Professional Documents
Culture Documents
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
Salesforce Opinions
Consumer Surveys
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.
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
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.
Ft = MAn=
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.
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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:
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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
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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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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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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50
Demand
= .4
45 40 35 1 2 3 4 5 6 7 8
= .1
9 10 11 12
Period
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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.
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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b=
n xy- x y n x -( x)
2 2
Y b X a= n
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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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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
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
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
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.