Introduction To Forecasting for the Littlefield Simulation

BUAD 311: Operations Management

Forecasting Objectives
Introduce the basic concepts of forecasting and its importance within an organization. Identify several of the more common forecasting methods Measure and assess the errors that exist in all forecasts

Managerial Issues
Recognizing the increased importance of forecasting in both manufacturing and services.
How to go about implementing forecasting at all levels in the organization.

Types of Forecasting
Qualitative Techniques
Non-quantitative forecasting techniques based on expert opinions and intuition. Typically used when there are no data available.

Time Series Analysis

Analyzing data by time periods to determine if trends or patterns occur.

Causal Relationship Forecasting

Relating demand to an underlying factor other than time. (Regression)
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Causal Relationship
Multiple Regression Models

Simple Linear Regression Model

The simple linear regression model seeks to fit a line through various data over time
Y

a
0 1 2 3 4 5 x (Time)

Yt = a + bx

Is the linear regression model

Yt is the regressed forecast value or dependent variable in the model, a is the intercept value of the the regression line, and b is similar to the slope of the regression line. However, since it is calculated with the variability of the data in mind, its formulation is not as straight forward as our usual notion of slope.

Simple Linear Regression Formulas for Calculating a and b

a = y - bx
xy - n(y)(x) x - n(x )
2 2

b=

Simple Linear Regression Problem Data

Question: Given the data below, what is the simple linear regression model that can be used to predict sales in future weeks?

Week 1 2 3 4 5

Sales 150 157 162 166 177

Answer: First, using the linear regression formulas, we can compute a and b

Week Week*Week Sales Week*Sales 1 1 150 150 2 4 157 314 3 9 162 486 4 16 166 664 5 25 177 885 3 55 162.4 2499 Average Sum Average Sum xy - n( y)(x) 2499 - 5(162.4)(3) 63 b= = = 6.3 2 2 55 5(9 ) 10 x - n(x )
a = y - bx = 162.4 - (6.3)(3) = 143.5

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The resulting regression model is:

Yt = 143.5 + 6.3x

Now if we plot the regression generated forecasts against the actual sales we obtain the following chart: 180 175 170 165 Sales 160 155 Forecast 150 145 140 135 1 2 3 4 5 Perio d Sales