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Forecasting

Other References
O Forecasting Methods And Applications by

Spyros Makridakis et al.

O Business Forecasting by
Keating

Wilson

and

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Introduction to Demand Forecasting

O Demand Forecasting: A statement about the

future state of demand

O Why Demand Forecasting?
O Forecasting enables a firm to plan appropriately

for the procurement of raw materials and

production and distribution of final goods

Unit of Forecasting
O Item (SKUs)
O Region (Continent, Country, City etc.)
O Channel (Online, Superstores, Mom and Pop

Stores etc.)
ITEM

REGION

CHANNEL

Shirt, White, Van

Heusen, 40
East Zone
Discount Store

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Multi-Tier Forecasting
O Reconciliation of Forecasts
Aggregation of Forecasts (Bottom-up)
Disaggregation of Forecasts (Top-down)

Forecasting Accuracy Metrics

n

O Bias

O MAD

1
n

O MSE

1
n

O MAPE

1
n

1
n

O SMAPE

i 1

i 1

Ft

At Ft

i 1

i 1

Ft

At Ft
At
At Ft

i 1

Ft

2
6

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Example
At
136

Ft
122.33

142

127.67

125

131.33

150

134.33

121

139

115

132

Calculate Bias, MAD, MAPE and MSE

Example
At
136

Ft
122.33

Et
13.67

|Et |
13.67

Et ^2
186.8689

|Et |/At
0.100515

142

127.67

14.33

14.33

125

131.33

205.3489

0.100915

-6.33

6.33

40.0689

0.05064

150

134.33

15.67

15.67

245.5489

0.104467

121

139

-18

18

324

0.14876

115

132

-17

17

289

0.147826

Bias 2.34
MSE 215.139

MAD 14.167

MAPE 10.89%
8

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Browns Tracking Signal

O Tracking Signal is the ratio of running

sum of forecasted errors to MAD and

can be expressed as
TS

RSFE
M AD

Example
At

Ft

Et

|Et |

MAD

RSFE

TS

136

122.33

13.67

13.67

13.67

13.67

1.000

142

127.67

14.33

14.33

14

28

2.000

125

131.33

-6.33

6.33

11.44

21.67

1.894

150

134.33

15.67

15.67

12.5

37.34

2.987

121

139

-18

18

13.6

19.34

1.422

115

132

-17

17

14.17

2.34

0.165
10

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Classification of Forecasting
Techniques
O Qualitative Forecasting Techniques:

Subjective, Opinion oriented

O Quantitative Forecasting Techniques:
Statistical Algorithms

11

Qualitative Forecasting Techniques

O Grass Roots: Salesperson
O Market

Research:

Interviews,

surveys
O Panel consensus: S & OP
O Historical analogy: Similar Products
O Delphi method: Group of Experts,
Iterative

12

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Quantitative Forecasting Techniques

O Time Series Based
Moving Average (Simple and Weighted)
Exponential Smoothing (Simple, Holt-Winter)
Trend Projections
ARIMA
Croston for Intermittent Demand

O Causality Based
Multiple Linear Regression

O Others

(Short Lifecycle, New Products,

Simulation)
13

TimeSeriesbasedMethods
D(i ), i 1,..., t
Historical
Data

Time Series
Model

D (t ), 1,2,...
Forecasts

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TimeSeriesBasedMethods
O Components of Time Series
O Level
O Trend

Microsoft Excel
Worksheet

Microsoft Excel
Worksheet

O Seasonality

(Both
Multiplicative)
O Cyclicality
O Random

Additive

and

Simple Moving Average

OA

k period simple
average is given as
Ft

moving

At 1 At 2 ... At k
k

16

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Weighted Moving Average

O A k period weighted moving average is given

as
Ft w1 At 1 w2 At 2 ... wk At k

where wis are the weights connected by the

following relation
w1 w2 ... wk 1, 0 wi 1
17

Example
O The

demand data available for January,

February, March and April are 120, 131, 116
and 130 respectively. Use a 4- period simple
moving average to predict the demands for the
next 6 months
O Also predict the demands for the next 6
months using weighted moving average with
weights 0.5, 0.3 and 0.2 respectively for t-1, t2 and t-3 time periods
18

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Simple Exponential Smoothing

O Simple Exponential Smoothing

Ft Ft 1 At 1 Ft 1

0 1
is known as the smoothing constant

19

Simple Exponential Smoothing

X(t)
734.7236
775.5469
808.2594
854.1412
834.9395
900.8387
949.1749
859.5532
900.6031
878.6872
816.2732
868.2826
727.0565

Alpha
F(t)
734.7236
734.7236
742.8882
755.9625
775.5982
787.4665
810.1409
837.9477
842.2688
853.9357
858.886
850.3634
853.9473

0.2
E(t)=X(t)-F(t)
0
40.8233
65.3712
98.1787
59.3412
113.372
139.0340
21.6055
58.3343
24.7515
-42.6128
17.9192
-126.8908

20

10

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Trend Adjusted Exponential

Smoothing
O Holts Method

Ft Lt Tt
Lt Ft 1 At 1 Ft 1
Tt Lt Lt 1 1 Tt 1

21

Decomposition of Time Series

O Additive Decomposition
O Multiplicative Decomposition
Quarter
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

Sales
1071.367
1105.261
1125.648
1085.552
1093.749
1011.672
917.6388
1017.165
22

11

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Trend Line through Regression

O Use the regression model

F t a b .t

23

Multiple Linear Regression

O In MLR, the forecasting is done by taking into

account a series of causality factors

F t a b1 . y 1 b 2 . y 2 . . . b k y k

24

12

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BassDiffusionMethodfor
NewProductsForecasting
O N(t) Cumulative no. of adopters from time of
O
O
O
O

launch to time t
S(t)=N(t)-N(t-1) i.e. no. of new adopters added
in the time interval [t-1,t]
S(t)=[p+(q/m) N(t-1)] [m-N(t-1)]
p
coefficient of innovation
q
coefficient of imitation

OtherMethods(Not
inthesyllabus)

13

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Holt Winters Exponential

Smoothing
O Holt

Winters
Seasonality)

Method

(Multiplicative

Ft Lt Tt St
Lt

At
1 Lt 1 Tt 1
St

Tt Lt Lt 1 1 Tt 1
A
St t m 1 St m
Lt m

27

Croston Method
O Whenever demand series has many zeroes, the

demand series is known as intermittent in

nature
O Croston Algorithm is an appropriate algorithm
under this case

See: http://help.sap.com/saphelp_scm70/helpdata/en/72/a2ca53f1a1214be10000000a174cb4/content.htm

28

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