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PREDICTION consists of a
variety of processes for identifying
what possible futures will happen.
DEMAND FORECASTING
Forecasting of demand
is the art of predicting
demand for a product
or service at some
future date on the basis
of certain present and
past behaviour patterns
of some related events.
OBJECTIVE
econometric
Sample
End use delphi
survey
• It is costly.
• It is time consuming.
• Difficult and practically impossible to
survey all the consumers.
• Useful only for products with limited
consumers.
MOVING AVERAGE METHOD
A moving average is an average of some fixed or
pre-determined number of observations which
moves through the series by dropping the top
item of the previous averaged group and adding
the next item. This method can be used to
determine the trend values for given data without
going into complex mathematical calculations.
Calculations are based on pre-determined
period in weeks, months & years etc.
SIMPLE MOVING AVERAGE
• Forecast Ft is average of n previous observations or
actuals Dt :
1
Ft 1 ( Dt Dt 1 Dt 1 n )
n
t
1
Ft 1 Di
n i t 1 n
• Note that the n past observations are equally weighted.
• Issues with moving average forecasts:
– All n past observations treated equally;
– Observations older than n are not included at all;
– Requires that n past observations be retained;
– Problem when 1000's of items are being forecast.
SIMPLE MOVING
AVERAGE
• Include n most recent observations
• Weight equally
• Ignore older observations
weight
1/n
n ... 3 2 1
today
EXPONENTIAL SMOOTHING
• Include all past observations
• .• Weight recent observations much more
heavily than very old observations:
weight
today
EXPONENTIAL
SMOOTHING
• Include all past observations
• .• Weight recent observations much more
heavily than very old observations:
0 1
weight
Decreasing weight given
to older observations
today
EXPONENTIAL
SMOOTHING: CONCEPT
• Include all past observations
• Weight recent observations much more heavily than very old observations:
0 1
weight
Decreasing weight given
to older observations
(1 )
(1 ) 2
(1 ) 3
today
EXPONENTIAL ‘
SMOOTHING: MATH
• .
Ft aDt a (1 a ) Dt 1 a (1 a ) 2 Dt 2
Ft aDt (1 a ) Ft 1
• Thus, new forecast is weighted sum of old forecast and actual demand
• Notes:
– Only 2 values (Dt and Ft-1 ) are required, compared with n for moving
average
– Parameter a determined empirically (whatever works best)
– Rule of thumb: < 0.5
– Typically, = 0.2 or = 0.3 work well
• Forecast for k periods into future is:
Ft k Ft