Session 3-Ch 3 (Stevenson)
Session 3-Ch 3 (Stevenson)
Session 3
Chapter 3
(W. Stevenson)
FORECAST
A statement about the future value of a variable of
interest such as demand (Prediction about the
future)
Forecasting is used to make informed decisions.
Long-range( Planning for several years or more)
Short-range(Planning and scheduling day to day
activities)
Forecasts affect decisions and activities throughout
an organization
2 uses of forecast-
1. Plan the system and
2. Plan the use of the system.
Features of Forecasts
Forecasting techniques generally assume that the
same underlying casual system that existed in the
past will continue to exist in the future.
Forecasts are rarely perfect because of
randomness. Allowances should be made for
forecast errors.
Forecast for groups of items tend to be more
accurate than forecasts for individual items.
Forecasting errors among items in a group usually
have a cancelling effect.
Forecastaccuracy decreases as the time period
covered by the forecast-the time horizon increases.
Elements of a good forecast
Simple to
Meaningful
In writing understand
Units
and use
Cost-
effective
Steps in the Forecasting Process
“The forecast”
7.
Is accuracy of No 8b. Select new forecast
forecast
model or adjust
acceptable?
parameters of existing
model
Yes
Actual forecast
MAD =
n
( Actual forecast)
2
MSE =
n -1
Executive opinions
Sales force opinions
Consumer surveys
Outside opinion
Delphi method
Opinions of managers and staff
Achieves a consensus forecast
Time Series Forecasts
Trend
Cycles
Seasonal variations
Naive Forecasts
Simple to use
Virtually no cost as data analysis is non-existent
Quick and easy to prepare
Easily understandable
Cannot provide high accuracy
Can be a standard for accuracy
If the actual demand in period 6 is 38, then the moving average forecast for period
7 is-
Weighted Moving Average (Example 3)
F3 F2 ( A2 F2 )
0.10, F3 42 0.10( 40 42) 42 0.10 ( 2) 42 0.2 41.8
F4 F3 ( A3 F3 )
0.10, F4 41.8 0.10( 43 41.8) 41.8 0.10 1.2 41.8 0.12 41.92
Picking a Smoothing Constant
• Selecting a smoothing constant is a matter of
Judgment or trial and error.
• Commonly used values of range from .05 to .50
• Low values of are used when the underlying average
tends to be stable.
• Higher values of are used when the underlying
average is susceptible to change.
• Closer the is to 0, the greater the smoothing
(Figure 3.4B)
Techniques for trend
• Analysis of trend involves developing an equation
that will describe trend.
• The trend component may be linear, or it may not
be.
• There are 2 important techniques that can be used
to develop forecasts when trend is present
Use of trend equation
An extension of exponential smoothing.
Linear Trend Equation
Ft
Ft = a + bt
0 1 2 3 4 5 t
n (ty) - t y
b =
2
n t - ( t) 2
y - b t
a =
n
Linear Trend Equation Example
t y
2
W eek t Sales ty
1 1 150 150
2 4 157 314
3 9 162 486
4 16 166 664
5 25 177 885
3-27
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
Associative Forecasting
Correlation
a measure of the strength of the
relationship between independent and
dependent variables
12-32
Correlation and Coefficient of Determination
Correlation, r
Measure of strength of relationship
between the dependent variable
(demand) and the independent variable
Varies between -1.00 and +1.00
Coefficient of determination, r2
Percentage of variation in dependent
variable resulting from changes in the
independent variable
12-33
Linear Regression Example
x y
(WINS) (ATTENDANCE) xy x2
4 36.3 145.2 16
6 40.1 240.6 36
6 41.2 247.2 36
8 53.0 424.0 64
6 44.0 264.0 36
7 45.6 319.2 49
5 39.0 195.0 25
7 47.5 332.5 49
49 346.7 2167.7 311
12-34
Computing Correlation
n xy - x y
r=
[n x2 - ( x)2] [n y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
r=
[(8)(311) - (49)2] [(8)(15,224.7) - (346.9)2]
r = 0.947
Coefficient of determination
r2 = (0.947)2 = 0.897
12-35
Choosing a Forecasting Technique
No single technique works in every situation
Two most important factors
Cost
Accuracy
Other factors include the availability of:
Historical data
Computers
Time needed to gather and analyze the data
Forecast horizon