Presented by

Md. Al Amin
Lecturer,
Dept. of IPE
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 Forecast
 A statement about the future value of a variable of
interest.

 Used to help managers

▪ Plan the system
▪ Plan the use of the system

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Elements of a Good Forecast

Timely

Reliable Accurate

Written

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 Elements of a Good Forecast
 The forecast should be timely. Usually, a certain amount of time is needed to respond to
the information contained in a forecast. For example, capacity cannot be expanded
overnight, nor can inventory levels be changed immediately. Hence, the forecasting
horizon must cover the time necessary to implement possible changes.
 The forecast should be accurate, and the degree of accuracy should be stated. This will
enable users to plan for possible errors and will provide a basis for comparing alternative
forecasts.
 The forecast should be reliable; it should work consistently. A technique that sometimes
provides a good forecast and sometimes a poor one will leave users with the uneasy
feeling that they may get burned every time a new forecast is issued.
 The forecast should be in writing. Although this will not guarantee that all concerned are
using the same information, it will at least increase the likelihood of it. In addition, a
written forecast will permit an objective basis for evaluating the forecast once actual
results are in.
 The forecasting technique should be simple to understand and use. Not surprisingly, fairly
simple forecasting techniques enjoy widespread popularity because users are more
comfortable working with them.
 The forecast should be cost-effective: The benefits should outweigh the costs.

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Steps in the Forecasting Process

“The forecast”

Step 6 Monitor the forecast

Step 5 Make the forecast
Step 4 Gather and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast

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 Types of Forecasts
 Judgmental - uses subjective inputs (qualitative)
 Time series - uses historical data assuming the future
will be like the past (quantitative)
 Associative models - uses explanatory variables to
predict the future

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 Types of Forecasts
 Judgmental forecasts rely on analysis of subjective inputs obtained from various
sources, such as consumer surveys, the sales staff, managers and executives, and
panels of experts.
 Time-series forecasts simply attempt to project past experiences into the future.
These techniques use historical data with the assumption that the future will be
like the past. Some models merely attempt to smooth out random variations in
historical data; others attempt to identify specific patterns in the data and project
or extrapolate those patterns into the future,
 Associative models use equations that consist of one or more explanatory
variables that can be used to predict demand. For example, demand for paint
might be related to variables such as the price per gallon and the amount spent on
advertising, as well as to specific characteristics of the paint (e.g., drying time,
ease of cleanup).

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 Judgmental Forecasts
(Qualitative)

Consumer surveys
Delphi method
Executive opinions
 Opinions of managers and staff

Sales force.
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 Time Series Forecasts
(Quantitative)
 Trend - long-term movement in data
 Seasonality - short-term regular variations in data
 Irregular variations - caused by unusual
circumstances
 Random variations - caused by chance

 CYCLE- wave-like variations lasting more than one

year

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 Forecast Variations
Irregular
variation

Trend

cycle
Cycles

90
89
88
Seasonal variations

Figure 3-1 1-11

 Forecasting Techniques
 Naïve
 Simple Moving Average
 Weighted Moving Average
 Exponential Smoothing
 ES with Trend and Seasonality

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 Naïve Forecast
 Simple to use
 Virtually no cost
 Data analysis is nonexistent
 Easily understandable
 Cannot provide high accuracy

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 NAÏVE METHOD
 No smoothing of data

Period 1 2 3 4 5 6 7 8 Average
Demand 74 86 88
Forecast 98 90
change 12 2

w why would you use this method

No ?

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 Techniques for Averaging
 Moving average
 Weighted moving average
 Exponential smoothing

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 Simple Moving Average
 Smoothes out randomness by averaging positive and
negative random elements over several periods
 n - number of periods (this example uses 4)

Period 1 2 3 4 5 6 7
Demand 74 90 100 60 80 90
Forecast 81 82.5 82.5

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 Points to Know on Moving Averages
 Pro: Easy to compute and understand
 Con: All data points were created equal….

