OPM - Topic 6 - Forecast

Topic 6 Forecasting
© Dr. Muhammad Wasif
Operations &
Production Management
(OPM)
Dr. Muhammad Wasif
Visiting Faculty, IBA.
6 – Forecasting
Resource Person : Dr. Muhammad Wasif Operations & Production Management www 2
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Topic 6 Forecasting
Section 6.1
Introduction to Forecasting
Forecasting
Process of estimating a future event
 Underlying basis of all business
decisions
 Production
 Inventory
 Personnel
 Facilities
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Topic 6 Forecasting
Applications of Forecasting
Accounting Cost/profit estimates
Finance Cash flow and funding
Human Resources Hiring/recruiting/training
Marketing Pricing, promotion, strategy
MIS IT/IS systems, services
Operations Schedules, MRP, workloads
Product/service design New products and services
Forecasting – Time Horizon

 Short-range forecast Long-range
forecasting
 Up to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforce levels, job
Medium-range
assignments, production levels forecasting
 Medium-range forecast
Short-range
 3 months to 3 years forecasting
 Sales and production planning, budgeting
 Long-range forecast Production/operation control
 3+ years
 New product planning, facility location, research and
development
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Topic 6 Forecasting
Types of Forecasts
Economic forecasts
 Address business cycle – inflation rate, money
supply, housing starts, etc.
Technological forecasts
 Predict rate of technological progress
 Impacts development of new products
Demand forecasts
 Predict sales of existing products and services
Seven Steps in Forecasting

1
• Determine the use of the forecast
2 • Select the items to be forecasted
3 • Determine the time horizon of the forecast
4 • Select the forecasting model(s)
5 • Gather the data
6 • Make the forecast
7 • Validate and implement results
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Topic 6 Forecasting
Forecasts – Idealism & Reality
Timely
Seldom Perfect
Reliable
Based on Assumptions
Reality
Accurate
Ideal
Meaningful Aggregate are more

accurate than individual
Written
Accuracy decreases as time
horizon increases
Easy to use
Approaches to Forecast
Qualitative Methods
 Used when situation is vague and little data exist; for example New
products, New technology
 Involves intuition, experience. e.g., forecasting sales on Internet
Quantitative Methods
 Used when situation is ‘stable’ and historical data exist; for example Existing
products, Current technology
 Involves mathematical techniques, e.g., forecasting sales of color televisions

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Topic 6 Forecasting
Overview of Qualitative Approaches
1. Jury of Executive opinion
2. Delphi Method
3. Sales force composite
4. Consumer Market Survey
Overview of Qualitative Methods

Jury of executive opinion
 Involves small group of high-level experts and managers
 Combines managerial experience with statistical models
 Quick decisions but group think is disadvantage
Delphi method
 Iterative group process, continues until consensus is
reached
 3 types of participants; Decision makers, Staff,
Respondents
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Topic 6 Forecasting
Overview of Qualitative Methods

Sales force composite
 Each salesperson projects his or her sales
 Combined at district and national levels
 Tends to be overly optimistic
Consumer Market Survey

 Ask customers about purchasing plans
 What consumers say, and what they actually do are often different
 Sometimes difficult to answer
Overview of Quantitative Approaches
1. Naive approach
2. Moving averages
time-series
models
3. Exponential smoothing
4. Trend projection
associative
5. Linear regression model
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Topic 6 Forecasting
Section 6.2
Time Series Forecasting

 Set of evenly spaced numerical data
 Obtained by observing response variable at regular

time periods
 Forecast based only on past values, no other

variables important
 Assumes that factors influencing past and present

will continue influence in future
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Topic 6 Forecasting

Trend Component
 Persistent, overall upward or downward pattern
 Changes due to population, technology, age, culture, etc.
 Typically several years duration
Seasonal Component
Number of
 Regular pattern of up and down fluctuations Period Length Seasons
Week Day 7
Month Week 4-4.5
 Due to weather, customs, etc. Month Day 28-31
Year Quarter 4
Year Month 12
 Occurs within a single year Year Week 52

Cyclical Component
 Repeating up and down movements
 Affected by business cycle, political, and economic factors
 Multiple years duration
Random Component
 Erratic, unsystematic, ‘residual’ fluctuations
 Due to random variation or unforeseen events
 Short duration and nonrepeating
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Topic 6 Forecasting
1- Naive Approach
 Assumes demand in next
period is the same as demand in most recent period
 e.g., If January sales were 68, then February sales will be 68
 Sometimes cost effective and efficient
 Can be good starting point
 Simple to use, Virtually no cost
 Cannot provide high accuracy
2- Moving Average Method

