Forecasting

1. Forecasting Ross L. Fink

2. Forecasting • Definition--Forecasting tries to predict the future • Used for planning purposes • Forecasting goes beyond predicting demand • Internal manufacturing costs • Cost of raw materials and component parts • Cost and availability of energy • Interest rates • Stock prices

3. Rules of Forecasting • Your forecast is never correct • Forecasts assume some underlying causal system • Generally, the shorter the time horizon of the forecast, the more accurate the forecast • Generally, forecasting aggregations (groups of items) is more accurate than forecasting individual items

4. Forecasting Methods • Qualitative • Quantitative

5. Qualitative Forecasting Methods • Consumer surveys • Test marketing • Sales force composite • Executive opinion • Delphi technique • Panel of experts

6. Quantitative Forecasting Methods • Time series • Naïve • Moving averages • Exponential smoothing • Box-Jenkins • Associative or causal models • Simple regression • Multiple regression

7. Decomposition of Time Series Data • Believe that data consists of components • Trend • Seasons • Cycles • Random and irregular variations • Approach--isolate components and forecast separately and then recombine to obtain final forecast

8. Ways to Select Forecasting Method • Noise-dampening (smoothing) • Response (lag) • Error measurement

9. Error Measurement • Mean Absolute Deviation (MAD)--Most popular • Average Error (AE) or bias • Mean Square Error (MSE) • Mean Absolute Percent Error (MAPE) • Standard deviation

10. Error • where, • Et = error for period t • At = actual demand for period t • Ft = forecast for period t

11. Mean Absolute Deviation

12. Example

13. Example

14. Example--3-month Moving Average

15. Example

16. Example

17. Simple Exponential Smoothing OR Alpha (smoothing Constant) is between 0 and 1