…. Weighted Moving Average

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 Weighted Moving Average
 Similar to a moving average method except that it
assigns more weight to the most recent values in a time
series.
 n – the number of periods
i – weight applied to period t-i+1

t
Ft +1 =   t − i +1 A i 1 2 3
i = t − n +1 Alpha 0.6 0.3 0.1

Period 1 2 3 4 5 6 7 8 Average
Demand 46 48 47 23 40
Forecast 32.70 35.60

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 Exponential Smoothing
 Simpler equation, equivalent to WMA
 – exponential smoothing parameter (0< )

 Ft = Ft −1 +  ( At −1 − Ft −1 )
 0.1

Period 1 2 3 4 5 6 7 8 Average
Demand 74 90 100 60
Forecast 72 72.2 73.98

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 Exponential Smoothing (α=0.30)
Ft = Ft −1 +  ( At −1 − Ft −1 )
PERIOD MONTH DEMAND
1 Jan 37
2 Feb 40 F2 = 37 + (0.30)(37-37)
3 Mar 41 = 37
4 Apr 37
5 May 45
6 Jun 50
F3 =37+ (0.30)(40-37)
7 Jul 43
8 Aug 47 = 37.9
9 Sep 56
10 Oct 52
11 Nov 55
12 Dec 54

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 Exponential Smoothing (cont.)
FORECAST, Ft + 1
PERIOD MONTH DEMAND ( = 0.3) ( = 0.5)
1 Jan 37 – –
2 Feb 40 37.00 37.00
3 Mar 41 37.90 38.50
4 Apr 37 38.83 39.75
5 May 45 38.28 38.37
6 Jun 50 40.29 41.68
7 Jul 43 43.20 45.84
8 Aug 47 43.14 44.42
9 Sep 56 44.30 45.71
10 Oct 52 47.81 50.85
11 Nov 55 49.06 51.42
12 Dec 54 50.84 53.21
13 Jan – 51.79 53.61

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 Adjusted Exponential Smoothing
• Variation of exponential smoothing used when a time
series exhibits a linear trend.

• The trend-adjusted forecast (TAF) is composed of two

elements: a smoothed error and a trend factor.

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Adjusted Exponential Smoothing

AFt +1 = Ft +1 + Tt +1
where
T = an exponentially smoothed trend factor

Tt +1 = (Ft +1 - Ft) + (1 - ) Tt
where
Tt = the last period trend factor
 = a smoothing constant for trend

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Adjusted Exponential Smoothing (β=0.30)
T3 = (F3 - F2) + (1 - ) T2
PERIOD MONTH DEMAND
= (0.30)(38.5 - 37.0) + (0.70)(0)
1 Jan 37
= 0.45
2 Feb 40
3 Mar 41 AF3 = F3 + T3 = 38.5 + 0.45
4 Apr 37 = 38.95
5 May 45
6 Jun 50 T13 = (F13 - F12) + (1 - ) T12
7 Jul 43
= (0.30)(53.61 - 53.21) + (0.70)(1.77)
8 Aug 47
9 Sep 56 = 1.36
10 Oct 52
11 Nov 55
12 Dec 54
AF13 = F13 + T13 = 53.61 + 1.36 = 54.96

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 Adjusted Exponential Smoothing: Example
FORECAST TREND ADJUSTED
PERIOD MONTH DEMAND Ft +1 Tt+ 1 FORECAST AFt +1

1 Jan 37 37.00 – –
2 Feb 40 37.00 0.00 37.00
3 Mar 41 38.50 0.45 38.95
4 Apr 37 39.75 0.69 40.44
5 May 45 38.37 0.07 38.44
6 Jun 50 38.37 0.07 38.44
7 Jul 43 45.84 1.97 47.82
8 Aug 47 44.42 0.95 45.37
9 Sep 56 45.71 1.05 46.76
10 Oct 52 50.85 2.28 58.13
11 Nov 55 51.42 1.76 53.19
12 Dec 54 53.21 1.77 54.98
13 Jan – 53.61 1.36 54.96

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 Linear Trend Equation
Y

Yt = a + bt
a
0 1 2 3 4 5 t
 b is the line slope.

