Forecast
a statement about the future value of a variable of interest. Forecasts are an important element in making informed decisions.
What forecasts do you use?
Why?
Two Important Aspects of Forecasts
1. Expected LEVEL of demand
---The level of demand may be a function of some STRUCTURAL VARIATION such as trend or seasonal variation
2. Accuracy
---Related to the potential size of forecast error
Features common to all Forecasts (4)
1. Techniques assume some underlying causal system that existed in the past will persist into the future.
2. Forecasts are not perfect.
3. Forecasts for groups of items are more accurate than those for individual items.
4. Forecast accuracy decreases as t
Elements of a GOOD forecasts
--should be TIMELY
--should be ACCURATE
--should be RELIABLE
--should be expressed in MEANINGFUL UNITS
--should be IN WRITING
--technique should be SIMPLE TO UNDERSTAND AND USE
--should be COST EFFECTIVE
Steps in the Forecasting process
1.Determine the purpose of the forecast
2. Establish a time horizon
3. Select a forecasting technique
4. Obtain, clean, and analyze appropriate data
5. Make the forecast
6. Monitor the forecast
Forecast Accuracy and Control
-Forecasters want to minimize forecast errors
---It is nearly impossible to correctly forecast real-world variable values on a regular basis
---So, it is important to provide an indication of the extent to which the forecast might deviate from the value o
Forecasting Approaches
1. Qualitative Forecasting
2. Quantitative Forecasting
Qualitative Forecasting
-Qualitative techniques permit the inclusion of soft information such as:
---Human factors
---Personal opinions
---Hunches
-These factors are difficult, or impossible, to quantify
Quantitative Forecasting
-Quantitative techniques involve either the projection of historical data or the development of associative methods that attempt to use causal variables to make a forecast
-These techniques rely on hard data
Types of Forecasts
1. Judgmental
2. Time series
3. Associative models
Judgmental Forecasts
uses subjective inputs
Forecasts that use subjective inputs such as opinions from consumer surveys, sales staff, managers, executives, and experts
---Executive opinions
---Salesforce opinions
---Consumer surveys
---Delphi method
Time-Series Forecasts
uses historical data assuming the future will be like the past
-Forecasts that project patterns identified in recent time-series observations
-----Time-series - a time-ordered sequence of observations taken at regular time intervals
-Assume that future va
Associative Models
uses explanatory variables to predict the future
Associative Forecasting Techniques
-Home values may be related to such factors as home and property size, location, number of bedrooms, and number of bathrooms
---________ ________ are based on the development of an equation that summarizes the effects of predictor variables
--------Predic
Predictor variables
variables that can be used to predict values of the variable of interest
Regression
a technique for fitting a line to a set of data points
Simple Linear Regression
- the simplest form of regression that involves a linear relationship between two variables
----------The object of _____ ______ _______ is to obtain an equation of a straight line that minimizes the sum of squared vertical deviations from the line (i.e.,
Simple Linear Regression Assumptions
1. Variations around the line are random
2. Devaiations around the average value (the line) should be normally distributed
3. Predictions are made only within the range of observed values
Standard Error
--A measure of the scatter of points around a regression line
--If the ____ _____ is relatively small, the predictions using the linear equation will tend to be more accurate than if the _____ ____ is larger
-Always plot the line to verify that a linear r
Correlation
---A measure of the strength and direction of relationship between two variables
---Ranges between -1.00 and +1.00
r^2, square of the correlation coefficient
---A measure of the percentage of variability in the values of y that is "explained" by the independent variable
---Ranges between 0 and 1.00
Time-Series Behaviors - Understanding demand patterns
Before a forecasting technique is selected, you MUST understand the underlying pattern of demand for your organization. Your selected forecasting technique MUST be able to mimic and predict that pattern of demand.
--Trend
--Seasonality
--Cycles
--Irregula
Trend
A long-term upward or downward movement in data
---Population shifts
---Changing income
Seasonality
Short-term, fairly regular variations related to the calendar or time of day. A pattern of demand that repeats itself in the short run.
Restaurants, service call centers, and theaters all experience seasonal demand
Cycle
Wavelike variations lasting more than one year
---These are often related to a variety of economic, political, or even agricultural conditions
Random Variation
Residual variation that remains after all other behaviors have been accounted for
Irregular Variation
Due to unusual circumstances that do not reflect typical behavior
--Labor strike
--Weather event
Time-series Forecasting
1. Naive Forecast
2. Moving Average
3. Weighted Moving Average
4. Exponential Smoothing
Naive Forecast
Uses a single previous value of a time series as the basis for a forecast
----The forecast for a time period is equal to the previous time period's value
Can be used when
---The time series is stable
---There is a trend
---There is seasonality
Time-Series Forecasting - Averaging
These Techniques work best when a series tends to vary about an average
---Averaging techniques smooth variations in the data
---They can handle step changes or gradual changes in the level of a series
---TECHNIQUES
1. Moving average
2. Weighted moving av
Moving Average
Technique that averages a number of the most recent actual values in generating a forecast.
As new data become available, the forecast is updated by adding the newest value and dropping the oldest and then recomputing the the average.
The number of data p
Weighted Moving Average
The most recent values in a time series are given more weight in computing a forecast
----The choice of weights, w, is somewhat arbitrary and involves some trial and error
Exponential Smoothing
A weighted averaging method that is based on the previous forecast plus a percentage of the forecast error.
Forecast Accuracy
Regardless of the forecasting technique selected, accuracy must be measured and evaluated.
Two common measures of ______ _____ are MAD and MSE.
MAD
weights all errors evenly.
MSE
weight errors according to their squared values.
Using Forecast Information
1. Reactive Approach
2. Proactive Approach
Reactive Approach
--View forecasts as probable future demand
--React to meet that demand
Proactive Approach
Seeks to actively influence demand
---Advertising
---Pricing
---Product/service modifications
Generally requires either and explanatory model or a subjective assessment of the influence on demand