class 06 - forecasting 1

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Forecasting

What is Forecasting?

Process of predicting a future event . It is making statements about events whoseactual outcomes have not yet been observed.

Time Horizon for Forecasting

Short-range forecast

Up to 1 year; usually less than 3 months

Job scheduling, worker assignments

Medium-range forecast

3 months to 3 years

Sales & production planning, budgeting

Long-range forecast3+ years

New product planning, facility location

Forecasting

Industrial Engineering

Forecasting

Methods

Moving

AverageMethod


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Forecasting

Seven Steps in Forecasting

Determine the use of the forecast

Select the items to be forecast

Determine the time horizon of the forecast

Select the forecasting model(s)

Gather the data

Make the forecast

Validate and implement results

Forecasting


Forecasting

Methods

Moving

AverageMethod


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Forecasting

Product Demand over 4 Years with Trend and Seasonality

Forecasting


Forecasting

Methods

Moving

AverageMethodYear

1Year

2Year

3Year

4

Seasonal peaks Trend component

Actualdemand line

Average demandover four years

Demandforprodu

ctorservice

Randomvariation


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Forecasting Methods

Forecasting Approaches

Forecasting


Forecasting

Methods

Moving

AverageMethod

Used when situation is stable& historical data exist

Existing products

Current technology

Involves mathematicaltechniques

e.g., forecasting sales of

color televisions

Quantitative Methods

Used when situation is vague& little data exist

New products

New technology

Involves intuition, experience

e.g., forecasting sales onInternet

Qualitative Methods


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Forecasting Methods

Quantitative Forecasting Methods


Quantitative

Forecasting

Linear

Regression

Associative

Models

Exponential

Smoothing

Moving

Average

Time Series

Models

Trend

Projection

Forecasting

Forecasting

Methods

Moving

AverageMethod


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Forecasting Methods

What is a Time Series?

Time series is a sequence of data points, measured typically at successive timesspaced at uniform time intervals.

Time series forecasting is the use of a model to forecast future events based onknown past events

Time Series Components


Trend

Seasonal

Cyclical

Random

Forecasting

Forecasting

Methods

Moving

AverageMethod


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Forecasting Methods

Trend Component

Persistent, overall upward or downward pattern

Due to population, technology etc.

Several years duration

Seasonal Component

Regular pattern of up & down fluctuationsDue 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


Forecasting

Forecasting

Methods

Moving

AverageMethod


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Forecasting Methods

Random Component

Erratic, unsystematic, residual fluctuations

Due to random variation or unforeseen events

Short duration & nonrepeating


Forecasting

Forecasting

Methods

Moving

AverageMethod


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Moving Average Method


MA is a series of arithmetic means used if there is little or no trend and often forsmoothing. It provides overall impression of data over time

Forecasting


Forecasting

Methods

Moving

AverageMethod

MAn

n

Demand in Previous Periods


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Moving Average Example

Youre manager of an automobile dealership that sells SUV. You want to forecastsales for 2010 in terms of major orders using a 3-period moving average.

2005 42006 62007 52008 32009 7


Time ResponseYi

MovingTotal(n=3)

MovingAverage

(n=3)2005 4 NA NA

2006 6 NA NA

2007 5 NA NA2008 3 4+6+5=15 15/3 = 5

2009 72010 NA

Forecasting

Forecasting

Methods

Moving

AverageMethod


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Moving Average MethodIndustrial Engineering

Time ResponseYi

MovingTotal

(n=3)

MovingAverage

(n=3)2005 4 NA NA

2006 6 NA NA

2007 5 NA NA2008 3 4+6+5=15 15/3 = 5

2009 7 6+5+3=14 14/3=4 2/32010 NA

Time ResponseYi

MovingTotal(n=3)

MovingAverage

(n=3)2005 4 NA NA

2006 6 NA NA

2007 5 NA NA2008 3 4+6+5=15 15/3=5.0

2009 7 6+5+3=14 14/3=4.72010 NA 5+3+7=15 15/3=5.0

Forecasting

Forecasting

Methods

Moving

AverageMethod


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Moving Average MethodIndustrial Engineering

Time ResponseYi

MovingTotal

(n=3)

MovingAverage

(n=3)2005 4 NA NA

2006 6 NA NA

2007 5 NA NA2008 3 4+6+5=15 15/3 = 5

2009 7 6+5+3=14 14/3=4 2/32010 NA

Time ResponseYi

MovingTotal(n=3)

MovingAverage

(n=3)2005 4 NA NA

2006 6 NA NA

2007 5 NA NA2008 3 4+6+5=15 15/3=5.0

2009 7 6+5+3=14 14/3=4.72010 NA 5+3+7=15 15/3=5.0

Forecasting

Forecasting

Methods

Moving

AverageMethod

class 06 - forecasting 1

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