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Chapter 6 Forecasting: Quantitative Approaches To Forecasting

This document discusses quantitative forecasting methods. It describes time series forecasting, which uses historical data from the variable being forecast, and causal forecasting, which uses other related variables. Three common time series methods are discussed: smoothing, trend projection, and trend/seasonal projection. Smoothing averages out irregular variations using techniques like moving averages. Accuracy is measured by errors like mean squared error and mean absolute deviation. Exponential smoothing calculates forecasts as a weighted average of past observations, with more weight on recent periods using a smoothing constant. The best constant is selected by minimizing forecast error.

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126 views10 pages

Chapter 6 Forecasting: Quantitative Approaches To Forecasting

This document discusses quantitative forecasting methods. It describes time series forecasting, which uses historical data from the variable being forecast, and causal forecasting, which uses other related variables. Three common time series methods are discussed: smoothing, trend projection, and trend/seasonal projection. Smoothing averages out irregular variations using techniques like moving averages. Accuracy is measured by errors like mean squared error and mean absolute deviation. Exponential smoothing calculates forecasts as a weighted average of past observations, with more weight on recent periods using a smoothing constant. The best constant is selected by minimizing forecast error.

Uploaded by

vanisha1994
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1

Chapter 6 Forecasting
The Components of a Time Series
Measures of Forecast Accuracy
Using Smoothing Methods in Forecasting
Using Trend Projection in Forecasting
Using Trend and Seasonal Components in Forecasting
Using Regression Analysis in Forecasting
Quantitative Approaches to Forecasting
Quantitative methods are based on an analysis of historical data
concerning one or more time series.
A time series is a set of observations measured at successive points in
time or over successive periods of time.
If the historical data used are restricted to past values of the series
that we are trying to forecast, the procedure is called a time series
method.
If the historical data used involve other time series that are believed
to be related to the time series that we are trying to forecast, the
procedure is called a causal method.
2
Time Series Methods
Three time series methods are:
smoothing
trend projection
trend projection adjusted for seasonal influence
The trend component accounts for the gradual shifting of the time series
over a long period of time.
Any regular pattern of sequences of values above and below the trend
line is attributable to the cyclical component of the series.
The seasonal component of the series accounts for regular patterns of
variability within certain time periods, such as over a year.
The irregular component of the series is caused by short-term,
unanticipated and non-recurring factors that affect the values of the time
series. One cannot attempt to predict its impact on the time series in
advance.
Components of a Time Series
3
Measures of Forecast Accuracy
Mean Squared Error
The average of the squared forecast errors for the historical data is
calculated. The forecasting method or parameter(s) which minimize this
mean squared error is then selected.
Mean Absolute Deviation
The mean of the absolute values of all forecast errors is calculated,
and the forecasting method or parameter(s) which minimize this measure
is selected. The mean absolute deviation measure is less sensitive to
individual large forecast errors than the mean squared error measure.
Smoothing Methods
In cases in which the time series is fairly stable and has no significant
trend, seasonal, or cyclical effects, one can use smoothing methods to
average out the irregular components of the time series.
Four common smoothing methods are:
Moving averages
Centered moving averages
Weighted moving averages
Exponential smoothing
4
Example: Gasoline Sales Page 186
Excel Spreadsheet Showing Input Data
Smoothing Methods
Moving Average Method
The moving average method consists of computing an average of the
most recent n data values for the series and using this average for forecasting
the value of the time series for the next period "t".
GasolineSales.xls
MSE = 92/9 = 10.22
Error=Actual-Forecast
5
Plot of Actual Gasoline Sales vs. Simulated Forecast with Moving Average Base
set at 3 periods (n=3).
6
Smoothing Methods
Exponential Smoothing
Using exponential smoothing, the forecast for the next period is equal to
the forecast for the current period plus a proportion () of the
forecast error in the current period.
Using exponential smoothing, the forecast is calculated by:
[the actual value for the current period] +
(1- )[the forecasted value for the current period],
where the smoothing constant, , is a number between 0 and 1.

t t t
F Y F

1
1
F
t+1
= forecast for the next time period, t+1
Y
t
= actual value as the time period t
F
t
= forecast that was calculated for the time period t
= value of the smoothing constant
is an approximation of the equivalent smoothing constant for a moving average using "n"
periods as the base of the average. For example, n=3 periods, then = 0.50. Therefore,
using a smoothing constant of 0.50 has roughly the same effect as a moving average of
three time periods.
1
2


t t t 1 t
F Y F F

or
7
Exponential Smoothing Forecast, = 0.2 Page 190
8
Exponential Smoothing Forecast, = 0.2 Page 192
0
5
10
15
20
25
1 2 3 4 5 6 7 8 9 10 11 12
Time Period
0
0
0
'
s

o
f

G
a
l
l
o
n
s
Actual
Forecast
9
Smoothing Methods: Evaluating the Smoothing Constant
Suppose we have the following actual demands and we want to figure out the best
smoothing constant, , to use for future forecasts.

The MSE will be used to evaluate the worth of the chosen smoothing constant.
ExpSmoNotes.xls
10
Smoothing Methods: Evaluating the Smoothing Constant
The Solver screen set up to minimize the MSE by varying the Smoothing Constant
from 0.01 to 0.99.
ExpSmoNotes.xls

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