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Learning Objectives:
Contents
Introduction to Forecasting
Forecasting Methods:
Qualitative
Time Series
o Simple Moving Average
o Weighted Moving Average
o Exponential Smoothing
o Adjusting for trends - Double Exponential Smoothing
o Multiplicative Seasonal Method
Causal Methods
Focus Forecasting
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Read: The University Bookstore Student Computer Purchase Program page 497 in the
text.
forecasting horizons:
forecasting methods:
qualitative methods
quantitative methods
- causal methods
time series forecasting methods are based on analysis of historical data (time series: a
set of observations measured at successive times or over successive periods). They
make the assumption that past patterns in data can be used to forecast future data
points.
3. mathematical models (trend lines, log-linear models, Fourier series, etc.): linear or
non-linear models fitted to time-series data, usually by regression methods
- the more periods (N) over which the moving average is calculated, the less
susceptible the forecast is to random variations, but the less responsive it is to changes
a weighted moving average is a moving average where each historical demand may be
weighted differently
where:
exponential smoothing gives greater weight to demand in more recent periods, and
less weight to demand in earlier periods
where:
At-1 = "series average" calculated by the exponential smoothing model to period t-1
the larger the smoothing parameter , the greater the weight given to the most recent
demand
(TREND-ADJUSTED EXPONENTIAL SMOOTHING)
when a trend exists, the forecasting technique must consider the trend as well as the
series average ignoring the trend will cause the forecast to always be below (with an
increasing trend) or above (with a decreasing trend) actual demand
double exponential smoothing smooths (averages) both the series average and the
trend
where:
At = exponentially smoothed average of the series in period t
What happens when the patterns you are trying to predict display seasonal effects?
What is seasonality? - It can range from true variation between seasons, to variation
between months, weeks, days in the week and even variation during a single day or
hour.
1. a forecast for the entire period (ie year) must be made using whatever
forecasting technique is appropriate. This forecast will be developed using
whatever
2. the forecast must be adjust to reflect the seasonal effects in each period (ie
month or quarter)
the multiplicative seasonal method adjusts a given forecast by multiplying the forecast
by a seasonal factor
Step 1: calculate the average demand y per period for each year (y) of past data by
dividing total demand for the year by the number of periods in the year
Step 2: divide the actual demand Dy,t for each period (t) by the average demand y per
period (calculated in Step 1) to get a seasonal factor f y,t for each period; repeat for
each year of data
Step 3: calculate the average seasonal factor t for each period by summing all the
seasonal factors fy,t for that period and dividing by the number of seasonal factors
Step 4: determine the forecast for a given period in a future year by multiplying the
average seasonal factor t by the forecasted demand in that future year
Actual Demand
Seasonal Factor
Year Q1 Q2 Q3 Q4
1 1.25 .875 .75 1.125
2 1.26 .84 .74 1.16
3 1.4 .83 .73 1.04
Avg. Seasonal Factor 1.30 .85 .74 1.083
Seasonal Factor - the percentage of average quarterly demand that occurs in each
quarter.
3. input-output models: describes the flows from one sector of the economy to
another, and so predicts the inputs required to produce outputs in another sector
4. simulation modelling
There are two aspects of forecasting errors to be concerned about - Bias and Accuracy
Bias - A forecast is biased if it errs more in one direction than in the other
Accuracy - Forecast accuracy refers to the distance of the forecasts from actual
demand ignore the direction of that error.
Example: For six periods forecasts and actual demand have been tracked The
following table gives actual demand Dt and forecast demand Ft for six periods:
Forecast Measure
conclusions:
average error per forecast was 28.33 units, or 13.9% of actual demand
Potential Rules for selecting a time series forecasting method. Select the method that
or others. It appears obvious that some measure of both accuracy and bias should be
used together. How?
if demand is inherently stable, low values of and and higher values of N are
suggested
if demand is inherently unstable, high values of and and lower values of N are
suggested
FOCUS FORECASTING
"focus forecasting" refers to an approach to forecasting that develops forecasts by
various techniques, then picks the forecast that was produced by the "best" of these
techniques, where "best" is determined by some measure of forecast error.
For the first six months of the year, the demand for a retail item has been 15, 14, 15,
17, 19, and 18 units.
A retailer uses a focus forecasting system based on two forecasting techniques: a two-
period moving average, and a trend-adjusted exponential smoothing model with = 0.1
and = 0.1. With the exponential model, the forecast for January was 15 and the trend
average at the end of December was 1.
The retailer uses the mean absolute deviation (MAD) for the last three months as the
criterion for choosing which model will be used to forecast for the next month.
a. What will be the forecast for July and which model will be used?
b. Would you answer to Part a. be different if the demand for May had been 14
instead of 19?
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