus smoothed error Tt= Current trend estimate

Techniques for Seasonality

These are regularly repeating movements in series values that can be tied to recurring events.

Shows the quarterly sales, in millions of dollars, of Hercher Sporting Goods, Inc. They are a sporting goods company that specializes in selling baseball and softball equipment to high schools, colleges, and youth leagues. They also have several retail outlets in some of the larger shopping malls. There is a distinct seasonal pattern to their business. Most of their sales are in the first and second quarters of the year, when schools and organizations are purchasing equipment for the upcoming season. During the early summer, they keep busy by selling replacement equipment. They do some business during the holidays (fourth quarter). The late summer (third quarter) is their slow season.

Sales of Baseball and Softball Equipment, Hercher Sporting Goods, 2003 2005 by Quarter

Techniques for Cycles

Cycles are up and down movements similar to seasonal variations but of longer duration say 2 to 6 years between peaks.

A business cycle showing these oscillatory movements has to pass through four phases-prosperity, recession, depression and recovery. In a business, these four phases are completed by passing one to another in this order.