 MA is a series of arithmetic means
 Used if little or no trend
 Used often for smoothing
 Provides overall impression of data over time
∑ demand in previous n periods

Moving average = n
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Topic 6 Forecasting
2- Moving Average Method
Actual 3-Month
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3
2- Weighted Moving Average Method

 Used when some trend might be present
 Older data usually less important
 Weights based on experience and intuition
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Topic 6 Forecasting
2- Weighted Moving Average Method

Actual 3-Month Weighted
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2
Weights Applied Period

3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights
Potential Problems With Moving Average

 Increasing n smooths the forecast but makes it less
sensitive to changes
 Do not forecast trends well
 Require extensive historical data
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Topic 6 Forecasting
3 - Exponential Smoothing
 Form of weighted moving average
 Weights decline exponentially
 Most recent data weighted most
 Requires smoothing constant ()
 Ranges from 0 to 1
 Subjectively chosen
 Involves little record keeping of past data
3 - Exponential Smoothing
 Predicted demand = 142 Ford Mustangs
 Actual demand = 153
 Smoothing constant a = .20
Ft = Ft–1 +  ·(At–1 - Ft–1)
New forecast = 142 + .2(153 – 142) = 144.2  144 units
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Topic 6 Forecasting
Effect of Smoothing Constants
Weight Assigned to
Most 2nd Most 3rd Most 4th Most 5th Most
Recent Recent Recent Recent Recent
Smoothing Period Period Period Period Period
Constant () (1 - ) (1 - ) 2 (1 - ) 3 (1 - )4
 = .1 .1 .09 .081 .073 .066
 = .5 .5 .25 .125 .063 .031
Effect of Smoothing Constants

 Chose high values of  when underlying average is likely to change
 Choose low values of  when underlying average is stable
225 –
Actual  = .5
200 – demand
Demand
175 –
 = .1
150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
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Topic 6 Forecasting
Choosing 
 The objective is to obtain the most accurate forecast no
matter the technique
 We generally do this by selecting the model that gives

us the lowest forecast error
 Forecast error = Actual demand - Forecast value
 = A t - Ft
Common Measures of Error
Mean Absolute Deviation (MAD)

∑ |Actual - Forecast|
MAD =
n
Mean Squared Error (MSE)

∑ (Forecast Errors)2
MSE =
n
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Topic 6 Forecasting
Common Measures of Error
Mean Absolute Percent Error (MAPE)
n
∑100|Actuali - Forecasti|/Actuali
MAPE = i=1
n
Comparison of Forecast Error
Rounded Absolute Rounded Absolute

Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
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Topic 6 Forecasting
∑ |deviations|
MAD = Actual
Tonnage
Forecast
with
Deviation
for
Forecast
with
Deviation
for
n
For1 = .10180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3
=159
82.45/8174.75
= 10.3115.75 172.75 13.75
For45 = .50175
190
173.18
173.36
1.82
16.64
165.88
170.44
9.12
19.56
6 =205
98.62/8175.02
= 12.3329.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
errors)2Absolute
∑ (forecastRounded Rounded Absolute
MSE = Actual Forecast Deviation Forecast Deviation
Tonnage n with for with for
For1 = .10180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3
= 1,526.54/8
159
= 190.82
174.75 15.75 172.75 13.75
For45 = .50175
190
173.18
173.36
1.82
16.64
165.88
170.44
9.12
19.56
6 = 1,561.91/8
205 = 195.24
175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
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Topic 6 Forecasting

n
∑100|deviation
Rounded i|/actual
Absolutei Rounded Absolute
MAPE = i =Tonnage
1
Actual Forecast
with
Deviation
for
Forecast
with
Deviation
for
Quarter Unloaded
n
 = .10  = .10  = .50  = .50
1  = .10
For 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3
= 44.75/8
159
= 5.59%
174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
For
5
 = .50
190 173.36 16.64 170.44 19.56
6 = 54.05/8
205 = 6.76%
175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62

Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.24
MAPE 5.59% 6.76%
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Topic 6 Forecasting

