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ED CRUZ
SCHOOL OF APPLIED ECONOMICS
UNIVERSITY OF SOUTHEASTERN PHILIPPINES
FORECASTING
Definitions:
QUANTITATIVE
SOFTWARE
METHODS
FORECASTING SYSTEM
USES OF FORECASTING
1. “Closing the gap”
2. Policy & advocacy
3. Marketing and Budgeting
4. Procurement and Pipeline
Planning
5. Quality Assurance
6. Preventing supply imbalance
TYPES OF FORECASTING METHODS
A. Qualitative methods
B. Quantitative methods
• Based on quantitative models
• Objective in nature
• Rely on mathematical
computations.
QUANTITATIVE FORECASTING METHODS
CHARACTERISTICS OF FORECASTING
b. Statistics
Are they reliable?
Criteria- t test, F test, R2, variances
4. Prediction and evaluation of the forecast
and evaluation of prediction errors
Forecast = model extrapolated in the future
Question:
How confident are we in this forecast ?
Answer:
If the errors made with this model in the
past are small, the error we will make will
be small too.
FORECASTING STATIONARY TIME SERIES
TIME SERIES MODELS
Model Description
1 20 28 34 18 100
2 58 86 104 52 300
3 40 54 72 34 200
4 500 200
5 600 500
6 700 600
EXERCISE
Quarter Sales
1 50147
2 49325
3 57048
4 76781
5 48617
6 50898
7 58517
8 77691
9 50862
10 53028
11 58849
12 79660
13 51640
14 54119
15 65681
16 85175
17 56405
18 60031
19 71486
20 92183
21 60800
22 64900
23 76997
24 103337
MOVING AVERAGE
4 500 200
5 600 275
6 700 340
7 400
Simple moving average method: The forecast for next period
(period t+1) will be equal to the average of a specified number of
the most recent observations, with each observation receiving
the same emphasis (weight).
Actual
Demand (At) Forecast
Year (Ft) Notes
This forecast was a guess at the
1 100 200
beginning.
This forecast was made using a naïve
2 300 100
approach.
From this point forward, these forecasts
3 200 200
were made on a year-by-year basis.
4 500 250
5 600 350
6 700 550
7 650
4
WEIGHTED MOVING AVERAGE
EXAMPLE (A):
After the third year, the weights that were used are as follows: Most recent year, .5;
year prior to that, .3; year prior to that, .2
Actual
Demand Weight Forecast
Year (At) (Ft) Notes
This forecast was a guess at the
1 100 0.2 200
beginning.
This forecast was made using a
2 300 0.3 100
naïve approach.
This forecast was made using a
3 200 0.5 300
naïve approach.
From this point forward, these
4 500 210 forecasts were made on a year-by-
year basis.
5 600 370
EXPONENTIAL SMOOTHING
Actual
Demand (At) Forecast
Year (Ft) Notes
This was a guess, since there was no
1 100 200
prior demand data.
From this point forward, these forecasts
2 300 190
were made on a year-by-year basis.
3 200 201
4 500 200.9
5 600 230.81
6 700 267.729
7 310.9561
When we made the forecast for last period (Ft), it
was made in the following fashion:
Similarities
1. assume stationary process;
2. single method parameter (N for the MA and α for
the exponential smoothing); and
3. lag behind trend
If there is a general trend, both approach will follow
but with some delay
COMPARISON BETWEEN MOVING AVERAGE AND
EXPONENTIAL SMOOTHING
Differences
By their definition, the two approaches do not
incorporate the same amount of data.
1. number of data taken into account
(Although ES takes all the data into account, its
recursive formulation allows the new forecast
to be determined on the basis of the last forecast
and last observation only).
2. computation and memory
COMPARISON BETWEEN MOVING AVERAGE AND
EXPONENTIAL SMOOTHING
Variables
for the MA: choose N
A large value for N will characterize a stable forecast.
This is a quality if the process is stable,
it isn't if the process undergoes some changes.
for the ES: choose a
A small value for a will characterize a stable forecast (we
give very little importance to the new
observation D(t)). Again, this is appropriate if the process
is stable and it isn't if the process
undergoes some changes.
EXERCISES
173 104 220
Linear
Regression :
Y(t) = a + bt
The regression
analysis aims
at fitting a
straight line in
the set of points
METHODS FOR TREND-BASED TIME
SERIES
a= -10.500 b + 1.501;
b= 0.133 - 0.0732 a;
Y= 0.43 + 0.10t
METHODS FOR TREND-BASED TIME SERIES (DOUBLE
EXP. SMOOTHING (HOLT))
An exponential smoothing algorithm that allows for local
linear trend in a time series
Current level of TS + Current slope or in level of TS
- To anticipate the upward or downward movement.
For the slope, we choose a value between the previous slope, b(t-1), and the slope of the
line passing by a(t-1) and a(t). That is, b(t) is a compromise between b(t-1) and (a(t)-a(t-1)).
Both compromises are ruled by smoothing factors: and .
METHODS FOR TREND-BASED TIME SERIES (DOUBLE
EXP. SMOOTHING (HOLT))
With these values, we obtained b(0)=0; b(10)=0.050; b(20)=0.091 while the model used to
generate the data had a slope equal to 0.1. Here below you see the values of the model
parameters a and b as the forecasts evolved.
METHODS FOR TREND-BASED TIME SERIES (DOUBLE
EXP. SMOOTHING (HOLT))
\
METHODS FOR TREND-BASED TIME SERIES (DOUBLE
EXP. SMOOTHING (HOLT))
The following values were observed: b(0)=0.2; b(10)=0.141 and b(20)=0.102 for a model using a
slope equal to 0.1. To avoid this initialization problem, a solution consists in using a linear
regression on the first data to initialize the model parameters a and b.
METHODS FOR TREND-BASED TIME SERIES (DOUBLE
EXP. SMOOTHING (HOLT))
Making forecasts :
Assume the forecasts are along the line
For example, with the LR, the forecast
F(t,t+x) is given by the curve Y(t+x). With
the double exponential smoothing, the
forecast is F(t,t+x)= a(t) + b(t)x.
METHODS FOR TREND-BASED TIME SERIES (LINEAR
REGRESSION VS. HOLTS METHOD)
Similarity :
adequate for series with trends
Differences :
LR: - lots of work
- equal weight for all the data
- (a weighted version is possible)
Double ES (Holt):
- easy to compute
- decreasing (possibly dynamic) weights
- difficult to initialize
SEASONAL TIME SERIES
Additive vs Multiplicative Models