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BU 385
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Forecasting Matters!
"According to a person familiar
with the matter, the company
initially expected to sell four Galaxy
S6 smartphones for each Galaxy
S6 Edge that it sold, and set up its
production facilities accordingly,"
The Journal reported. "Instead,
demand was much likely closer to
even for the two devices, the
person said. The company ended
up having more white S6 phones
than it could sell and not enough
S6 Edge handsets, which hurt
sales, revenue and profit figures.
http://www.eweek.com/mobile/samsung-estimated-q2-profit-revenue-fall-again-as-troubles-persist.html
Today
Forecasting
What is it?
Why forecast?
What makes for a good forecast?
How do we approach forecasting? (i.e. a
process)
Next 2 classes
Qualitative (Judgmental)
Quantitative
Time Series
Linear Trend
long
long term
term
(annual)
(annual)
(types
(types of
of products
products &
&
services
to
services to offer,
offer,
capacities,
capacities, facilities
facilities
layout, equipment,
equipment,
layout,
location)
location)
Use
Use of
of the
the System
System
Schedule
Schedule the
the System
System
medium
medium term
term (monthly)
(monthly)
(inventory,
(inventory, workforce
workforce
levels,
planning
levels, planning
short
short term
term
(daily,
(daily, weekly)
weekly)
(production,
(production,
purchasing,
purchasing, staff
staff
production)
production)
scheduling)
scheduling)
Range
Medium
Range
Aggregate Planning
Manufacturing
Services
Order Scheduling
Short
Range
Features of Forecasting
Usual Tradeoffs
Cost vs
Accuracy
1 Determine
2 Establish a time
purpose of forecast
horizon
analyze data
5 Prepare the
6 Monitor the
forecast
forecast
4 Select a
forecasting
technique
Approaches to Forecasting
Judgmental
Quantitative
Associative models
Judgmental Methods
Executive opinions
Expert opinions
Consumer Surveys
Historical analogies
Associative
Time Series
(Causal)
Models
Models
Moving
Exponential
Average
Smoothing
Trend
Projection
Linear
Regression
Time Series
Existing products
Current technology
usually short-term
Time Series
Forecasting is the
Data availability
most commonly used
Accuracy required
Size of forecasting budget
because it is
Availability of qualified personnel
inexpensive and easy
Naive
Moving Averages
Exponential Smoothing
Trend Projections (Good for longer-term)
Trend Adjusted Exponential Smoothing
Example
Year: 1998 1999 2000 2001 2002
Sales: 78.7 63.5 89.7 93.2 92.1
Level
Trend
Seasonal
Cycle
Time
Trend component
Random
variation
Year
1
Year
2
Year
3
Year
4
Trend models
Moving average
Weighted moving average
Exponential smoothing
Linear (and non-linear trend)
Trend adjusted exponential
smoothing
Naive Methods
A = actual
Nave Method
F2 = A 1
30 loafs
Simple Average
Advantages:
Simple to use
Disadvantages:
Simple Average
Example:
t 1
Ft i t N
N
F3 = (42+40)/2 = 41
F4 = (42 + 40 + 43)/3 = 41.67
.
Period Actual
Simple Avg.
1
42
2
40
42
3
43
41
4
40 41.666667
5
41
41.25
6
39
41.2
7
46 40.833333
8
44 41.571429
9
45
41.875
10
38 42.222222
11
40
41.8
12
39 41.636364
Weighted
: Ft
Moving Average
Weight
period n
Demand
Weights
Exponentia l
: Ft Ft 1 At 1 Ft 1
Smoothing
F = forecast
A = actual
= smoothing
constant
period n
Moving Average
Advantages:
Disadvantages:
3
43
4
40
5
41
Demand
42
40
43
40
41
F3 F4 F5 43 40 41
41.33
F6
3
3
Moving Average
t 1
Ft
a)
i t n
MA3
b)
43 40 41
41.33
3
MA3
40 41 39
40.00
3
Period Deman
d
1
42
2
40
3
43
4
40
5
41
6
?
7
?
41.33
40.00
39
30
28
Actual Sales
26
24
Quantity
22
20
18
16
14
12
10
|
10
11
12
Period Deman
d
1
42
2
40
3
43
4
40
5
41
6
?
7
?
41.0
40.2
39
30
average
25
20
Quantity
Actual sales
15
Moving average
10
|
1
10
11
12
Exponential Smoothing
widely used
easy to use
easy to alter weighting
F = F + (A - F )
t
t-1
t-1
t-1
F = forecast
A = actual
Exponential Smoothing:
Alternate Formula
F = (1 - F + (A )
t
t-1
t-1
F = forecast
A = actual
Period Actual
Forecast
Calculations
1
65
60
2
55
F2 F1 0.4 A1 F1
60 0.4 65 - 60 62
3
58
F3 F2 0.4 A 2 F2
62 0.4 55 - 62 59.2
4
64
F4 F3 0.4 A 3 F3 59.2 0.4 58 - 59.2 58.72
Dem and
820
775
680
655
F = (1 - F + (A )
t
t-1
t-1
F3=(.7)(775)+(1 - 0.7)(820)=788.5
F = (1 - F + (A )
t
t-1
t-1
Selecting a Smoothing
Constant
225
200
Actual
a = .5
Demand
demand
175
150
a = .1
|
5
Period
Choosing
True or False?
A moving average forecast tends to be
more responsive to changes in the
data series when more data points are
included in the average.
False
As compared to a simple moving
average, the weighted moving
average is more reflective of the
recent changes.
True
A smoothing constant of 0.1 will cause
an exponential smoothing forecast to
react more quickly to a sudden
change than a value of .3 will.
Equation : yt a bt
Slope : b
n ty t y
n t t
2
y b t
y - intercept : a
n
Linear Trend
Actual observation
Demand
Deviation
Deviation
Deviation
Deviation
Deviation
Deviation
Deviation
yt a bt
Time
Sales y
t2
ty
1
2
3
150
157
162
1
4
9
150
314
486
4
5
166
177
16
25
664
885
t 15
y 812
2
t
55
ty 2,499
225
6.3
5 55 225
275 225
812 6.3 15
a
143.5
5
yt a bt 143.5 6.3t
Sales y
150
2
3
157
162
4
5
166
177
yt a bt 143.5 6.3t
Trend-Adjusted Exponential
Smoothing
TAF
=S +T
t+1
t
t
T =T
+ ( S
t
t-1
t
where
S = smoothed average at the end of period t
t
T = smoothed trend at the end of period t
t
Trend-Adjusted Exponential
Smoothing
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