0.1 0.2 0.3 0.4 0.5
Actial F Dev. F Dev. F Dev. F Dev. F Dev.
1 180 175 5 175 5 175 5 175 5 175 5
2 168 175.5 7.5 176 8 176.5 8.5 177 9 177.5 9.5
3 159 174.75 15.75 174.4 15.4 173.95 14.95 173.4 14.4 172.75 13.75
4 175 173.18 1.82 171.32 3.68 169.465 5.535 167.64 7.36 165.88 9.12
5 190 173.36 16.64 172.056 17.944 171.1255 18.8745 170.584 19.416 170.44 19.56
6 205 175.05 29.95 175.6448 29.3552 176.7879 28.21215 178.3504 26.6496 180.22 24.78
7 180 178.02 1.98 181.5158 1.51584 185.2515 5.251495 189.0102 9.01024 192.61 12.61
8 182 178.22 3.78 181.2127 0.787328 183.676 1.676047 185.4061 3.406144 186.3 4.3
82.42 81.68237 87.99919 94.24198 98.62
MAD 10.3025 10.2103 10.9999 11.78025 12.3275
MAPE 5.591537 5.545828 5.992131 6.436648 6.755313
Exponential Smoothing with Trend Adjustment

When a trend is present, exponential
smoothing must be modified
Forecast Exponentially Exponentially
including (FITt) = smoothed (Ft) + smoothed (Tt)
trend forecast trend
Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1)
Tt = (Ft - Ft - 1) + (1 - )Tt - 1
Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
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Topic 6 Forecasting

Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24
6 21
7 31
8 28
9 36
10

Example
Forecast
1 12 11 2 13.00
2 17
3 20
4 19
5 24 Step 1: Forecast for Month 2
6 21
7 31 F2 = A1 + (1 - )(F1 + T1)
8 28 F2 = (.2)(12) + (1 - .2)(11 + 2)
9 36
10 = 2.4 + 10.4 = 12.8 units
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Topic 6 Forecasting

Example
Forecast
1 12 11 2 13.00
2 17 12.80
3 20
4 19
5 24 Step 2: Trend for Month 2
6 21
7 31 T2 = (F2 - F1) + (1 - )T1
8 28 T2 = (.4)(12.8 - 11) + (1 - .4)(2)
9 36
10 = .72 + 1.2 = 1.92 units

Example
Forecast
1 12 11 2 13.00
2 17 12.80 1.92
3 20
4 19
5 24 Step 3: Calculate FIT for Month 2
6 21
7 31 FIT2 = F2 + T2
8 28 FIT2 = 12.8 + 1.92
9 36
10 = 14.72 units
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Topic 6 Forecasting

Example
Forecast
1 12 11 2 13.00
2 17 12.80 1.92 14.72
3 20 15.18 2.10 17.28
4 19 17.82 2.32 20.14
5 24 19.91 2.23 22.14
6 21 22.51 2.38 24.89
7 31 24.11 2.07 26.18
8 28 27.14 2.45 29.59
9 36 29.28 2.32 31.60
10 32.48 2.68 35.16

Example
35 –
30 – Actual demand (At)

Product demand
25 –
20 –
15 –
10 – Forecast including trend (FITt)

with  = .2 and  = .4
5 –
0 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Time (month)
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Topic 6 Forecasting
4 - Trend Projections
 Fitting a trend line to historical data points to project
into the medium to long-range
 Linear trends can be found using the least squares

technique
y^ = a + bx
^ = computed value of the variable to
where y
be predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
Linear Regression Method

Least squares method minimizes the sum of the squared errors (deviations)
Values of Dependent Variable
Actual observation Deviation7

(y-value)
Deviation5 Deviation6
Deviation3
Deviation4
Deviation1
(error) Deviation2
Trend line, y^ = a + bx
Time period
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Topic 6 Forecasting
Linear Regression Method
Equations to calculate the regression variables
y^ = a + bx
xy - nxy
b=
x2 - nx2
a = y - bx
Linear Regression Method - Example

Time Electrical Power
Year Period (x) Demand x2 xy
2003 1 74 1 74
2004 2 79 4 158
2005 3 80 9 240
2006 4 90 16 360
2007 5 105 25 525
2008 6 142 36 852
2009 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86
∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(42)
a = y - bx = 98.86 - 10.54(4) = 56.70

