1. Forecasting
OPS 370

2. Forecasting
Forecasting - Chapter 4

3. Total Sales, New Offerings
What to Forecast?
Demand for Individual
Products & Services
Short Term
(0-3 Months)
Demand for Product &
Service Families
Medium Term
(3 Months – 2 Years)
Total Sales, New Offerings
Long Term
(>2 Years)
Forecasting - Chapter 4

4. How to Forecast? Qualitative Methods Quantitative Methods
Based On Educated Opinion & Judgment (Subjective)
Particularly Useful When Lacking Numerical Data (Example: Design and Introduction Phases of a Product’s Life Cycle)
Quantitative Methods
Based On Data (Objective)
Forecasting - Chapter 4

5. Qualitative Methods Executive Judgment Sales Force Composite
Market Research/Survey
Delphi Method
Forecasting - Chapter 4

6. Quantitative Methods Time Series & Regression
Time Series  Popular Forecasting Approach in Operations Management
Assumption:
“Patterns” That Occurred in the Past Will Continue to Occur In the Future
Patterns
Random Variation
Trend
Seasonality
Composite
Forecasting - Chapter 4

8. UK Airline Miles
Thousands of Miles

9. Forecasting Steps Collect Relevant/Reliable Data
Data Collection
Collect Relevant/Reliable Data
Be Aware of “Garbage-In, Garbage Out”
Data Analysis
Model Selection
Monitoring
Forecasting - Chapter 4

10. Forecasting Steps Plot the Data Identify Patterns Data Collection
Data Analysis
Model Selection
Monitoring
Forecasting - Chapter 4

11. Forecasting Steps Choose Model Appropriate for Data
Data Collection
Choose Model Appropriate for Data
Consider Complexity Trade-Offs
Perform Forecast(s)
Select Model Based on Performance Measure(s)
Data Analysis
Model Selection
Monitoring
Forecasting - Chapter 4

12. Track Forecast Performance (Conditions May and Often Do Change)
Forecasting Steps
Data Collection
Track Forecast Performance (Conditions May and Often Do Change)
Data Analysis
Model Selection
Monitoring
Forecasting - Chapter 4

13. Time Series Models Short Term Naïve Simple Moving Average
Weighted Moving Average
Exponential Smoothing
Forecasting - Chapter 4

14. Forecasting Example
L&F Bakery has been forecasting by “gut feel.” They would like to use a formal (i.e., quantitative) forecasting technique.
Forecasting - Chapter 4

15. Forecasting Methods
Naïve
Forecasting - Chapter 4

16. Forecasting Methods
Naïve (Excel)
=C4
=C5
Forecasting - Chapter 4

17. Forecasting Methods
Moving Average

18. Forecasting Methods
30 Day Moving Average of AAPL Price

19. Forecasting Methods Moving Average (Excel) =AVERAGE(C4:C6)

20. Forecasting Methods
Moving Average Example
Assume n = 2

21. Forecasting Methods
Weighted Moving Average

22. Forecasting Methods Weighted Moving Average =$G$6*C6+$G$5*C5+$G$4*C4

23. Forecasting Methods Weighted Moving Average Example
Assume n = 2, W1 = 0.7, W2 = 0.3

24. Forecasting Methods
Exponential Smoothing

25. Forecasting Methods
Exponential Smoothing

26. Forecasting Methods Exponential Smoothing (Excel) Initial forecast
=D4+$G$4*(C4-D4)
=D5+$G$4*(C5-D5)

27. Forecasting Methods
Exponential Smoothing Example
Assume a = 0.4

28. Forecasting Methods How to Select Value of a?
Alpha determine importance of recent forecast results in new forecasts

29. Determining Forecast Quality
How Well Did a Forecast Perform?
Determine Forecast Error
Error = Actual Demand – Forecasted Demand
Average Error
121.8

30. Determining Forecast Quality
Why is Average Error a Deceiving Measure of Quality?
Better Measures:
Mean Absolute Deviation
Mean Squared Error
Root Mean Squared Error

31. Determining Forecast Quality
Measure of Bias: Tracking Signal = Sum of Errors/MAD
=731/131.8 = 5.55
*OK if between -4 and +4
MAD
MSE

32. Determining Forecast Quality
For this MA(2) forecast. What is MAD, MSE, and TS?

33. Linear Regression
<SKIP Section in Textbook on Exponential Smoothing with Linear Trend>

34. Linear Trend Line Given Data Parameters to estimate
Y = Values of Response Variable
X = Values of Independent Variable
Parameters to estimate
a = Y-intercept
b = slope
Use “least squares” regression equations to estimate a and b.
Or …

35. Excel for Linear Regression
Use SLOPE Function
Use INTERCEPT Function