Class 06 - Forecasting 1

Industrial Engineering
Forecasting
What is Forecasting?
Forecasting
Process of predicting a future event . It is making statements about events whose actual outcomes have not yet been observed.
Time Horizon for Forecasting

Forecasting Methods Short-range forecast
Up to 1 year; usually less than 3 months Job scheduling, worker assignments
Medium-range forecast Moving Average Method

3 months to 3 years Sales & production planning, budgeting
Long-range forecast
3+ years New product planning, facility location
1
Forecasting
Short-term vs. Longer-term Forecasting

Forecasting
Medium/long range forecasts deal with more comprehensive issues and support management decisions regarding planning and products, plants and processes. Short-term forecasting usually employs different methodologies than longer-term forecasting Short-term forecasts tend to be more accurate than longer-term forecasts.
Forecasting Methods
Types of Forecasts
Economic Forecasts
Address business cycle, e.g., inflation rate, money supply etc.
Moving Average Method
Technological Forecasts
Predict technological change Predict new product sales
Demand Forecasts
Predict existing product sales
2
Forecasting
Seven Steps in Forecasting

Forecasting
Determine the use of the forecast

Select the items to be forecast
Forecasting Methods
Determine the time horizon of the forecast Select the forecasting model(s) Gather the data Make the forecast
Validate and implement results
Forecasting
Product Demand over 4 Years with Trend and Seasonality

Forecasting
Demand for product or service Seasonal peaks Trend component
Forecasting Methods
Actual demand line
Average demand over four years Random variation Year 1
Year 2
Year 3
Year 4
4
Forecasting Methods
Forecasting Approaches
Forecasting
Qualitative Methods
Quantitative Methods
Used when situation is vague & little data exist
Used when situation is stable & historical data exist
Forecasting Methods
New products
Existing products
Current technology
New technology
Involves intuition, experience
e.g., forecasting sales on Internet
Involves mathematical techniques
e.g., forecasting sales of color televisions
Forecasting Methods
Quantitative Forecasting Methods

Forecasting
Quantitative Forecasting
Forecasting Methods
Time Series Models
Associative Models
Moving Average
Exponential Smoothing
Trend
Projection
Linear
Regression
Forecasting Methods
What is a Time Series?

Forecasting
Time series is a sequence of data points, measured typically at successive times spaced at uniform time intervals.
Time series forecasting is the use of a model to forecast future events based on known past events
Forecasting Methods
Time Series Components

Trend Cyclical

Seasonal Random
7
Forecasting Methods
Trend Component
Forecasting
Persistent, overall upward or downward pattern
Due to population, technology etc.

Several years duration
Seasonal Component
Forecasting Methods Regular pattern of up & down fluctuations Due to weather, customs etc.
Occurs within 1 year

Cyclical Component
Repeating up & down movements
Due to interactions of factors influencing economy

Usually 2-10 years duration
8
Forecasting Methods
Random Component
Forecasting Erratic, unsystematic, residual fluctuations
Due to random variation or unforeseen events Short duration & nonrepeating Forecasting Methods

Forecasting
MA is a series of arithmetic means used if there is little or no trend and often for smoothing. It provides overall impression of data over time
MA
Forecasting Methods
Demand in Previous n Periods n
10
Moving Average Example

Forecasting
Youre manager of an automobile dealership that sells SUV. You want to forecast sales for 2010 in terms of major orders using a 3-period moving average. 2005 4 2006 6 2007 5 2008 3 2009 7
Forecasting Methods
Time 2005 2006 2007 2008 2009 2010
Response Yi 4 6 5 3 7 NA
Moving Total (n=3) NA NA NA 4+6+5=15
Moving Average (n=3) NA NA NA 15/3 = 5

11

Time Response Yi 4 6 5 3 7 NA Moving Total (n=3) NA NA NA 4+6+5=15 6+5+3=14 Moving Average (n=3) NA NA NA 15/3 = 5 14/3=4 2/3
Forecasting
2005 2006 2007 2008 2009 2010
Forecasting Methods
Time 2005 2006 2007 2008 2009 2010
Moving Total (n=3) NA NA NA 4+6+5=15 6+5+3=14 5+3+7=15
Moving Average (n=3) NA NA NA 15/3=5.0 14/3=4.7 15/3=5.0

12

Time Response Yi 4 6 5 3 7 NA Moving Total (n=3) NA NA NA 4+6+5=15 6+5+3=14 Moving Average (n=3) NA NA NA 15/3 = 5 14/3=4 2/3
Forecasting
2005 2006 2007 2008 2009 2010
Forecasting Methods
Time 2005 2006 2007 2008 2009 2010
Moving Total (n=3) NA NA NA 4+6+5=15 6+5+3=14 5+3+7=15
Moving Average (n=3) NA NA NA 15/3=5.0 14/3=4.7 15/3=5.0

13

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Industrial Engineering

Time Horizon for Forecasting

Medium-range forecast Moving Average Method

Short-term vs. Longer-term Forecasting

Moving Average Method

Seven Steps in Forecasting

Determine the use of the forecast

Moving Average Method

Validate and implement results

Product Demand over 4 Years with Trend and Seasonality

Actual demand line

Average demand over four years Random variation Year 1

Moving Average Method

Used when situation is vague & little data exist

Used when situation is stable & historical data exist

Involves intuition, experience

Moving Average Method

e.g., forecasting sales on Internet

Involves mathematical techniques

e.g., forecasting sales of color televisions

Quantitative Forecasting Methods

Time Series Models

Moving Average Method

What is a Time Series?

Time Series Components

Moving Average Method

Due to population, technology etc.

Occurs within 1 year

Due to interactions of factors influencing economy

Moving Average Method

Moving Average Method

Moving Average Method

Demand in Previous n Periods n

Moving Average Method

Moving Average Method

Moving Average Example

Time 2005 2006 2007 2008 2009 2010

Moving Average Method

Moving Total (n=3) NA NA NA 4+6+5=15

Moving Average (n=3) NA NA NA 15/3 = 5

Moving Average Method

Time 2005 2006 2007 2008 2009 2010

Moving Average Method

Moving Total (n=3) NA NA NA 4+6+5=15 6+5+3=14 5+3+7=15

Moving Average (n=3) NA NA NA 15/3=5.0 14/3=4.7 15/3=5.0

Moving Average Method

Time 2005 2006 2007 2008 2009 2010

Moving Average Method

Moving Total (n=3) NA NA NA 4+6+5=15 6+5+3=14 5+3+7=15

Moving Average (n=3) NA NA NA 15/3=5.0 14/3=4.7 15/3=5.0

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