10/15/2023

Outline
Forecasting
4 ▶ What Is Forecasting?
▶ The Strategic Importance of Forecasting
▶ Seven Steps in the Forecasting System
▶ Forecasting Approaches
▶ Time-Series Forecasting
▶ Naïve
PowerPoint slides by Jeff Heyl
▶ Moving Average
▶ Weighted Moving Average

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What is Forecasting? Forecasting Time Horizons

1. Short-range forecast
► Process of predicting a ► Up to 1 year, generally less than 3 months
future event ► Purchasing, job scheduling, workforce levels,
► Underlying basis
of all business
?? job assignments, production levels
2. Medium-range forecast
decisions ► 3 months to 3 years

► Production ► Sales and production planning, budgeting

3. Long-range forecast
► Inventory
► 3+ years
► Personnel
► New product planning, facility location,
► Facilities research and development
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Distinguishing Differences Types of Forecasts

1. Medium/long range forecasts deal with more 1. Economic forecasts
deal with dement or comprehensive issues
► Address business cycle – inflation rate, money
and support management decisions supply, housing starts, etc.
regarding planning and products, plants and
processes 2. Technological forecasts
2. Short-term forecasting usually employs ► Predict rate of technological progress
different methodologies than longer-term ► Impacts development of new products
forecasting 3. Demand forecasts
3. Short-term forecasts tend to be more ► Predict sales of existing products and services
accurate than longer-term forecasts

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Strategic Importance of Seven Steps in Forecasting

Forecasting 1.
2.
Determine the use of the forecast
Select the items to be forecasted what the product that I want to add
3. Determine the time horizon important of the forecast
► Supply-Chain Management – Good 4. Select the forecasting model(s) I have to see the product is new and
supplier relations, advantages in product after we go to the next step example the iPhone 15 so apple ….. After
we select the model so this dataneeded
innovation, cost and speed to market 5. Gather the data needed to make the forecast

► Human Resources – Hiring, training, 6. Make the forecast

7. Validate and implement the results
laying off workers
► Capacity – Capacity shortages can result
in undependable delivery, loss of
customers, loss of market share

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The Realities! Forecasting Approaches

Qualitative Methods
► Forecasts are seldom perfect,
unpredictable outside factors may ► Used when situation is vague and
impact the forecast little data exist
► Most techniques assume an ► New products
underlying stability in the system
► New technology
► Product family and aggregated
► Involves intuition, experience
forecasts are more accurate than
individual product forecasts ► e.g., forecasting sales on Internet

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Forecasting Approaches Overview of Qualitative Methods

Quantitative Methods
1. Jury of executive opinion
► Used when situation is ‘stable’ and
historical data exist ► Pool opinions of high-level experts,
sometimes augmented by statistical
► Existing products models
► Current technology 2. Delphi method
► Involves mathematical techniques ► Panel of experts, queried iteratively
► e.g., forecasting sales of color
televisions
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Overview of Qualitative Methods Jury of Executive Opinion

► Involves small group of high-level experts
and managers
3. Sales force composite
► Group estimates demand by working
► Estimates from individual salespersons together
are reviewed for reasonableness, then
aggregated ► Combines managerial experience with
statistical models
4. Market Survey ► Relatively quick
► Ask the customer
► ‘Group-think’
disadvantage

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Delphi Method Sales Force Composite

► Iterative group
process, continues Decision Makers
(Evaluate responses ► Each salesperson projects his or her
until consensus is and make decisions) sales
reached
► Combined at district and national
► Three types of Staff
(Administering levels
participants survey)

► Decision makers
► Sales reps know customers’ wants
► Staff ► May be overly optimistic
► Respondents Respondents
(People who can make
valuable judgments)
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Market Survey Overview of Quantitative

Approaches
► Ask customers about purchasing
plans 1. Naive approach
► Useful for demand and product 2. Moving averages
design and planning 3. Exponential Time-series
smoothing models
► What consumers say and what they
actually do may be different 4. Trend projection
5. Linear regression Associative
► May be overly optimistic model

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Time-Series Forecasting Time-Series Components

