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Forecasting is the art and science of

predicting future events




I know no way of judging the future but
by the past.
Patrick Henry


I see that you will
get an A this semester.
Why Forecast?
Lead times require that decisions be
made in advance of uncertain events.
Forecasts of product demand,
materials, labor, financing are an
important inputs to scheduling,
acquiring resources, and determining
resource requirements (reduce
uncertainty)
Make production planning easier
Elements of a Good Forecast
Timely
Accurate
Reliable
Written
CLASSIFICATION OF FORECASTING
PROBLEMS
According to Time Horizons
According to Forecast Method Used
Time Horizons
Short Term (up to 3 months)
Purchase orders
Scheduling workforce levels
Production levels
Job assignments
Medium Term (3 months to 2-3
years)
Production planning
Sales planning
Budgeting
Purchasing
Distribution

Time Horizons
Long Term (2-3 years or more)
New products
Capital expenditures
Facility location/expansion
Capacity planning
Strategic planning

Time Horizons
Forecast Method Used
Qualitative Forecast
Subjective in nature
Executive opinion:
panel consensus (a group of managers,
staffs and experts make forecast based on
consensus among them under the risk of
dominance)
consumer market survey (marketing
department sends surveyor to collect
information from consumer)
delphi method
Delphi Method
l. Choose the experts to participate representing a variety
of knowledgeable people in different areas
2. Through a questionnaire (or E-mail), obtain forecasts
(and any premises or qualifications for the forecasts)
from all participants
3. Summarize the results and redistribute them to the
participants along with appropriate new questions
4. Summarize again, refining forecasts and conditions,
and again develop new questions
5. Repeat Step 4 as necessary and distribute the final
results to all participants
Principles of Forecasting
Forecasts are almost always wrong.
Every forecast should include an
estimate of the forecast error.
Actual errors are almost always
bigger than estimated errors.
The greater the degree of
aggregation, the more accurate the
forecast.
Combining methods may improve
accuracy.
Long-term forecasts are usually less
accurate than short-term forecasts.
Psychological biases impair forecasts.



Principles of Forecasting
Forecasting Steps
Step 1 Determine purpose of forecast
Step 2 Establish a time horizon
Step 3 Select a forecasting technique
Step 4 Gather and analyze data
Step 5 Prepare the forecast
Step 6 Measure forecast error
Step 7 Forecast verification
The forecast
Important Factors for selecting forecasting
methods
Time Horizons
Forecasting Objective by considering
accuracy and costs
Products life cycle
Demand patterns
Time
(a) Trend
Time
(d) Trend with seasonal pattern
Time
(c) Seasonal pattern
Time
(b) Cycle
D
e
m
a
n
d

D
e
m
a
n
d

D
e
m
a
n
d

D
e
m
a
n
d

Random
movement
Demand Patterns
Cost if in-accuracy of forecast versus cost
of making forecast











Accuracy of forecasting
high low


Accuracy of forecast

Accuracy of forecast is determined by the
value of forecast error
Forecast error = D
t
F
t
e
t
where
D
t
= data at period t and F
t
= forecast at
period t




Period
Data
D
t

Forecast
F
t

D
t
F
t
D
t
F
t
(D
t
F
t
)
2

t
t t
D
F D

1 146 142 4 4 16 2,7%
2 150 148 2 2 4 1,3%
3 144 149 5 5 25 3,5%
4 147 148 1 1 1 0.7%
5 152 149 3 3 9 2,0%
6 153 153 0 0 0 0,0%
7 142 150 8 8 64 5,6%
8 139 146 7 7 49 5,0%
9 147 141 6 6 36 4,1%
10 152 144 8 8 64 5,3%
Total 2 44 268 30,2%
Note: D
t
F
t
et n = Number of data

a. Mean Square Error (MSE)
MSE =

n
t
n
et
1
2


= 268/10 = 26,8

b. Mean Absolute Percentage Error (MAPE)
MAPE =

n
t
t
D
t
F
t
D
n
1
100
=
2 , 30
10
100
% =
3,02

c. Mean Absolute Deviation (MAD)
MAD =
n
n
t
et

1
= 44 /10 = 4,4


a. Bias of Forecasting Error (BFE)
BFE =

n
n
t
et

1
= 2/10 = 0,2

e. The Running Sum of Forecast Error
(RSFE)

RSFE =


n
t
Ft Dt
1
) (
atau
=

n
t
et
1
= 2
Time series Methods
Simple Average
Simple Average: Forecasting Method by averaging all
the past data
SA = D
t
+ D
t-1
+ D
t-2
+ . + D
t- (N 1)


N
Where :
D
t
: The present data
D
t-1
: The previous data (one period ahead)
D
t-(N-1)
: The oldest data
N : number of data /total period

Example
The present demand (D
t
) = 150 Bakpias
The demand 1 period ahead (D
t-1
) = 100 Bakpias
The demand 2 periods ahead (D
t-2
) = 130 Bakpias
The demand 3 periods ahead (D
t-3
) = 110 Bakpias
The demand 4 periods ahead (D
t-4
) = 170 Bakpias
The demand 5 periods ahead (D
t-5
) = 180 Bakpias

SA = 150 + 100 + 130 + 110 + 170 + 180 = 140 Bakpias
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Simple Moving Average
Moving average is a sequence of average value derived from
the sequential data (demand) by removing the first data and
adding the next data
Averaging is made based on the period of moving
We use a moving average when demand has no discernable
trend or seasonality.
In this case,
Systematic component of demand = level

Example :
With moving average of 5 (MA = 5),the average of five
data from five periods becomes the forecast of the
sixth period of the data selected

Moving average forecast with MA = 5
Month
Demand (ton)
(Dt)
Forecast
(Ft)
Jan 107,6
Feb 185,9
Mar 196,6
Apr 216,6
May 233,4
Jun 229,7 188,02
Jul 234,8 212,44
Agt 202,9

Note :
188,02 = 107,6 + 185,9 + 196,6 + 216,6 + 233,4
5
212,44 = 185,9 + 196,6 + 216,6 + 233,4 + 229,7
5

Moving average forecast with MA = 6
Month
Demand
(ton)
(Dt)
Forecast
(Ft)
Jan 107,6
Feb 185,9
Mar 196,6
Apr 216,6
May 233,4
Jun 229,7
Jul 234,8 193,27
Agt 202,9 214,47
Note :
193,27 = 107,6+ 185,9+ 196,6+ 216,6+ 233,4 + 229,7
6
214,47 = 185,9 + 196,6 + 216,6 + 233,4 + 229,7 +234,8
6