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What Is Forecasting? Elements of A Good Forecast

The document discusses forecasting methods and principles. It covers key elements of a good forecast like timeliness, accuracy, and reliability. Time series forecasting techniques are examined, including naive methods, averaging, exponential smoothing, and incorporating trends and seasonality. Accuracy measures like mean absolute deviation and mean squared error are also defined. The goal of forecasting is to inform planning and decision making in areas like operations, finance, and marketing.

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Catherine Fuentes
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43 views3 pages

What Is Forecasting? Elements of A Good Forecast

The document discusses forecasting methods and principles. It covers key elements of a good forecast like timeliness, accuracy, and reliability. Time series forecasting techniques are examined, including naive methods, averaging, exponential smoothing, and incorporating trends and seasonality. Accuracy measures like mean absolute deviation and mean squared error are also defined. The goal of forecasting is to inform planning and decision making in areas like operations, finance, and marketing.

Uploaded by

Catherine Fuentes
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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OPN (MODULE 1) * Elements of a Good Forecast

* What is Forecasting? 1. The forecast should be timely.

 basic input in the decision process of a 2. The forecast should be accurate, and the
business because it provides information on degree of accuracy should be stated.
needed by the organization for future demand
3. The forecast should be reliable; it should
 It is the basis of the organization’s decision- work consistently.
making involving budgeting, planning capacity,
4. The forecast should be expressed in
sales, production and inventory, personnel,
meaningful units.
purchasing and more which is very vital in every
organization 5. The forecast should be in writing
 it uses statistical tools and techniques that are * Steps in the Forecasting Process
supported by human judgment and intuition.
1. Decide what to forecast.
* The Strategic Importance of Forecasting
2. Evaluate and analyze appropriate data.
1. Accounting
3. Select and test the forecasting model.
2. Finance
4. Generate the forecast.
3. Human Resource
5. Monitor forecast accuracy.
4. Marketing
* Forecasting Approaches
5. Operations
1. Time Series Data
6. Product/Service Design
 uses time-ordered sequence of observations
*Two Uses for Forecast taken at regular intervals (hourly, daily, weekly,
monthly, quarterly, annually)
1. Plan the System
 analysis of time-series data (based on
2. Plan the use of the System
historical data) that requires the analyst to
* Principles of Forecasting identify the underlying behavior of the series.

1. Forecasts are rarely perfect. 2. Focus Forecasting

2. Forecasts are more accurate for grouped data  Focus forecasting approach in forecast are
than for individual data. based on the best current performance.

3. Forecasts are more accurate for shorter than 3. Diffusion Models


longer time periods.
 used for new products or services where
4. Forecasting techniques assume that the same historical data are not available.
underlying causal system that existed in the
past will continue to exist in the future

5. groups of items tend to be more accurate


than forecasts for individual items
* Types of Time Series Data  uses the data from the most recent
period up to the given period where historical
1. Trend
data would be analyzed.
 refers to long-term upward or downward
4. Weighted Moving Average
movement in the data
 more responsive to changes because
2. Seasonality
more recent periods may be more heavily
 refers to short-term, fairly regular variations weighted.
of data
MODULE 3
3. Cycle
* Exponential Smoothing
 a wavelike variations of more than one year’s
 based on the previous forecast plus a
duration
percentage difference between that forecast
MODULE 2 and the actual value of the series at that point.

* Time Series Forecasting * Three elements of Exponential Smoothing

1. Naïve Approach 1. Last period’s forecast (Ft)

 uses previous value of a time series asthe 2. Last periods actual value (At)
basis of the forecast
3. Select value of smoothing coefficient,
 forecasting technique which assumes that between 0 and 1.0
the demand or data gathered in the next period
 Next Forecast = Previous Forecast + α(Actual
is equal or the same to the demand from the
– Previous Forecast)
most recent period.
* Forecast Accuracy Measures
 can be used with stable series such as
with seasonal variations or with trends 1. Forecast Error

2. Averaging  the difference between the forecast and


actual value for a given period.
 smooth fluctuations in a time series
because of combining data into average where 2. Mean Absolute Deviation (MAD)
it offsets the individual high and low values of
 measure the forecast error by averaging the
data.
sum of the absolute errors.
 generated through averaging reflects the
3. Mean Squared Error (MSE)
recent values of a time series.
 the measure of forecast error that computes
3. Moving Average
error as the average of the squared error.
 a forecasting method that uses an
4. Mean Absolute Percentage Error (MAPE)
average of the n most recent periods of data to
forecast the next period  the absolute percent error
MODULE 4 1. Additive Model

* Forecasting Trend  expressed in quantity,

1. Trend  added to or subtracted from the series


average in order to incorporate seasonality
 refers to a long-term upward or
downward movement in the data. It is used to 2. Multiplicative Model
study data for population shifts, changing
 expressed as a percentage of the average
incomes, and cultural changes.
(or trend) amount,
2. Trend-adjusted Exponential Smoothing
 used to multiply the value of a series to
 exponential smoothing model that is incorporate seasonality.
suited to data that exhibit trend. It uses three
equations:

➢ Smoothing the level of series

➢ Smoothing the trend

➢ Forecast Including Trend

* Linear Trend Line

 time series technique that compute a forecast


with trend by drawing a straight line through a
set of data

 useful for computing forecast when data


display a clear trend over time

MODULE 5

* Seasonal Variation

 time-series data that are regularly repeating


upward or downward movements in series
values based on recurring events from a given
season or period

 based on a daily, weekly, monthly, and other


regularly recurring patterns in data.

* Seasonality Season

 regular annual variations.

 expressed in terms of the amount of actual


values deviate from the average values of a
series. I

* Two Models of Seasonality

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