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FORECASTING

Heinz Reimann Orais


MBA 1

A FORECAST is a prediction, estimate, or determination of what will occur


in the future based on a certain set of factors. The value being forecast
may be sales, interest, rates, funds, GNP, technological status and so on.
Major Categories of Forecasting Time Horizon
1.

Short-term Forecast

2.

Intermediate-term Forecast

3.

Long-term Forecast

Forecasting Technique
4.

Qualitative Techniques

5.

Time Series Analysis

6.

Causal Methods

FORECASTING METHODS or TIME SERIES METHODS


1. Simple Moving Average
2. Weighted Moving Average
3. Simple Exponential Smoothing
4. Adjusted Exponential Smoothing
5. Forecast Reliability

EXAMPLE: The Beta automobile dealer in Quezon avenue area


wants to accurately forecast demand for the Beta special edition
car during the next month. Because the distributor is in Korea, it is
difficult to send cars back or recorder if the proper number of cars
is not ordered a month ahead. From sales records, the dealer has
accumulated the following data for the past year.

MONTH

MOTORCYCLES DEMANDED

January

60

February

70

March

50

April

90

May

10

June

80

July

150

August

70

September

110

October

150

November

130

SIMPLE MOVING AVERAGE: is the unweighted average of a


consecutive number of data points.
Simple Moving Average= (most recent n data values)
n
Computation for 3 Months moving average
April

Moving Average = 60 + 70 + 50 = 180 = 60


3

May

Moving Average = 70 + 50 + 90 = 210 = 70


3

JuneMoving Average = 50 + 90 + 10 = 150 = 50


3

July Moving Average = 90 + 10 + 80 = 180 = 60


3

Compute until you reached the month of DECEMBER

Computation for 5 Months moving average

JuneMoving Average = 60 + 70 + 50 + 90 + 10 = 280 = 56


5

July Moving Average = 70 + 50 + 90 + 10 + 80 = 300 = 60


5
5
August

September

Moving Average = 50 + 90 + 10 + 80 + 150 = 380 = 76


5
5
Moving Average = 90 + 10 + 80 + 150 + 70 = 400 = 80
5
5

Compute until you reached the month of DECEMBER

TABLE 1
3 and 5 Months Moving Average
Period

Month

Motorcycles
Demanded

3mo
moving
ave.

5mo
moving ave

Jan

60

Feb

70

Mar

50

Apr

90

60

May

10

70

June

80

50

56

July

150

60

60

Aug

70

80

76

Sept

110

100

80

10

Oct

150

110

84

11

Nov

130

110

112

12

Dec

130

122

WEIGHTED MOVING AVERAGE


n
Weighted Moving Average=

W1 X1
1=1

Computation of Weighted Moving Average (WMA)

April WMA = 20%(60) + 30%(70) + 50%(50) = 12 + 21 + 25 = 58


May WMA = 20%(70) + 30%(50) + 50%(90) = 14 + 15 + 45 = 74
June WMA = 20%(50) + 30%(90) + 50%(10) = 10 + 27 + 5 = 42
July WMA = 20%(90) + 30%(10) + 50%(80) = 18 + 3 + 40 = 61
Aug WMA = 20%(10) + 30%(80) + 50%(150) = 2 + 24 + 75 = 101

Compute until you reached the month of DECEMBER

TABLE 2
Exponential Smoothing Forecast
Period

Month

Motorcycles
Demanded

WMA

Jan

60

Feb

70

Mar

50

Apr

90

58

May

10

74

June

80

42

July

150

61

Aug

70

101

Sept

110

96

10

Oct

150

106

11

Nov

130

122

12

Dec

132

SIMPLE EXPONENTIAL SMOOTHING:

F1+1 = a Y1 + (1 a) F1
a = 0.10 therefore (1 - a) = 0.90 then substitute to the
exponential smoothing formula.
F3

F5

= aY2 + (1 a) F2

F4

= aY3 + (1 a) F3

= (0.10)(70) + (0.90) (60)

= (0.10)(50) + (0.90) (61)

= 7 + 54

= 5 + 54.9

= 61

= 59.9

= aY4 + (1 a) F4

F6

= aY5 + (1 a) F5

= (0.10)(90) + (0.90) (59.9)

= (0.10)(10) + (0.90) (62.91)

= 9 + 53.91

= 5 + 56.62

= 62.91

= 57.62
Compute until you reached F12. Then compute for
a = 0.30 from F3 to F12

TABLE 3
Exponential Smoothing Forecast
Period

Month

Motorcycles
Demanded (Y1)

a = 0.10

a = 0.30

Jan

60

---

---

Feb

70

60

60

Mar

50

61

63

Apr

90

59.9

59.1

May

10

62.91

68.37

June

80

57.62

50.86

July

150

59.86

59.60

Aug

70

68.87

86.72

Sept

110

68.98

81.70

10

Oct

150

73.08

90.19

11

Nov

130

80.77

108.13

12

Dec

85.69

114.69

ADJUSTED FORECAST:

T1+1 = (0.20) (F1 + 1 F1) + 0.80T1


B = 0.20 therefore (1 - B) = 0.80 then substitute to the
adjusted forecast. Let T2 = 0.
T3

T4

= 0.20 (F3 - F2) + 0.80T2

AF3 = F3 + 4T3

= 0.20 (61 - 60) + 0.80 (0)

= 61 + 4 (0.20)

= 0.20 + 0

= 61 + 0.80

= 0.20

= 61.80

= 0.20 (F4 F3) + 0.80T3

AF4 = F4 + 4T4

= 0.20 (59.9 - 61) + 0.80 (0.20)

= 59.9 + 4 (-0.06)

= 0.20 (-1.1) + 0.16

= 59.9 + 0.24

= - 0.22 + 0.16

= 59.66

= - 0.06
Compute until you reached T12.

TABLE 4
Adjusted Smoothing Forecast
Period

Month

Motorcycles
Demanded (Y1)

Forecast
F1+1
a = 0.10

Adjusted
Forecast
B = 0.20

Jan

60

---

---

Feb

70

60

60

Mar

50

61

61.8

Apr

90

59.9

59.66

May

10

62.91

65.11

June

80

57.62

55.14

July

150

59.86

59.66

Aug

70

68.87

75.91

Sept

110

68.98

74.70

10

Oct

150

73.08

80.42

11

Nov

130

80.77

93.21

12

Dec

85.69

99.57

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