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FORECAST:
A statement about the future value of a variable of
interest such as demand.
Forecasts affect decisions and activities throughout
an organization
Accounting, finance
Human resources
Marketing
Operations
Production/Services
Assumes causal system
past ==> future
Forecasts are rarely perfect because of
randomness
I see that you will
Forecasts more accurate for get an A this semester.
groups vs. individuals
Forecast accuracy decreases
as time horizon increases
Steps in the Forecasting Process
“The forecast”
Executive opinions
Sales force opinions
Consumer surveys
Outside opinion
Delphi method
Opinions of managers and staff
Achieves a consensus forecast
Time Series Forecasts
Irregular
variation
Trend
Cycles
90
89
88
Seasonal variations
Naive Forecasts
Simple to use
Virtually no cost
Easily understandable
Moving average
Weighted moving average
Exponential smoothing
Moving Average
y = a + bx
Predictor variables
- used to predict values of variable interest
Least squares regression
- technique for fitting a line to a set of points
- minimizes sum of squared deviations around the
line
Linear Model Seems Reasonable
X Y Computed
7 15
relationship
2 10
6 13 50
4 15 40
14 25 30
15 27 20
10
16 24
0
12 20 0 5 10 15 20 25
14 27
20 44
15 34
7 17
A straight line is fitted to a set of sample points.
Sources of Forecast errors
Forecast horizon