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Forecasting (Review)

SaEd M. Salhieh, Ph.D.

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

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Forecasting Time Horizons

Short-range forecast
Up to 1 year, generally less than 3 months Purchasing, job scheduling, workforce levels, job assignments, production levels

Medium-range forecast
3 months to 3 years Sales and production planning, budgeting

Long-range forecast
3+ years New product planning, facility location, research and development
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Seven Steps in Forecasting

1. Determine the use of the forecast 2. Select the items to be forecasted 3. Determine the time horizon of the forecast 4. Select the forecasting model(s) 5. Gather the data 6. Make the forecast 7. Validate and implement results
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Forecasting Approaches
Qualitative Methods
Used when situation is vague and little data exist
New products New technology

Quantitative Methods
Used when situation is stable and historical data exist
Existing products Current technology

Involves intuition, experience

e.g., forecasting sales on Internet

Involves mathematical techniques

e.g., forecasting sales of color televisions

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Overview of Quantitative Approaches

1. Naive approach 2. Moving averages 3. Exponential smoothing 4. Trend projection 5. Linear regression
associative model
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time-series models

Naive Approach
Assumes demand in next period is the same as demand in most recent period
e.g., If January sales were 68, then February sales will be 68

Sometimes cost effective and efficient Can be good starting point

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Moving Average Method

MA is a series of arithmetic means Used if little or no trend Used often for smoothing
Provides overall impression of data over time
demand in previous n periods n
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Moving average =

Weighted Moving Average

Used when some trend might be present
Older data usually less important

Weights based on experience and intuition

Weighted moving average = (weight for period n) x (demand in period n) weights

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Exponential Smoothing
Form of weighted moving average
Weights decline exponentially Most recent data weighted most

Requires smoothing constant ()

Ranges from 0 to 1 Subjectively chosen

Involves little record keeping of past data

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Exponential Smoothing
New forecast = Last periods forecast + (Last periods actual demand Last periods forecast) Ft = Ft 1 + (At 1 - Ft 1)
where Ft = new forecast Ft 1 = previous forecast = smoothing (or weighting) constant (0 1)
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Exponential Smoothing with Trend Adjustment

When a trend is present, exponential smoothing must be modified
Forecast Exponentially Exponentially including (FITt) = smoothed (Ft) + smoothed (Tt) trend forecast trend

2011 Pearson Education, Inc. publishing as Prentice Hall

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Exponential Smoothing with Trend Adjustment

Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1) Tt = (Ft - Ft - 1) + (1 - )Tt - 1
Step 1: Compute Ft Step 2: Compute Tt Step 3: Calculate the forecast FITt = Ft + Tt
2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 13

Common Measures of Error

Mean Absolute Deviation (MAD)
MAD = |Actual - Forecast| n

Mean Squared Error (MSE)

(Forecast Errors)2 MSE = n
2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 14

Common Measures of Error

Mean Absolute Percent Error (MAPE)
n

MAPE =

i=1

100|Actuali - Forecasti|/Actuali
n

2011 Pearson Education, Inc. publishing as Prentice Hall

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Trend Projections
Fitting a trend line to historical data points to project into the medium to long-range Linear trends can be found using the least squares technique
^ = a + bx y
^ = computed value of the variable to where y be predicted (dependent variable) a = y-axis intercept b = slope of the regression line x = the independent variable
2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 16

Least Squares Method

Equations to calculate the regression variables
^ = a + bx y

b=

xy - nxy x2 - nx2

a = y - bx
2011 Pearson Education, Inc. publishing as Prentice Hall 4 - 17

Seasonal Variations In Data

Steps in the process:
1. Find average historical demand for each season 2. Compute the average demand over all seasons 3. Compute a seasonal index for each season 4. Estimate next years total demand 5. Divide this estimate of total demand by the number of seasons, then multiply it by the seasonal index for that season

2011 Pearson Education, Inc. publishing as Prentice Hall

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Industrial Engineering

Examples

The following gives the number of pints of Type A blood used at Woodlawn Hospital in the past six weeks. Week of August 31 September 7 September 14 September 21 September 28 October 5 Pints Used 360 389 410 381 368 374

a) Forecast the demand for the week of October 12 using a three-week moving average. b) Use a three week weighted moving average, with weights of .1, .3, and .6, using .6 for the most recent week. Forecast demand for the week of October 12. c) Compute the forecast for the week of October 12 using exponential smoothing with a forecast for August 31st of 360 and = 0.2.
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Industrial Engineering

Examples

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Industrial Engineering

Examples

The Undergraduate Hospital is considering the purchase of a new ambulance. The decision will rest partly on the anticipated mileage to be driven next year. The miles driven during the past five years are as follows. Year Mileage 1 3,000 2 4,000 3 3,400 4 3,800 5 3,700 Forecast the mileage for next year using a two-year moving average. Find the MAD for your forecast in part (a). Use a weighted two-year moving average with weights of .4 and .6 to forecast next years mileage. (The weight of .6 is for the most recent year.) What is the MAD of this forecast? Compute the forecast for year 6 using exponential smoothing, an initial forecast for year 1 of 3,000 miles, and =0.5.

a) b) c)

d)

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Industrial Engineering

Examples

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Industrial Engineering

Examples

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Industrial Engineering

Examples

The following gives the number of accidents that have occurred on Florida State Highway 101 during the last four months Month January February March April Number of Accidents 30 40 60 90

Forecast the number of accidents that will occur in May, using least squares regression to derive a trend equation.

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Industrial Engineering

Examples

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Industrial Engineering

Examples

The number of transistors (in millions) made at a plant in Japan during the past five years follows. Year Transistors 1 140 2 160 3 190 4 200 5 210 a) Forecast the number of transistors to be made next year, using linear regression. b) Compute the Mean Squared Error when using linear regression.

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Industrial Engineering

Examples

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