OM7
Trend-Adjusted Exponential Smoothing
Chapter 8: Forecasting
Forecasting - predicting future events.
Principles of Forecasting:
1. Forecasts are rarely perfect.
2. Forecasts are more accurate for groups or
families of items rather than for individual items.
3. Forecasts are more accurate for shorter than
longer time horizons.
Steps in the Forecasting Method:
1. Decide what to forecast.
2. Evaluate and analyze appropriate data.
3. Select and test the forecasting model.
4. Generate the forecast.
5. Monitor forecast accuracy.
Qualitative Forecasting Methods forecast is
made subjectively by the forecaster.
Quantitative Forecasting Methods forecast is
based on mathematical modeling.
Types of Forecasting Methods:
1. Qualitative Forecasting Methods
-Characteristics: based on human judgement,
opinions, subjective and non-mathematical
-Strengths: can incorporate latest changes in the
environment and inside information
-Weaknesses: can bias the forecast and reduce
forecast accuracy
2. Quantitative Forecasting Methods
-Characteristics: based on mathematics,
quantitative in nature
-Strengths: consistent and objective, able to
consider much information and data at one time
-Weaknesses: often quantifiable data are not
available, only as good as the data on which they
are based
Qualitative Forecasting Methods:
1. Executive Opinion forecasting method in
which a group of managers collectively develop a
forecast.
2. Market Research approach to forecasting that
relies in surveys and interviews to determine
customer preferences.
3. Delphi Method approach to forecasting in
which a forecast is the product of a consensus
among a group of experts.
Quantitative Forecasting Methods:
1.Time Series Models based on the assumption
that a forecast can be generated from the
information contained in a time series of data.
2.Time Series a series of observations taken over
time.
3.Casual Models based on the assumption that
the variable being forecast is related to other
variables in the environment.
Time Series Models:
1. Nave Method forecasting method that
assumes next periods forecast is equal to the
current periods actual value.
2. Simple Mean Average the average of a set of
data.
3. Simple Moving Average a forecasting method
in which only n of the most recent observations are
average.
4. Weighted Moving Average a forecasting
method in which n of the most recent observations
are averaged and past observations may be
weighed differently.
5. Exponential Smoothing uses a sophisticated
weighted average procedure to generate a forecast.
6.
exponential smoothing model that is suited to data
that exhibit a trend.
7.Linear Trend Line computes a forecast with
trend by drawing a straight line through a set of
data.
8. Seasonal Indexes percentage amount by
which data for each season are above or below the
mean.
Casual (Associative) Models:
1. Linear Regression procedure that models a
straight-line relationship between two variables.
2. Multiple Regression similar to linear but
models the relationship of multiple variables with
the variable being forecast.
Four Basic Patterns in a Time Series Model:
1. Level or Horizontal Pattern a pattern in
which data values fluctuate around a constant
mean.
2. Trend a pattern in which data exhibit increasing
or decreasing values overtime.
3. Seasonality any pattern that regularly repeats
itself and is constant in length.
4. Cycles data patterns created by economic
fluctuations.
Random Variation is an unexplained variation
that cannot be predicted.
Data= level + trend + seasonality + cycle +
random variation
Data= pattern + random variation
Correlation Coefficient is statistic that measures
the direction and strength of the linear relationship
between two variables.
Forecast Error is the difference between the
forecast and actual value for a given period.
Et= At Ft
Et= forecast error for period t
At= actual value for period t
Ft= forecast for period t
Most Commonly Used Error Measures:
1. Mean Absolute Deviation (MAD) measure of
forecast error that computers error as the average
of the sum of the absolute errors.
MAD= |actual forecast|/n
2. Mean Squared Error (MSE) measure of
forecast error that computers error as the average
of the squared error.
MSE= (actual forecast)2/n
Forecast Bias a persistent tendency for a
forecast to be over or under the actual value of the
data.
Tracking Signal tool used to monitor the quality
of a forecast.
Tracking Signal= algebraic sum of forecast
errors/MAD
Tracking Signal= (actual forecast)/MAD
Factors in Selecting the Right Forecasting
Model:
1. Amount and type of available data.
2. Degree of accuracy required.
3. Length of forecast horizon.
4. Data patterns present.
Forecasting Software:
1. Spreadsheets
2. Statistical Packages
3. Specialty Forecasting Packages
Guidelines for Selecting Forecasting Software:
1. Does the package have the facilities you want?
2. What platform is the package available for?
3. How easy is the package to learn and use?
4. It is possible to implement new methods?
5. Do you require interactive or repetitive
forecasting?
6. Do you have large data sets?
7. Is there any local support?
8. Does the package give the right answers?
Focus Forecasting is a forecasting approach that
has gained some popularity in business.
Collaborative, Planning, Forecasting and
Replenishment (CPFR) is a collaborative process
between two trading partners that establishes
formal guidelines for joint forecasting and planning.
Nine Steps to Utilize CPFR:
1. Establish collaborative relationships.
2. Create a joint business plan.
3. Create a sales forecast.
4. Identify exceptions for sales forecasts.
5. Resolve/collaborate on exceptions to sales
forecasts.
6. Create order forecast.
7. Identify exceptions for order forecast.
8. Resolve/collaborate on exceptions to order
forecast.
9. Generate order