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Chapter 9 Forecasting Copyright 2015 Health Administration Press
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After mastering this material, students will be able to articulate the value of a good forecast, describe the attributes of a good forecast, apply demand theory to forecasts, and use basic forecasting tools appropriately. 2Copyright 2015 Health Administration Press
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Forecasting: Using the past to predict the future. Most business decisions rely on forecasts. Key forecasts are – future demand for products, and – future price of inputs. The goal is to support decision making. “What if” forecasts can be helpful. 3Copyright 2015 Health Administration Press
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Why forecast quantity demanded? input prices? 4Copyright 2015 Health Administration Press
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Good forecasts should be easy to understand, transparent, easy to modify, accurate, and precise. 5Copyright 2015 Health Administration Press
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Understandability Ideally the methods are simple – so decision makers can see flaws, – so hidden assumptions will be obvious, and – so that nobody will be “snowed.” It’s the job of the analyst to make forecasts look simple. 6Copyright 2015 Health Administration Press
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Transparency Transparency is closely tied to simplicity. The audience needs to know what you did with – the approach, – the data, – and so forth. You want decision makers to ask hard questions. 7Copyright 2015 Health Administration Press
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Easy Modification How will a forecast change – if a key assumption changes? – if key data change? Example – You forecast sales growth of 8 percent with an assumption that the economy grows 3 percent. – What happens if the economy grows 2 percent? 8Copyright 2015 Health Administration Press
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Accuracy and Precision Since all forecasts err, there’s a tradeoff. – Accuracy: Forecast interval includes true value – Precision: Forecast interval is very small 9Copyright 2015 Health Administration Press
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Accuracy and Precision Example of an accurate, imprecise forecast: – Sales will increase by 0–10 percent. – If sales increase 1 percent, the forecast is accurate. Example of a precise, inaccurate forecast: – Sales will increase 2 percent. – If sales increase 1 percent, the forecast is inaccurate. 10Copyright 2015 Health Administration Press
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Many Ways to Forecast Qualitative – Delphi – Focus groups – Expert judgment 11Copyright 2015 Health Administration Press Quantitative – Simple extrapolation – Moving averages – Statistical techniques
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Qualitative Forecast: Delphi Delphi – Forecast is developed by a panel of experts. – Experts anonymously answer questions. – Responses are fed back to panel. – Members may then change their original responses. Very time consuming and expensive New groupware makes this much easier 12Copyright 2015 Health Administration Press
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Qualitative Forecast: Market Research Market research – Panels – Questionnaires – Surveys 13Copyright 2015 Health Administration Press
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Qualitative Forecast: Expert Judgment Expert judgment by – management, – sales force, and – other knowledgeable persons. 14Copyright 2015 Health Administration Press
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Quantitative Forecast: Simple Extrapolation Simple extrapolation – Percentage adjustment – Moving average 15Copyright 2015 Health Administration Press
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Quantitative Forecasts: Model-Based Methods Model-based methods – Trend and seasonal decomposition – Time series methods (e.g., ARIMA Models) – Multiple regression using leading indicators 16Copyright 2015 Health Administration Press
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Simple Extrapolation Example: Sales will increase by 2 percent – What’s good about this forecast? – What’s bad about it? 17Copyright 2015 Health Administration Press
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Moving Average Example: Sales will equal (Q t-1 + Q t-2 ) / 2 – What’s good about this forecast? – What’s bad about it? 18Copyright 2015 Health Administration Press
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Weighted Average Example: Sales will equal (α t-1 Q t-1 ) + (α t-2 Q t-2 ) – What’s good about this forecast? – What’s bad about it? 19Copyright 2015 Health Administration Press
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Regression-Based Forecast Example: Sales will equal β 1 X + β 2 Y + β 3 Z (weights come from statistical analysis) – What’s good about this forecast? – What’s bad about it? 20Copyright 2015 Health Administration Press
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A Moving Average Forecast 21Copyright 2015 Health Administration Press
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A Regression Forecast = 207.22 + 2.21 × Time 22Copyright 2015 Health Administration Press
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HOW FORECASTS GO WRONG 23Copyright 2015 Health Administration Press
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Laws of Forecasting The future will be like the past. – Changes can make our forecasts terrible. Forecasts will be wrong. – This is true even if the future is like the past. – This is more true if the data are noisy. 24Copyright 2015 Health Administration Press
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Implications Forecasts identify likely outcomes. – Some will be more likely than others. – Even unlikely outcomes may occur. The goals are to – support decision making, and – reduce uncertainty. 25Copyright 2015 Health Administration Press
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Who would predict this? 26Copyright 2015 Health Administration Press
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We need to forecast future values, and to understand how accurate our forecasts are. 27Copyright 2015 Health Administration Press
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Why is it crucial to estimate forecast error? Q1 estimate = 2,400 resident days. – Physical capacity is 2,800 resident days. – Nursing capacity varies with staffing. Hiring lead time is 30 days. How are these two estimates different? – 2,400 ± 200 (with 95 percent confidence) – 2,400 ± 900 (with 95 percent confidence) 28Copyright 2015 Health Administration Press
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The Forecasting Process 1.Set the goal. 2.Choose a reasonable model. – Collect data. – Analyze data. 3.Share the results with decision makers. 4.Revise the forecast as new data arrive. 29Copyright 2015 Health Administration Press
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Advice for Forecasters You will be wrong. – Be able to explain why. – Be humble. – Track factors that affect your forecasts. The goal is to support decision making. Forecasting is not an end in itself. 30Copyright 2015 Health Administration Press
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CONCLUSIONS 31Copyright 2015 Health Administration Press
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Forecasts are important, just tools, and always wrong. 32Copyright 2015 Health Administration Press
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Forecasts combine judgment and history, and should be – consistent with demand theory, – explicit about their assumptions, and – explicit about how precise they are. 33Copyright 2015 Health Administration Press
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Good forecasts should be easy to understand, transparent, easy to modify, accurate, and precise. Unfortunately, these goals often conflict. 34Copyright 2015 Health Administration Press
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Many Forecasting Techniques Qualitative – Delphi – Focus groups – Expert judgment 35Copyright 2015 Health Administration Press Quantitative – Extrapolation – Moving averages – Regression models
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