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Topic 6 Forecasting

Time Electrical Power
Year Period (x) Demand x2 xy
2003 1 74 1 74
2004 2 79 4 158
2005 3 80 9 240
The trend line
2006 4 is 90 16 360
2007^ 5 105 25 525
2008y = 56.70
6 + 10.54x 142 36 852
2009 7 122 49 854
∑x = 28 ∑y = 692 ∑x = 140
2 ∑xy = 3,063
x=4 y = 98.86
∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(42)
a = y - bx = 98.86 - 10.54(4) = 56.70

160 –
Trend line,
150 – y^ = 56.70 + 10.54x
140 –
Power demand
130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
2003 2004 2005 2006 2007 2008 2009 2010 2011
Year
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Topic 6 Forecasting
5 - Seasonal Variations In Data
The multiplicative seasonal model can adjust trend

data for seasonal variations in demand

Steps in the process:
1. Find average historical demand for each season
2. Compute the average demand over all seasons
3. Compute a seasonal index for each season
4. Estimate next year’s total demand
5. Divide this estimate of total demand by the number of
seasons, then multiply it by the seasonal index for that
season
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Topic 6 Forecasting

San Diego Hospital
Demand Average Average Seasonal
Month 2015 2016 2017 2015-2017 Monthly Index
Jan 80 85 105 90 94
Feb 70 85 85 80 94
Mar 80 93 82 85 94
Apr 90 95 115 100 94
May 113 125 131 123 94
Jun 110 115 120 115 94
Jul 100 102 113 105 94
Aug 88 102 110 100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 75 72 83 80 94
Dec 82 78 80 80 94

San Diego Hospital
Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94
Mar 80 93 Average
82 85 monthly 94
2015-2017 demand
Seasonal90index95= 115Average monthly
Apr 100 demand94
May 113 125 131 123 94
= 90/94 = .957
Jun 110 115 120 115 94
Jul 100 102 113 105 94
Aug 88 102 110 100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 75 72 83 80 94
Dec 82 78 80 80 94
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Topic 6 Forecasting

San Diego Hospital
Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90 95 115 100 94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 115 94 1.223
Jul 100 102 113 105 94 1.117
Aug 88 102 110 100 94 1.064
Sept 85 90 95 90 94 0.957
Oct 77 78 85 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851

San Diego Hospital
Jan 80 85 105 90 94 0.957
Feb 70 85Forecast
85 80
for 2018 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90 95 115 100
Expected annual demand = 1,200 94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 1,200 115 94 1.223
Jul 100 Jan
102 113 x .957
105 = 96 94 1.117
12
Aug 88 102 110 100 94 1.064
Sept 85 90 1,200
95 90 94 0.957
Feb x .851 = 85
Oct 77 78 8512 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851
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Topic 6 Forecasting
2018 Forecast
140 – San Diego Hospital 2017 Demand
130 – 2016 Demand
2015 Demand
120 –
Demand
110 –
100 –
90 –
80 –
70 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Time
Section 6.3
Associative Forecasting
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Topic 6 Forecasting
Associative Forecasting
Forecasting an outcome based on predictor variables
using the least squares technique
𝑦 a b·x
where 𝑦 computed value of the variable to be predicted
(dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable though to predict the value of
the dependent variable
Associative Forecasting - Example

Sales Local Payroll
($ millions), y ($ billions), x
2.0 1
3.0 3
2.5 4
2.0 2 4.0 –
2.0 1
3.5 7 3.0 –
Sales
2.0 –
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
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Topic 6 Forecasting
Sales, y Payroll, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
∑y = 15.0 ∑x = 18 ∑x2 = 80 ∑xy = 51.5

^
y = 1.75 + .25x Sales = 1.75 + .25(payroll)
If payroll next year

is estimated to be 4.0 –
$6 billion, then:
3.25
3.0 –
Sales
Sales = 1.75 + .25(6)

2.0 –
Sales = $3,250,000
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
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Topic 6 Forecasting
Monitoring and Controlling Forecasts

Tracking
 Measures how well the forecast is predicting actual
values
 Ratio of running sum of forecast errors (RSFE) to mean
absolute deviation (MAD)
 Good tracking signal has low values
 If forecasts are continually high or low, the forecast has
a bias error
Monitoring and Controlling Forecasts
Tracking RSFE
signal =
MAD
∑(Actual demand in
period i -
Forecast demand
Tracking in period i)
signal =
∑|Actual - Forecast|/n)
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Topic 6 Forecasting
Tracking Signal
Signal exceeding limit

