Learning Objectives
Principles of Forecasting
Many types of forecasting models that
differ in complexity and amount of
data & way they generate forecasts:
1.
Forecasts are rarely perfect
2.
Forecasts are more accurate for
grouped data than for individual items
3.
Forecast are more accurate for shorter
than longer time periods
4
Qualitative Methods
Type
Executive
opinion
Characteristics
Strengths
Weaknesses
A group of managers Good for strategic or One person's opinion
meet & come up with new-product
can dominate the
a forecast
forecasting
forecast
Market
research
Delphi
method
Seeks to develop a
consensus among a
group of experts
Excellent for
Time consuming to
forecasting long-term develop
product demand,
technological
changes, and
Quantitative Methods
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Naive:
Simple Mean:
Ft 1 At
Moving Average:
Ft 1 A t / n
Ft 1 A t / n
Ft 1 Ct A t
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Period
1
2
Actual
300
315
3
4
290
345
5
6
7
320
360
375
8
15
Actual
300
315
290
345
320
360
375
2-Period
4-Period
2-Per.Wgted.
Expon. Smooth.
340.0
328.8
344.0
372.0
367.5
350.0
369.0
372.6
16
17
Forecasting Trend
S t A t (1 )(S t 1 Tt 1 )
Tt (S t S t 1 ) (1 )Tt 1
FITt 1 S t Tt
19
Forecasting Seasonality
20
Seasonality cont
21
23000
22000
Spring
19000
19000
Summer
14000
17000
Total
80000
84000
90000
Average 20000
21000
22500
22
Causal Models
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Linear Regression
XY X Y
X 2 X X
XY n X Y
b
X nX
2
a Y bX
Y=a + bX
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Sales $
(Y)
Adv.$
(X)
XY
130
32
4160
X^2
Y^2
XY n X Y
b
X nX
2
2304 16,900
28202 447.25147.25
151
52
7852
2704 22,801
150
50
7500
2500 22,500
158
55
8690
3025 24964
153.85
53
a Y b X 147.25 1.1547.25
a 92.9
Y a bX 92.9 1.15X
Y 92.9 1.1553 153.85
Tot
589
189
9253 447.25
1.15
Correlation Coefficient
How Good is the Fit?
Correlation coefficient (r) measures the direction and strength of the linear
relationship between two variables. The closer the r value is to 1.0 the better
the regression line fits the data points.
n XY X Y
r
n
r
X X
2
* n
Y Y
2
428,202 189589
.982
r 2 .982 .964
2
Multiple Regression
27
E t A t Ft
actual forecast
actual - forecast
MSE
Tracking Signal
TS
CFE
M AD
29
Method B
Month
Actual
sales
Fcast
Error
Cum.
Error
Tracking
Signal
Fcast
Error
Cum.
Error
Tracking
Signal
Jan.
30
28
27
Feb.
26
25
25
1.5
March
32
32
29
April
29
30
-1
27
May
31
30
29
10
MAD
MSE
1.4
4.4
30
Forecasting Software
Spreadsheets
Statistical packages
33
Focus Forecasting
Combining Forecasts
37
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Chapter 8 Highlights
Time series models are based on the assumption that all information
needed is contained in the time series of data. Causal models assume
that the variable being forecast is related to other variables in the
environment.
There are four basic patterns of data: level or horizontal, trend,
seasonality, and cycles. In addition, data usually contain random
variation. Some forecast models used to forecast the level of a time
series are: nave, simple mean, simple moving average, weighted
moving average, and exponential smoothing. Separate models are
used to forecast trends and seasonality.
A simple causal model is linear regression in which a straight-line
relationship is modeled between the variable we are forecasting and
another variable in the environment. The correlation is used to
measure the strength of the linear relationship between these two
variables.
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Highlights cont
42
Homework Help
8.4: (a) forecasts using 3 methods. (b) compare forecasts
using MAD. (c) choose the best method and forecast
July.
8.7: use 3 methods to forecast and use MAD and MSE to
compare. (notes: will not have forecasts for all periods
using 3-period MA; use actual for period 1 as forecast to
start exp smoothing.
8.10: determine seasonal indices for each day of the week,
and use them to forecast week 3.
8.12: simple linear regression (trend) model.
NOTE: Spreadsheets might be very useful for working these
problems.
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