Ch.13 (1) Forecasting PDF

Forecasting
The future is made of the same stuff as the present.
– Simone Weil
Forecasting
• Predict the next number in the pattern:
a) 3.7, 3.7, 3.7, 3.7, 3.7, ?
b) 2.5, 4.5, 6.5, 8.5, 10.5, ?

Forecasting
• Predict the next number in the pattern:
a) 3.7, 3.7, 3.7, 3.7, 3.7, 3.7
b) 2.5, 4.5, 6.5, 8.5, 10.5, 12.5

Outline
• What is forecasting?
• Types of forecasts
• Time-Series forecasting
• Regression
• Moving Average
• Exponential Smoothing
• Many others
• Good forecasts
What is Forecasting?
▪ Process of predicting a future
event based on historical data
▪ Educated Guessing
▪ Underlying basis of
all business decisions
• Production
Measuring Forecast Accuracy: The Complete
• Inventory Guide | RELEX Solutions (ditanyingxiao.com)
• Personnel
• Facilities
Why do we need to forecast?
• In general, forecasts are almost always wrong.
• Throughout the day we forecast different aspects:
• weather, traffic, stock market
• Not all of them are derived from sophisticated
methods.
• “Best" educated guesses about future are more
valuable for purpose of planning than no forecasts
and hence no planning.
Forecasting Methods
Forecasting
Qualitative Quantitative
Qualitative Forecasting Methods
Qualitative
Forecasting
Sales Market
Executive Delphi
Force Research/
Judgement Method
Composite Survey
Quantitative Forecasting Methods
Quantitative
Forecasting
Time Series Causal

Methods Method
Moving Regression
Average Analysis
Exponential
Smoothing
Many
Others
Forecasting Methods
• Qualitative forecasting models are useful for long-term
forecasting (> 2 years).
• Quantitative techniques better fit short to medium
term forecasting (up to 2 years).
• Operational decisions are primarily concerned with
problems having planning horizons of less than two
years.
• The long-term techniques of qualitative forecasting are
not widely used in OM situations.
• The focus on this course will be on quantitative
methods.
Causal
Forecasting
Causal Forecasting
• Explains the behavior of an uncertain future parameter
in terms of other parameters.
• For instance, if we are trying to evaluate the economics
of opening a new fast-food outlet at a given location,
we need a forecast of demand.
• Possible predictors of demand include population and
number of competitor fast-food restaurants within
some distance of the location.
• By collecting data on demand, population, and
competition for existing comparable restaurants, we
can use statistics to estimate constants in a model.
Regression Analysis
• This technique for fitting a function to data.
• Simple linear regression equation:
Dependent Population Y Population slope

variable intercept coefficient
Independent
variable
• The equation provides an estimate of the

population regression line.
Regression Analysis: Cookies Store
Example
• An emerging cookie store franchise was in the
process of evaluating sites for future outlets.
• Top management assumed that the success of a
store is strongly influenced by the number of
people who live within five miles of it.
• Analysts collected the population data and annual
sales data for 12 existing franchises, as summarized
in Table 1.
Example
Table 1
Franchise Population (000) Sales ($000)
1 50 200
2 25 50
3 14 210
4 76 240
5 88 400
6 35 200
7 85 410
8 110 500
9 95 610
10 21 120
11 30 190
12 44 180
Example
• There is a need to develop a model for predicting
the sales of a new franchise from its five-mile-
radius population.
• The analysts made use of regression analysis to
find the "best-fit" straight line through the data.
• They did this by choosing the Regression function
in Excel, which produced the output shown in
Figure 1.
Example
Figure 1
Regression Analysis: Cookies
Store Example
Example
• Thus, the predictive model is given by:
Sales = 27.382 + 4.43 x Population
• So a new franchise with a five-mile-radius
population of 60 thousand would have predicted
annual sales of:
Sales = 27.382 + 4.43 (60) = $293.182 K

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Forecasting

The future is made of the same stuff as the present.

a) 3.7, 3.7, 3.7, 3.7, 3.7, ?

b) 2.5, 4.5, 6.5, 8.5, 10.5, ?

a) 3.7, 3.7, 3.7, 3.7, 3.7, 3.7

b) 2.5, 4.5, 6.5, 8.5, 10.5, 12.5

Time Series Causal

Dependent Population Y Population slope

• The equation provides an estimate of the

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