1. Forecasting
Ross L. Fink

2. Forecasting Definition--Forecasting tries to predict the future
Used for planning purposes
Forecasting goes beyond predicting demand
Internal manufacturing costs
Cost of raw materials and component parts
Cost and availability of energy
Interest rates
Stock prices

3. Rules of Forecasting Your forecast is never correct
Forecasts assume some underlying causal system
Generally, the shorter the time horizon of the forecast, the more accurate the forecast
Generally, forecasting aggregations (groups of items) is more accurate than forecasting individual items

4. Forecasting Methods
Qualitative
Quantitative

5. Qualitative Forecasting Methods
Consumer surveys
Test marketing
Sales force composite
Executive opinion
Delphi technique
Panel of experts

6. Quantitative Forecasting Methods
Time series
Naïve
Moving averages
Exponential smoothing
Box-Jenkins
Associative or causal models
Simple regression
Multiple regression

7. Decomposition of Time Series Data
Believe that data consists of components
Trend
Seasons
Cycles
Random and irregular variations
Approach--isolate components and forecast separately and then recombine to obtain final forecast

8. Ways to Select Forecasting Method
Noise-dampening (smoothing)
Response (lag)
Error measurement

9. Error Measurement Mean Absolute Deviation (MAD)--Most popular
Average Error (AE) or bias
Mean Square Error (MSE)
Mean Absolute Percent Error (MAPE)
Standard deviation

10. Error where, Et = error for period t At = actual demand for period t
Ft = forecast for period t

11. Mean Absolute Deviation

12. Example

13. Example

14. Example--3-month Moving Average

15. Example

16. Example

17. Simple Exponential SmoothingOR
Alpha (smoothing Constant) is between 0 and 1