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 Calculating a and b
n  (ty) -  t  y
b =
2
n t - (  t) 2

 y - b t
a =
n

Yes… Linear Regression!!

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Linear Trend Equation Example
t y
2
Week t Sales ty
1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885

 t = 15  t = 55
2
 y = 812  ty = 2499
2
( t) = 225

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 Linear Trend Calculation
5 (2499) - 15(812) 12495-12180
b = = = 6.3
5(55) - 225 275 -225

812 - 6.3(15)
a = = 143.5
5

y = 143.5 + 6.3t
Look on page 85
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 Disadvantages of simple linear regression
1. apply only to a linear relationship with an
independent variable.
2. one needs a considerable amount of data to establish
the relationship ( at least 20).
3. all observations are weighted equally

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 Forecast Accuracy
 Forecast error
 difference between forecast and actual demand
 MAD
 mean absolute deviation

 MAPD
 mean absolute percent deviation

 Cumulative error
 Average error or bias

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Mean Absolute Deviation (MAD)
 At - Ft 
MAD = n

where
t = period number
At = demand in period t
Ft = forecast for period t
n = total number of periods
  = absolute value

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 MAD Example
PERIOD DEMAND, At Ft ( =0.3) (At - Ft) |At - Ft|
1 37 37.00 – –
2 40 37.00 3.00 3.00
3 41 37.90 3.10 3.10
4 37  At -38.83
Ft  -1.83 1.83
5 MAD
45 = n 38.28 6.72 6.72
6 50 40.29 9.69 9.69
7 43 53.3943.20 -0.20 0.20
8 47 = 43.14 3.86 3.86
9 56
11 44.30 11.70 11.70
10 52 47.81 4.19 4.19
11 55
= 4.85 49.06 5.94 5.94
12 54 50.84 3.15 3.15
557 49.31 53.39

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 Other Accuracy Measures
Mean absolute percent deviation (MAPD)
|At - Ft|
MAPD =
 At
Cumulative error
E =  et
Average error
 et
(E )= n
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 Comparison of Forecasts

FORECAST MAD MAPD E (E)

Exponential smoothing ( = 0.30) 4.85 9.6% 49.31 4.48
Exponential smoothing ( = 0.50) 4.04 8.5% 33.21 3.02
Adjusted exponential smoothing 3.81 7.5% 21.14 1.92
( = 0.50,  = 0.30)

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 Forecast Control
 Tracking signal
 monitors the forecast to see if it is biased high or low

(At - Ft) E
Tracking signal = =
MAD MAD

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 Tracking Signal Values
DEMAND FORECAST, ERROR E = TRACKING
PERIOD At Ft At - Ft (At - Ft) MAD SIGNAL

1 37 37.00 – – – –
2 40 37.00 3.00 3.00 3.00 1.00
3 41 37.90 3.10 6.10 3.05 2.00
4 37 38.83 -1.83 4.27 2.64 1.62
5 45 38.28 6.72 10.99 3.66 3.00
Tracking
6 signal
50 for period 3
40.29 9.69 20.68 4.87 4.25
7 43 43.20 -0.20 20.48 4.09 5.01
8 476.10 43.14 3.86 24.34 4.06 6.00
TS3 = = 2.00
9 563.05 44.30 11.70 36.04 5.01 7.19
10 52 47.81 4.19 40.23 4.92 8.18
11 55 49.06 5.94 46.17 5.02 9.20
12 54 50.84 3.15 49.32 4.85 10.17

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 Sources of forecast errors
 The model may be inadequate.
 Irregular variation may occur.
 The forecasting technique may be used incorrectly or
the results misinterpreted.
 There are always random variations in the data.

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 End Notes
 The two most important factors in choosing a
forecasting technique:
 Cost
 Accuracy
 Keep it SIMPLE!
 FORECAST(70,{23,34,12},{67,76,56}) (if you can…let
the computer do it)

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