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Demand Forecasting 2017

Forecasting enables managers to anticipate future demand, sales, or production. It assumes past trends will continue and is rarely perfect. Forecasts are more accurate for groups than individuals and accuracy decreases over longer time horizons. Elements of a good forecast include being timely, accurate, reliable, simple, meaningful, and in writing. The forecasting process involves determining purpose and time horizon, gathering data, selecting a technique, making the forecast, and monitoring performance. Common techniques are judgmental, associative, time-series, and Delphi methods. Time-series components are trend, seasonality, cycles, and irregular variations. Averaging/smoothing methods include moving averages. Common accuracy measures are mean absolute deviation, mean squared error,

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143 views10 pages

Demand Forecasting 2017

Forecasting enables managers to anticipate future demand, sales, or production. It assumes past trends will continue and is rarely perfect. Forecasts are more accurate for groups than individuals and accuracy decreases over longer time horizons. Elements of a good forecast include being timely, accurate, reliable, simple, meaningful, and in writing. The forecasting process involves determining purpose and time horizon, gathering data, selecting a technique, making the forecast, and monitoring performance. Common techniques are judgmental, associative, time-series, and Delphi methods. Time-series components are trend, seasonality, cycles, and irregular variations. Averaging/smoothing methods include moving averages. Common accuracy measures are mean absolute deviation, mean squared error,

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Forecasting: Common Features

Forecasting enables a manager to anticipate/predict future


demand, sale, production, etc. so s/he can plan accordingly.

It assumes that the same underlying causal system


that existed in the past will continue to exist in the future.

It is rarely perfect; actual results usually differ from the


predicted values, owing to the presence of randomness.

It tends to be more accurate for a group of items than


for individual items, due to cancelling effect in the group.

Its accuracy decreases as the time horizon increases;


short-range forecasts usually tend to be more accurate.
Forecasting: Elements of a Good Forecast

The forecast must be timely;

It must be accurate; its accuracy should be stated;

It has to be reliable, and should work consistently;

Its technique should be simple to understand and use;

It has to be expressed in meaningful units;

It should be in writing, increasing use of same info by all.


Forecasting: Steps in Forecasting Process

Determine the purpose of the forecast; when/how to use;

Establish a time horizon, indicating the time interval(s);

Gather and analyze relevant data before forecasting;

Select a forecasting technique suitable for the data;

Make the forecast, using the selected technique(s);

Monitor the forecast to determine its performance.


Forecasting: Techniques

Judgmental: Rely on analyses of subjective inputs, such


as opinions from consumers, sales staff, executives, etc.

Associative Models: Use techniques consisting of one or


more explanatory variables to predict a future demand.

Time-series: Ident project patterns in recent time-ordered


sequence (using historical data), assuming future like past.

Delphi: A series of relevant questionnaires answered by


experts, managers, staff, with/without info to each other.
Forecasting: Methods

Qualitative: Causal (Judgmental, Associative);

Quantitative: Time-series (Averaging/Smoothing, Trend


projection, Trend projection adjusted for Seasonal
influence, etc.), Delphi, etc.

Naive Method: Simplest, but widely used approach. Uses a


single previous value of time-series as the basis of
Example:
forecast.
Period Actual Change from Previous Value Forecast
Previous, t-1 40
Current, t 60 +20
Next, t+1 60 + 20 = 80
Time-Series Components

Trend: A long-term upward/downward movement in data;

Seasonality: Short-term, fairly regular variations related to


the time of the calendar day, or week, month, quarter, etc.

Cycles: Wave-like variations, lasting for more than a year;

Irregular Variations: Caused by unusual circumstances


not reflective of typical behaviour, e.g. strike, weather, etc;

Random Variations: The residual variations that remain


after all other behaviours have been accounted for.
Averaging/Smoothing Methods
Moving Average: A method that averages a number of
recent actual values, updated as new values are available.

Thus, the forecast for time-period t, Ft = MAn = (At-1)/n,

where, Ft = Forecast value for time period t;

MAn = moving average for n no. of periods;

i = index corresponding to time-period (i = 1~n);

n = no. of periods in moving averages;

At-1 = actual value in period t-1.


Moving Average
(continued)
Examples: Compute a three-period moving average forecast,
given the demand for shopping carts for the last five periods.

Period Demand Solution:


t y
1 44 Taking the three most recent demands,
2 42 F6 = (41 + 40 + 43) / 3 = 124 / 3 = 41.333 nos.
3 43 Again, if the actual demand in period 6 turns
out to be 38,
4 40 F7 = (38 + 41 + 40) / 3 = 119 / 3 = 39.667 nos.
5 41 Ft updated, as the new actual value found.
Forecast Accuracy
Three common measures for summing historical errors are:

A. Mean Absolute Deviation (MAD): The average


absolute forecast error;

MAD = [Actualt - Forecastt] / n, where Et = At Ft;

B. Mean Squared Error (MSE): The average of the


squared forecast errors;

MSE = [Actualt - Forecastt] / (n 1), where n = pds;

C. Mean Absolute Percentage Error (MAPE): The


average absolute percentage error;

MAPE = [Actualt - Forecastt/ Actualt * 100]% / n.


Forecast Accuracy
Example: Compute MAD, MSE and MAPE for the following data:
Period Actual Forecast E=A-F E E/A*100 Solution:
t A F
1 217 215 2 4 0.922% A. MAD
2 213 216 3 9 1.408 = E/ n
3 216 215 1 1 0.463 = 22 / 8 = 2.750
4 210 214 4 16 1.905 B. MSE
5 213 211 2 4 0.939 = E / (n - 1)
6 219 214 5 25 2.283 = 76 / 7 = 10.857
7 216 217 1 1 0.463 C. MAPE
8 212 216 4 16 1.887 =[E/A*100]/n
= - - 22 76 10.27% =10.27/8 =1.284%

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