Forecast - Notes
Forecast - Notes
Forecast - Notes
Chapter 17
FORECASTING 1
Forecasting Approaches
◆ Qualitative Methods:
– Jury of executive opinion
– Sales force composite
– Delphi method
– Consumer market survey
◆ Quantitative Methods:
Time series models: assume that the future
is a function of the past.
– Naive approach
– Moving averages
– Exponential smoothing
– Trend projection
– Seasonal Indexing
FORECASTING 2
Components of a Time Series
FORECASTING 3
Product Demand Charted over 4
Years with Trend and
Seasonality
Actual
demand
line
Average
demand
over four
Rand years
om
variat
ion
Year Year Year Year
1 2 3 4
FORECASTING 4
Simple Moving Average
FORECASTING 5
Simple Moving Average (cont.)
◆ Example:
7
7 −
FORECASTING 6
Weighted Moving Average
∑ ( weighti )(demandi )
∑ ( weights)
FORECASTING 7
Weighted Moving Average
(cont.)
5 90
6 130
7
7 −
FORECASTING 8
Exponential Smoothing
Ft = Ft −1 + α (A t −1 − Ft −1 )
where,
Ft = new forecast
Ft-1 = previous forecast
α = smoothing constant (0 ≤ α ≤ 1)
A t −1 = previous period's actual demand
FORECASTING 9
Exponential Smoothing
(cont.)
◆ Example (α = 0.3)
W eek A ctual Exponential
Sales Sm oothing
1 80 −
2 100 −
3 90 −
4 110 90 (given)
5 90
6 130
7 −
7
FORECASTING 10
Error Measurement
Forecast error = A t − Ft
∑ forecast errors
MAD =
n
∑ ( forecast errors ) 2
MSE =
n
100∑ ( A t − Ft /A t )
MAPE = %
n
FORECASTING 11
Error Measurement
(cont.)
FORECASTING 12
Exponential Smoothing
with Trend Adjustment
Ft = α × At −1 + (1 − α ) × ( Ft −1 + Tt −1 )
Tt = β × ( Ft − Ft −1 ) + (1 − β ) × Tt −1
FITt = Ft + Tt
Ft = ES forecast in period t
Tt = trend value in period t
At = actual demand in period t
α = smoothing constant (0 ≤ α ≤ 1)
β = smoothing constant (0 ≤ β ≤ 1)
FORECASTING 13
Exponential Smoothing
with Trend Adjustment (cont.)
◆ Example
Let α = 0.7 , β = 0.4
Month A F T FIT
14 2
1 19 16
(given) (given)
2 24
3 30
FORECASTING 14
Trend Projections
Trend Line : yˆ = a + bx
∑ ( xy ) − n( x )( y )
slope = b = 2 2
∑ ( x ) − n( x )
intercept = a = y − bx
x = index for periods, start with 1,
y = actual time series data,
x = average of the x values,
y = average of the y values,
yˆ = forecast values.
FORECASTING 15
Trend Projections (cont.)
◆ Example
year x y x2 xy
1 100
2 110
3 122
4 130
5 139
6 152
7 164
49
sum 917
FORECASTING 16
Trend Projections (cont.)
◆ Example
T r e n d P r o je c t i o n
200
180
160
140
120
100
80
1 2 3 4 5 6 7 8 9
FORECASTING 17
Trend Projections (cont.)
◆ Example
T r e n d P r o j e c t io n
200
180
160
140
120
100
80
1 2 3 4 5 6 7 8 9
FORECASTING 18
Seasonal Variations
FORECASTING 19
Seasonal Variations (cont.)
◆Example
FORECASTING 20
Associative Model:
Simple Linear Regression
FORECASTING 21
Tracking Signal
FORECASTING 22
Plot of a Tracking Signal
Signal exceeded
limit
Tracking signal
Upper
+ control limit
0 Acceptable
MAD
range
-
Lower control
limit
Time
FORECASTING 23
Tracking Signal (cont.)
◆ Example
Month Ai Fi Ai - Fi |Ai - Fi|
1 71 78
2 80 75
3 101 83
4 84 84
5 60 88
6 73 85
sum − −
RSFE =
MAD =
Tracking Signal =
FORECASTING 24