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Predicted
demand
looking back
Time six months
Jan Feb Mar Apr May Jun Jul Aug
Forecasting
Previous data Future data
Forecasting Time Horizons
Ø Short-range forecast
þ Forecasting will be done up to 3 months.
þ Purchasing, workforce levels, job assignments
Ø Medium-range forecast
þ 3 months to 3 years
þ Sales and production planning, budgeting
Ø Long-range forecast
þ 3+ years
þ New product planning, facility location, research and
development
Types of Forecasts
– Economic forecasts
– Predict a variety of economic indicators like inflation
rates, interest rates, etc.
Technological forecasts
Demand forecasts
Qualitative Quantitative
methods methods
Qualitative methods
Quantitative
Forecasting
or
Example: 14
• The demand for electric power at N.Y. Edison
over the past 7 years are shown in the following
Table (in megawatts). The firm wants to forecast
next year’s demand by fitting a straight-line trend
to these data. Identify forecasted demand for 8th
year?
Example: 15
• Aroma Drip Coffee Incorporation produces
commercial coffee machines that are sold all
over the world. The company’s production
facility has operated at near capacity for over a
year now. Plant Manager, thinks that sales
growth will continue and he wants to develop
long range forecasts to help to plan facility
requirements for next 3 years. Sales records for
the past 10 years have been complied. Forecast
the demand for next 3 years using Trend
Projection method.
Year Annual Sales (Thousands of Units)
1 1000
2 1300
3 1800
4 2000
5 2000
6 2000
7 2200
8 2600
9 2900
10 3200
Associative Models
• Associative forecasting models usually consider
several variables that may affect the quantity
being predicted.
• This approach is more powerful than the time-
series methods that use only the historical values
for the forecast variable.
• For example, the sales of Umbrella might get
affected by the factor such as
ØWeather,
ØAdvertising budget, And
ØCompetitors’ prices.
• In associative model there are two type of
variables:
1. Independent variable
2. Dependent variable
• Independent variable: There are many factors,
which may affect the forecasting of any product’s
demand.
• Dependent variable: The dependent variable (sales
of product) is dependent on the independent
variable.
• For Example: In the case of PC:
• Demand would be called the dependent variable.
• The other variables like
ØDell’s advertising budget,
ØThe company’s prices,
ØCompetitors’ prices and
ØPromotional strategies
would be called independent variables .
Linear Regression
• y = dependent variable
• b = slope of regression line
• a = y-axis intercept
• x = independent variable
Difference between trend projection and linear
regression
• Trend projection always have positive slope but
linear regression can also have a negative slope.
• In trend projection the independent variable is
always time where as in linear regression the
independent variable need not be time, can be
any variable.
Example: 16
• A maker of personalized golf shirts has been
tracking the relationship between sales and
advertising dollars over the past four years. The
results are as follows:
• y = dependent variable
• a = y-axis intercept
• x1 and x2= values of the two independent variables
• b1 and b2= coefficients for the two independent
variables
• Where
• y = dependent variable
• a = y-axis intercept
• x1, x2 ... xn= values of the n independent variables
• b1, b2 ... bn= coefficients for the n independent
variables