W S William
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Forecast Horizon
Forecast horizon is the period for which forecast is prepared Long-Range (years) ( e.g. Process selection, Capacity addition) Medium-Range (months) (e.g. Manpower planning, procurement of long lead time items) Short-Range (weeks) (e.g. Production schedules, overtimes etc.)
Time Span
Units of Measure
Dollars, tons, etc.
Years
MediumRange
Months
Short-Range
Weeks
Specific product quantities Machine capacities Planning Purchasing Scheduling Workforce levels Production levels Job assignments
Principles of Forecasting
Forecasting Methods
Broadly, forecasting methods fall under two categories: Qualitative Methods : These are subjective in nature (Executive Opinion, Market Research , Delphi Method) Quantitative Methods: They use mathematical or simulation methods base d on historical demand or relationships between variables. Extrapolated or Time Series (Use past data to forecast future)
Explanatory or Causal Method (Establishes a relationship between dependent and independent variables); y= f(x)
Components of Demand
Horizontal Component
Trend Component Seasonal Component
An averaging period (AP) is given or selected The forecast for the next period is the arithmetic average of the AP most recent actual demands It is called a simple average because each period used to compute the average is equally weighted . . . more
It is called moving because as new demand data becomes available, the oldest data is not used By increasing the AP, the forecast is less responsive to fluctuations in demand (low impulse response) By decreasing the AP, the forecast is more responsive to fluctuations in demand (high impulse response)
Week 1 2 3 4 5 6 7 8 9 10 11 12
Demand 650 678 720 785 859 920 850 758 892 920 789 844
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This is a variation on the simple moving average where instead of the weights used to compute the average being equal, they are not equal This allows more recent demand data to have a greater effect on the moving average, therefore the forecast . . . more
The weights must add to 1.0 and generally decrease in value with the age of the data The distribution of the weights determine impulse response of the forecast
Determine the 3-period n weighted moving w i = 1 average forecast i=1 for period 4 Weights (adding up to 1.0): t-1: .5 t-2: .3 t-3: .2
Step1: Select the number of periods for which moving average will be computed, thus number N is called an order of moving average
Step 2: Take the average demand for the most recent N periods. This average demand then becomes the forecast for the next period.
Exponential Smoothing
Premise--The most recent observations might have the highest predictive value.
Therefore, we should give more weight to the more recent time periods when forecasting.
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Associative Forecasting
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Yt = a + bx
0 1 2 3 4 5
x (weeks)
b is similar to the slope. However, since it is calculated with the variability of the data in mind, its formulation is not as straightforward as our usual notion of slope
Calculating a and b
a = y - bx
xy - n(y)(x) x - n(x )
2 2
b=
Week 1 2 3 4 5
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y = 143.5 + 6.3t
180 175 170 165 160 155 150 145 140 135
1 2 3 4 5
Sales
Sales Forecast
Period
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Forecast Accuracy
Accuracy is the typical criterion for judging the performance of a forecasting approach Accuracy is how well the forecasted values match the actual values
Monitoring Accuracy Accuracy of a forecasting approach needs to be monitored to assess the confidence you can have in its forecasts and changes in the market may require reevaluation of the approach Accuracy can be measured in several ways Mean absolute deviation (MAD) Mean squared error (MSE)
Example--MAD
Month 1 2 3 4 5 Sales 220 250 210 300 325 Forecast n/a 255 205 320 315
Solution
Month 1 2 3 4 5 Sales 220 250 210 300 325 Forecast Abs Error n/a 255 5 205 5 320 20 315 10 40
A
MAD =
t=1
- Ft
40 = = 10 4
Tracking Signal
Tracking signal
Ratio of cumulative error to MAD
Tracking signal
Bias Persistent tendency for forecasts to be Greater or less than actual values.
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