DEMAND FORECASTING

ANDE TECHNIQUE
MR. PENAMANTE
Why Forecast?
It is useful to know the future

For example:
Ancient Spartans: Outcome of battle
Sports: Predict game outcome
Businesses: Anticipate revenue sales and costs, develop and
revise strategy
Steps to Developing a Forecast
1. Determine use of the forecast; what is it we are trying to obtain
2. Identify items we need to forecast
3. Determine the time horizon of the forecast: small, medium or
long term.
4. Select forecasting model(s)
5. Gather data needed to make forecast
6. Validate the forecasting model
7. Make the forecast. Implement results
TYPES OF FORECASTING
1. QUALITATIVE – incorporate judgement or subjective
factors into the forecasting model
2. TIME SERIES – predict the future using historical data
3. CAUSAL – estimate relationship between variables or
factors that influence forecasted value
QUALITATIVE FORECASTING MODEL
1. DELPHI METHOD – iterative group process to elicit
forecasts.
2. JURY OF EXECUTIVE DECISION – small group of high level
managers
3. SALES FORCE COMPOSITE – area forecasts combined to
generate broader forecast
4. CONSUMER MARKET SURVEYS – survey customers or
potential customers
TIME SERIES FORECASTING
Time series data is the sequence of data points where order
indicates successive measurements over time.

Example of time series data – you record your sales every

month. You can use the information to forecast the sales for
the next month
TIME SERIES FORECASTING MODELS
1. Moving Averages Model – forecast coming period is
average of n previous periods.
2. Weighted Moving Averages - forecast coming period is
average of n previous periods. The weights of n periods
sum to one.
3. Exponential Smoothing – is a weighted average of actual
value in current period and forecast for current period.
In a causal forecasting model, the forecast for the quantity of interest
“rides piggyback” on another quantity or set of quantities.

In other words, our knowledge of the value of one variable (or

perhaps several variables) enables us to forecast the value of
another variable.

In this model, let

y denote the true value of some variable of
interest and
^
y denote a predicted or forecast value for that
variable.
Then, in a causal model,
^
y = f(x1, x2, … xn)
where
f is a forecasting rule, or function, and
x1, x2 , … xi , is a set of variables
In this representation, the x variables are often called independent
variables, whereas y is the dependent or response variable. ^

We either know the independent variables in advance or can

forecast them more easily than y. ^

Then the independent variables will be used in the forecasting

model to forecast the dependent variable.
Summary: Causal Forecasting Models
The goal of causal forecasting model is to develop the best statistical
relationship between a dependent variable and one or more
independent variables.
The most common model approach used in practice is regression
analysis. Only linear regression models are examined in this course.
In causal forecasting models, when one tries to predict a dependent
variable using a single independent variable, it is called a simple
regression model.
When one uses more than one independent variable to forecast the
dependent variable, it is called a multiple regression model.