1 What Is Forecasting? Sales will be $200 Million!

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Presentation transcript:

1 What Is Forecasting? Sales will be $200 Million!

2 Time Series Analysis  Time series forecasting models try to predict the future based on past data.  You can pick models based on:

3 Simple Moving Average Formula  The simple moving average model assumes an average is a good estimator of future behavior.  The formula for the simple moving average is: F t = Forecast for the coming period N = Number of periods to be averaged A t-1 = Actual occurrence in the past period for up to “n” periods

4 Simple Moving Average Problem (1)  Question: What are the 3-week and 6-week moving average forecasts for demand?  Assume you only have 3 weeks and 6 weeks of actual demand data for the respective forecasts

F 4 =( )/3 = F 7 =( )/6 = Calculating the moving averages gives us: © The McGraw-Hill Companies, Inc.,

6

7 Simple Moving Average Problem (2) Data  Question: What is the 3 week moving average forecast for this data?  Assume you only have 3 weeks and 5 weeks of actual demand data for the respective forecasts

8 Simple Moving Average Problem (2) Solution

9 Weighted Moving Average Formula While the moving average formula implies an equal weight being placed on each value that is being averaged, the weighted moving average permits an unequal weighting on prior time periods. w t = weight given to time period “t” occurrence. (Weights must add to one.) The formula for the moving average is:

10 Weighted Moving Average Problem (1) Data Weights: t-1.5 t-2.3 t-3.2 Question: Given the weekly demand and weights, what is the forecast for the 4 th period or Week 4?

11 Weighted Moving Average Problem (1) Solution F 4 = 0.5(720)+0.3(678)+0.2(650)=693.4

12 Weighted Moving Average Problem (2) Data Weights: t-1.7 t-2.2 t-3.1 Question: Given the weekly demand information and weights, what is the weighted moving average forecast of the 5 th period or week?

13 Weighted Moving Average Problem (2) Solution

14 Exponential Smoothing Model F t = F t-1 +  (A t-1 - F t-1 )  = smoothing constant

15 Exponential Smoothing Problem (1) Data  Question: Given the weekly demand data, what are the exponential smoothing forecasts for periods 2-10 using  =0.10 and  =0.60?  Assume F 1 =D 1

16 Answer: The respective alphas columns denote the forecast values. Note that you can only forecast one time period into the future.

17 Exponential Smoothing Problem (1) Plotting