Chapter 4: Forecasting Flashcards
Main purpose of forecasting
making good estimates
a prediction of what will happen in the future
forecast
is a set of observations measured at successive points in, or over successive periods of, time.
time series
objective of time series methods
discover a pattern in the
historical data and then extrapolate this pattern into the future.
Important uses of forecasting to managers
-help them plan the system
-help them plan the use of system
long-range set of plans (what facilities and equipment to have, where to locate, concerning what types of products of service to offer)
Planning the system
usually shorter and intermediate range planning (planning inventory, purchasing, production, budgeting, scheduling)
Planning the use of system
part and a science of predicting future events (can help managers by reducing some of uncertainties)
Forecasting
not just predicting demand, it also used to predict profit, sales, costs, productivity changes, prices, availability of raw materials, interest rates, prices of stock and bonds, and movements of economic decisions
Business Forecasting
GDP, GNP, inflation, economic borrowing among others
Economic Decisions
Forecasting Process
- Determine the purpose of the forecast
- Establish a time horizon that the forecast must cover
- Select a forecasting method
- Gather and analyze the appropriate data and then prepare the forecast
- Monitoring the forecast to correct the accuracy for future use.
Approaches to Forecasting
-Qualitative Forecasting
-Quantitative Forecasting
judgement obtained from various sources such as consumer surveys, sales, staff, managers, executives, even the management consultants, and various panel of experts
Qualitative Forecasting
Qualitative Forecasting includes…
-Executive Opinions
-Sales Force
-Customer Surveys
-Opinions of Manager and Staff
often used as a part of long-range planning and new product development
Executive Opinions
direct contact with the customers; effective way to forecast judgmentally
Sales Force
contact information that might not be available elsewhere
Customer Surveys
may solicit from a number of other managers and from their staff or may concern advice on political or economic decisions
Opinions of Manager and Staff
based on historical database on numbers
Quantitative Forecasting
Quantitative Forecasting includes…
-Time Series
-Latin Forecast
simplest forecasting technique
Latin Forecast
Advantage of Latin Forecast
has virtually no cost; quickly and easy to prepare
Disadvantage of Latin Forecast
mobility to provide highly accurate forecast
for fairly stable components and to average out the irregular components of the time series
Smoothing Methods
computing an average of the most recent n data values in the time series and using this average for forecasting the value of the time series for the next period
Moving Averages
computing the average of the most recent n periods, the more recent observations are typically given more weight than older observations.
Weighted Moving Averages
most widely used techniques in forecasting
Exponential Smoothing
new forecast is based on the previous forecast plus percentage of the difference between that forecast and the actual value of the series at that point
Exponential Smoothing
Ft+1=
forecast of the time series for period t+1
Yt=
actual value of the time series in period t
Ft=
forecast of the time series for period t
a=
smoothing constant
determines how the historical time series values are weighted
smoothing constant
