3-1 Forecasting

Planning
Forecasting
By-

Abhishek Gupta

Id. No. 49284

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FORECAST:

 A statement about the future value of a variable of

interest such as demand.
 Forecasts affect decisions and activities throughout
an organization
 Accounting, finance
 Human resources
 Marketing
 MIS
 Operations
 Product / service design
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Uses of Forecasts

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing and promotion strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

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 Assumes causal system

past ==> future
 Forecasts rarely perfect because of
randomness
 Forecasts more accurate for
groups vs. individuals I see that you will
get an A this semester.
 Forecast accuracy decreases
as time horizon increases
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Elements of a Good Forecast

Timely

Reliable Accurate

Written
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Steps in the Forecasting Process

1. Analysing and understanding the problem

2. Developing sound foundation
3. Collecting and analysing data
4. Estimating future events
5. Comparing results
6. Follow up action
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Types of Forecasting Models

1.Qualitative methods – judgmental methods

Forecasts generated subjectively by the forecaster
Educated guesses

2.Quantitative methods – mathematical modeling

Forecasts generated through mathematical
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Qualitative Methods

Type Characteristics Strengths Weaknesses

Executive A group of managers Good for strategic or One person's opinion
opinion meet & come up with new-product can dominate the
a forecast forecasting forecast

Market Uses surveys & Good determinant of It can be difficult to

research interviews to identify customer preferences develop a good
customer preferences questionnaire

Delphi Seeks to develop a Excellent for Time consuming to

method consensus among a forecasting long-term develop
group of experts product demand,
technological
changes, and
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Quantitative Methods

 Time Series Models:

 Assumes information needed to generate a forecast is contained
in a time series of data
 Assumes the future will follow same patterns as the past
 Causal Models or Associative Models
 Explores cause-and-effect relationships
 Uses leading indicators to predict the future
 Housing starts and appliance sales
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Time Series Forecasts

 Trend - long-term movement in data

 Seasonality - short-term regular variations in data

 Cycle – wavelike variations of more than one

year’s duration
 Irregular variations - caused by unusual
circumstances
 Random variations - caused by chance
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Forecast Variations
Figure 3.1

Irregular
variation

Trend

Cycles

90
89
88
Seasonal variations
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Naive Forecasts

Uh, give me a minute....

We sold 250 wheels last
week.... Now, next week
we should sell....

The forecast for any period equals

the previous period’s actual value.
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Naïve Forecasts

 Simple to use
 Virtually no cost

 Quick and easy to prepare

 Data analysis is nonexistent

 Easily understandable

 Cannot provide high accuracy

 Can be a standard for accuracy

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Forecast Accuracy

 Error - difference between actual value and predicted

value
 Mean Absolute Deviation (MAD)
 Average absolute error
 Mean Squared Error (MSE)
 Average of squared error
 Mean Absolute Percent Error (MAPE)
 Average absolute percent error
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MAD, MSE, and MAPE

 Actual  forecast
MAD =
n
2
 ( Actual  forecast)
MSE =
n -1

( Actual  forecast / Actual*100)

MAPE =
n
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Example 10

Period Actual Forecast (A-F) |A-F| (A-F)^2 (|A-F|/Actual)*100

1 217 215 2 2 4 0.92
2 213 216 -3 3 9 1.41
3 216 215 1 1 1 0.46
4 210 214 -4 4 16 1.90
5 213 211 2 2 4 0.94
6 219 214 5 5 25 2.28
7 216 217 -1 1 1 0.46
8 212 216 -4 4 16 1.89
-2 22 76 10.26

MAD= 2.75
MSE= 10.86
MAPE= 1.28
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Controlling the Forecast

 Control chart
 A visual tool for monitoring forecast errors
 Used to detect non-randomness in errors

 Forecasting errors are in control if

 All errors are within the control limits
 No patterns, such as trends or cycles, are
present
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Sources of Forecast errors

 Model may be inadequate

 Irregular variations

 Incorrect use of forecasting technique

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