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Forecasting A. Forecasting Across the Organization 1. Forecasts are critical inputs to business plans, annual plans, and budgets.

a. Finance: b. Human resources: c. Marketing: d. Operations and supply chain managers: 2. Managers throughout the organization make forecasts on many different variables other than future demand, such as: Key Decisions on Making Forecasts
1.

Deciding what to forecast

2.

Choosing a forecast system

3.

Choosing the type of forecasting technique a. Judgment and qualitative methods b. Quantitative methods

Causal Methods: Linear Regression 1. Linear regression a. Definition b. Dependent variable and independent variables c. In models with only one independent variable, the theoretical relationship is a straight line: Y= a + bX where Y = dependent variable X = independent variable a = Y-intercept of the line b = slope of the line 2. Sample correlation coefficient, r 3. Sample coefficient of determination, r2 4. Standard error of the estimate, syx 5. Forecasting with linear regression

Time-Series Methods 1. Naive forecast. Forecast = Dt 2. Estimating the average a. Simple moving average Forecasting formula:
Ft +1 = Sum of last n demands Dt + Dt 1 + Dt 2 + + Dt n +1 = n n

where Dt = actual demand in period t n = total number of periods in the average Ft+1 = forecast for period t+1 b. Forecast error Definition and formula

Application 13.1a: Estimating with Simple Moving Average We will use the following customer-arrival data in this application. Mont h 1 2 3 4 Customer arrivals 800 740 810 790

Use a three-month moving average to forecast customer arrivals for month 5.

F5 =

D4 + D3 + D2 = 3

Forecast for month 5 is _____ customer arrivals. If the actual number of arrivals in month 5 is 805, what is the forecast for month 6?
F6 = D5 + D4 + D3 = 3

Forecast for month 6 is _____ customer arrivals. Given the three-month moving average forecast for month 5, and the number of patients that actually arrived (805), what is the forecast error?
E5 =

c. Weighted moving averages. Ft+1 = W1Dt + W2Dt1 ++WnDt


n+1

d. Exponential smoothing Formula:


Ft +1 = ( Demand this period ) + (1 )( Forecast calculated last period ) = Dt + (1 ) Ft

An equivalent formula is: Ft +1 = Ft + ( Dt Ft ) Example 13.3: Reconsider the patient arrival data in Example 13.2. It is now the end of week 3. Using = 0.10, calculate the exponential smoothing forecast for week 4.

What is the forecast error for week 4 if the actual demand turned out to be 415?

What is the forecast error for week?

3. Including a trend a. Trend-adjusted exponential smoothing method Example 13.4

b. Formula:
At = ( Demand this period ) + (1 )( Average + Trend estimate last period ) Tt = ( Average demand this period - Average demand last period ) + (1 )( Trend estimate last period ) = ( At At 1 ) + (1 )Tt 1 = Dt + (1 )( At 1 + Tt 1 )

Ft +1 = At + Tt

where At = exponentially smoothing average of the series in period t Tt = exponentially smoothing average of the trend in period t = smoothing parameter for the average, with a value between 0 and 1 = smoothing parameter for the trend, with a value between 0 and 1 Ft+1 = forecast for period t+1 Choosing a Time-Series Method 1. Forecast error a. Types of forecast errors Bias Random b. Measures of forecast error Cumulative forecast error (bias):
CFE = E t
t =1 n

Average forecast error (mean bias): Mean squared error: Standard deviation:
MSE =
n

E=

CFE n

E
t =1

2 t

n
t

(E
t =1

n 1

Mean absolute deviation:

MAD =

E
t =1

Mean absolute percent error:


CFE

MAPE =

E
t =1

/ Dt (100) n

Tracking signal = MAD c. Example 13.6: Calculating Measures of Forecast Errors A forecasting procedure has been used for the last 8 months, with the following results. Evaluate how well the procedure is doing, by finishing the following table and then computing the different forecast error measures. DemandForecastError Error Absolute Absolute Month (Dt) (Ft) (Et) Square Error Percent d (|Et||) Error (Et2) (|Et||/ Dt)100 1 200 225 -25 ____ ____ ____% 2 240 220 20 ____ ____ ____ 3 300 285 15 ____ ____ ____ 4 270 290 -20 ____ ____ ____ 5 230 250 400 20 8.7 20 6 260 240 20 400 20 7.7 7 210 250 40 19.0 40 1600 8 275 240 35 1225 35 12.7 Totals
CFE =
E =

MSE =

=
MAD =

MAPE =
Tracking signal =

2. Criteria for selecting time-series methods a. b. c. d. Using Multiple Techniques 1. Combination forecasts 2. Focus forecasting

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