FORECASTING

Forecasting

- It is the process of estimation in unknown situation.

- A prediction of what is likely to happen in the future.

- PURPOSE of FORECASTING
- “Converting the predictions into numbers and concrete data is the main
purpose of forecasting.”
Basic Steps to follow in forecasting

 1. Establish the objective of the forecast being aimed for.

 2. Choose the items/quantities to be forecasted.
 3. Determine the period of time for the forecast.
 4. Decide on the forecasting technique.
 5. Gather the data needed.
 6. Utilize the forecasting method
 7. Make the forecast
 8. Apply the forecasting method.
Business Forecasting

 Business Forecasting is an estimate or prediction of

future development in business such as sales,
expenditures, revenues, income and profits. It is
considered as one of the most important aspect of
corporate planning.
Demand Forecasting

 Demand Forecasting is a forecast that projects

company’s sales.
Classification of Forecasting Methods

 1. Qualitative Forecasting Method – is based on judgments or

opinions and is subjective in nature. It does not rely on
mathematical computations.
TYPES OF QUALITATIVE FORECASTING METHOD:
a. Delphi Method – This is the most common type of qualitative
forecasting method. In here, a group of experts separated from each
other makes a forecast. They are asked questions through the use of
“questionnaire” and they are basically called “respondents”.
b. Jury of Executive Opinion – is a forecasting method that is
recommended when a situation is not likely to repeat itself. This is a
qualitative forecast that is based on a judgment of a single expert or a
consensus of the group of experts.
 c. Sales Force Composite – in this method, a salesperson predicts
his sales in his area based on past performance and trend. This
forecast is reviewed to be sure it is realistic and attainable
 d. Consumer Market Survey – This method gathers information,
data from customers and prospective customers regarding their
future needs and intended purchases, thereby improving
forecasting details and product design.
 2. Quantitative Forecasting Method – This type of forecasting method is
based on quantitative models, and is objective in nature. It relies heavily
on mathematical computations.
TYPES OF QUANTITATIVE FORECASTING METHOD
a. Time-Series Method – It is an attempt to predict the future by means of
historical data and a set of ordered observations on a quantitative characteristics
of an event at equally spaced time positions.
Components of Time Series Method
a.1 Trend – the gradual shifting (upward or downward movement) of
the time series. The shifting or trend is frequently the result of long term factors such
as changes in the community, demographic characteristics of the population,
technology, and consumer’s preference.
 a.2 Seasonality - is a pattern of the demand fluctuation above
or below the trend line that occurs every year
 a.3 Cycles or Cyclical Components – any recurring sequence
of points above and below the trend line lasting more than one
year. These are usually tied into the business cycles.
 A.4 Random Variation – “blips” in the data caused by chance
and unusual situations and do not follow discernible pattern.
 Two general forms of Time-Series Model
 A.1.1 Multiplication Model- assumes that demand is the product of
the four component.
Demand = T x S x C x R
 A.1.2 Additive Model – adds the component to provide and
estimate
Demand = T + S + C + R
 B. Smoothing Method – these methods includes moving average,
weighted averages and exponential smoothing. These method
“smooth out” random fluctuations caused by irregular components
of the time series.
 C. Naïve Method – this is the simplest technique. It simply uses the
actual demand for the period as the forecasted demand for the
next period.
SMOOTHING METHOD

 MOVING AVERAGE
 Moving Average = Σ(most recent n data values)
n
WEIGHTED MOVING AVERAGE
WMA = Σ(most recent n data values)(demand in period n)
Σweights
 EXPONENTIAL SMOOTHING
New Forecast = Last period’s forecast + a (last period’s actual demand –
last period’s forecast
***Where a is a constant value
Example:
In January, a demand for 200 units of Toyota car model “Vios” for February was
predicted by a car dealer. Actual February demand was 250 cars. Forecast the
March demand using a smoothing constant of a = 0.30.
 Forecast Error – It tells us how well the methods are performed against
themselves using past data.
Forecast Error = Actual Demand – Forecast
Example: Solve for (???) at a constant a = 0.20 and a = 0.50

Period Actual Demand Forecast Error

1 20 - -

2 35 20 ???

3 46 ??? ???

4 30 ??? ???

5 40 ??? ???

6 50 ??? ???
Mean Absolute Deviation

 Mean Absolute Deviation (MAD) – is a technique for determining the

accuracy of a forecasting model by taking the average of the absolute
value.
MAD = (Forecast Error)
n
Trend Line Forecast

 This is a technique fits a trend line to a series of historical data points

and then projects the line in the future for medium to long range
forecast.
Regression Analysis

 It is a statistical technique used to develop a

mathematical equation showing how variables are
related. It is a forecasting procedure that uses the least
squares approach on one or more independent
variables to develop a forecasting method.