Tracking signal
Upper control limit
+
0 MADs Acceptable
range
–
Lower control limit
Time
Tracking Signal - Example

Cumulative
Absolute Absolute
Actual Forecast Forecast Forecast
Qtr Demand Demand Error RSFE Error Error MAD
(AD) (FD) (AD-FD) |RSFE| (CAFÉ) CAFÉ/Qtr
1 90 100 -10 -10 10 10 10.0

2 95 100 -5 -15 5 15 7.5
3 115 100 +15 0 15 30 10.0
4 100 110 -10 -10 10 40 10.0
5 125 110 +15 +5 15 55 11.0
6 140 110 +30 +35 30 85 14.2
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Topic 6 Forecasting
Tracking Signal - Example
Cumulative
Tracking Absolute Absolute
Actual Forecast
Signal Forecast Forecast
Qtr Demand Demand Error RSFE Error Error MAD
(RSFE/MAD)
1 90 =100
-10/10 -1 -10 -10 10 10 10.0
2 95 =100
-15/7.5 -2 -5 -15 5 15 7.5
0/10 = 0
3 115 100 +15 0 15 30 10.0
-10/10 = -1
4 100 110
+5/11 = +0.5 -10 -10 10 40 10.0
5 125 =110
+35/14.2 +2.5 +15 +5 15 55 11.0
6 140 110 +30 +35 30 85 14.2
The variation of the tracking signal between -2.0 and

+2.5 is within acceptable limits
Section 6.4
Miscellaneous Forecasting
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Topic 6 Forecasting
Adaptive Forecasting
 It’s possible to use the computer to continually

monitor forecast error and adjust the values of the α
and β coefficients used in exponential smoothing to
continually minimize forecast error
 This technique is called adaptive smoothing
Focus Forecasting
 Developed at American Hardware Supply, focus forecasting is
based on two principles:
1. Sophisticated forecasting models are not always better than
simple ones
2. There is no single technique that should be used for all
products or services
 This approach uses historical data to test multiple
forecasting models for individual items
 The forecasting model with the lowest error is then used to
forecast the next demand
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Topic 6 Forecasting
References
 Operations Management, 10th Ed., by J. Heizer &
B. Render
 Operations Management, William J. Stevenson.
 Operations Management, 7th Ed., N. Slack, A.B.
Jones, R. Johnston.
 Cases in Operations Management, S. Chambers, C.
Harland, A. Harison, N. Slack.
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Topic 6 Forecasting

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

Forecasting – Time Horizon

 Long-range forecast Production/operation control

Seven Steps in Forecasting

2 • Select the items to be forecasted

3 • Determine the time horizon of the forecast

4 • Select the forecasting model(s)

5 • Gather the data

6 • Make the forecast

7 • Validate and implement results

Forecasts – Idealism & Reality

Meaningful Aggregate are more

 Involves intuition, experience. e.g., forecasting sales on Internet

 Involves mathematical techniques, e.g., forecasting sales of color televisions

Overview of Qualitative Approaches

1. Jury of Executive opinion

3. Sales force composite

4. Consumer Market Survey

Overview of Qualitative Methods

Overview of Qualitative Methods

 Combined at district and national levels

 Tends to be overly optimistic

Consumer Market Survey

 Sometimes difficult to answer

Overview of Quantitative Approaches

Time Series Forecasting

Time Series Forecasting

 Obtained by observing response variable at regular

 Forecast based only on past values, no other

 Assumes that factors influencing past and present

Time Series Forecasting

 Changes due to population, technology, age, culture, etc.

 Typically several years duration

Time Series Forecasting

 Affected by business cycle, political, and economic factors

 Multiple years duration

 Due to random variation or unforeseen events

 Short duration and nonrepeating

 e.g., If January sales were 68, then February sales will be 68

 Sometimes cost effective and efficient

 Can be good starting point

 Simple to use, Virtually no cost

 Cannot provide high accuracy

2- Moving Average Method

 Used if little or no trend

 Used often for smoothing

 Provides overall impression of data over time

∑ demand in previous n periods

2- Moving Average Method

2- Weighted Moving Average Method

 Older data usually less important

 Weights based on experience and intuition

2- Weighted Moving Average Method

Weights Applied Period

Potential Problems With Moving Average

 Do not forecast trends well

 Require extensive historical data

 Weights decline exponentially