► Set of evenly spaced numerical data

Trend Cyclical
► Obtained by observing response
variable at regular time periods
► Forecast based only on past values, no
other variables important
► Assumes that factors influencing past
and present will continue influence in Seasonal Random
future

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Components of Demand Trend Component

Trend
component
► Persistent, overall upward or
downward pattern
Demand for product or service

Seasonal peaks

► Changes due to population,

Actual demand
line technology, age, culture, etc.
Average demand
► Typically several years duration
over 4 years

Random variation
| | | |
1 2 3 4
Time (years)
Figure 4.1

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Seasonal Component Cyclical Component

► Regular pattern of up and down
fluctuations ► Repeating up and down movements
► Due to weather, customs, etc. ► Affected by business cycle, political,
and economic factors
► Occurs within a single year
► Multiple years duration
Week
PERIOD LENGTH “ SEASON” LENGTH
Day
NUMBER OF “ SEASONS” IN PATTERN
7
► Often causal or
Month Week 4 – 4.5 associative
Month Day 28 – 31
relationships
Year Quarter 4
Year Month 12
Year Week 52
0 5 10 15 20
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Random Component Naive Approach

► Erratic, unsystematic, ‘residual’
► Assumes demand in next
fluctuations
period is the same as
► Due to random variation or unforeseen demand in most recent period
events ► e.g., If January sales were 68, then
► Short duration February sales will be 68
and nonrepeating ► Sometimes cost effective and
efficient
► Can be good starting point
M T W T
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Moving Averages Moving Average Example

► MA is a series of arithmetic means MONTH

January
ACTUAL SHED SALES
10
3-MONTH MOVING AVERAGE

► Used if little or no trend February

March
12
13

► Used often for smoothing April

May
16
19
(10 + 12 + 13)/3 = 11 2/3
(12 + 13 + 16)/3 = 13 2/3

► Provides overall impression of data June 23 (13 + 16 + 19)/3 = 16

July 26 (16 + 19 + 23)/3 = 19 1/3
over time August 30 (19 + 23 + 26)/3 = 22 2/3
September 28 (23 + 26 + 30)/3 = 26 1/3

Moving average =
ådemand in previous n periods October 18 (26 + 30 + 28)/3 = 28
(30 + 28 + 18)/3 = 25 1/3
November 16
n December 14 (28 + 18 + 16)/3 = 20 2/3

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Weighted Moving Average Weighted Moving Average

► Used when some trend might be MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE

present January
February
10
12
► Older data usually less important March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1/6
► Weights based on experience and May 19
WEIGHTS APPLIED PERIOD
intuition June
July
23
26 3 Last month

August 30 2 Two months ago

(( )(
Weighted å Weight for period n Demand in period n )) September 28 1 Three months ago

18 6 Sum of the weights

moving = October

average å Weights November

December
Forecast for
16this month =
3 x 14
Sales last mo. + 2 x Sales 2 mos. ago + 1 x Sales 3 mos. ago
Sum of the weights

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Weighted Moving Average Potential Problems With

Moving Average
MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE
January 10
February 12 1. Increasing n smooths the forecast but
March
April
13
16 [(3 x 13) + (2 x 12) + (10)]/6 = 12 1/6
makes it less sensitive to changes
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 14 1/3
2. Does not forecast trends well
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 20 1/2 3. Requires extensive historical data
August 30 [(3 x 26) + (2 x 23) + (19)]/6 = 23 5/6
September 28 [(3 x 30) + (2 x 26) + (23)]/6 = 27 1/2
October 18 [(3 x 28) + (2 x 30) + (26)]/6 = 28 1/3
November 16 [(3 x 18) + (2 x 28) + (30)]/6 = 23 1/3
December 14 [(3 x 16) + (2 x 18) + (28)]/6 = 18 2/3

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Graph of Moving Averages

Weighted moving average (from Example 2)

30 –

25 –
Sales demand

20 –

15 – Actual sales

10 – Moving average
(from Example 1)
5–
| | | | | | | | | | | |

J F M A M J J A S O N D
Figure 4.2 Month

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