Week 5 Lecture 1 - Forecasting

Question 1

What are the 4 steps in the forecasting process?

Answer 1

1. Identify the purpose of the forecasting.
   - Are we trying to forecast daily sales? Yearly sales? Growth of the market?
2. Series to be forecast
   - Are we going to forecast one element of sales? One product? A series of products? A group of products?
3. Classification of series
   - statistical forecast
4. Forecast adjustments
   - The forecasting process is adjusted over time.

Question 2

What is the ‘purpose’ of forecasting?

Answer 2

• Strategic Planning
• HR Planning
• Financial Planning
• Sales and Marketing Planning
• Operations planning

Question 3

If the forecasting period is long, what happens to the interval of data points?

Answer 3

They get spaces apart more. It would be unrealistic to forecast every single day.

Question 4

What is the downfall regarding forecasting?

Answer 4

All forecasts will be wrong, the aim of forecasting is to find a number/quantity that is close to the final outcome.

Question 5

What three forms does forecasting take?

Answer 5

1. Statistical (objective) methods - usually used more in the short term e.g. time-series, causal methods
2. Judgmental (subjective) methods - a group of experts try to find a forecasting value. Useful for long term forecasting or when introducing a new product. E.g. individual judgment, group judgment.
3. Guessing

Question 6

What flows towards and away from the customer in a supply chain forecast?

Answer 6

Materials flow towards the customer

Information flows back away from the consumer to the supply chain

Question 7

A high level of aggregation and a short time horizon is best forecast using what methods?

Answer 7

Time series

And

Causal methods

Question 8

A low level of aggregation and a short term horizon is best forecast using what methods?

Answer 8

Time series

Question 9

A high level of aggregation and a long horizon is best forecast using what methods?

Answer 9

Judgemental methods

Question 10

A low level of aggregation and a long horizon are best forecast using what methods?

Answer 10

Causal

And

Judgmental

Question 11

What four factors influence the use of ‘judgment’?

Answer 11

1. No data (new product)
2. Historical data is no longer relevant (product has been superseded)
3. Different circumstances (new promotion, new discount level)
4. An expectation that human judgment will be more accurate

Question 12

What are two downsides of using the judgmental method?

Answer 12

They’re time consuming

They need employees to complete

Question 13

In relation to judgment, cognitive biases come in three forms, what are they?

Answer 13

Optimistic bias
The forecast is too optimistic.

Confirmation bias
You already think something to be true so when you find 1 piece of supporting evidence, you accept this as absolute.

Overconfidence bias
This relates to confirmation bias but relates to people being overconfident without conducting the right amount of research.

Question 14

What are the 3 main reasons for optimistic bias?

Answer 14

Confusion of targets and forecasts.
Over confidence
Competitive neglect

Question 15

What is the ‘Delphi method’ and when is it used?

Answer 15

The ‘Delphi method’ involves trying to reach a general consensus through multiple rounds of questionnaires completed by a group of experts.

The questionnaire is distributed multiple times and the results aggregated and distributed to the group who then take the questionnaire again.

Question 16

What 3 main ‘things’ can a time-series graph show?

Answer 16

• Trend
• Seasonality
• Irregularity

Question 17

What is the definition of a trend in terms of a time-series graph?

Answer 17

A consistent change in the level of the time series

Question 18

What is ‘Line Shift’ in relation to a time-series and what causes it?

Answer 18

Line shift is a sudden change (jump) in the level of demand.

A line shift can be a result of changes in conditions.

Question 19

What is a ‘trended series’?

Answer 19

A trended series assumes that a trend will continue throughout the forecasting horizon.

Question 20

How is a trend line identified in a trended series?

Answer 20

Trend line can be used in excel. It works by using ‘least squares’ linear regression to identify the line of best fit.

Question 21

When is a trend line appropriate?

Answer 21

When the data is non-seasonal

Question 22

What is meant by the term ‘Seasonality’?

Answer 22

Periodic changes occurring in a repeating pattern (e.g. daily, weekly, annually)

Question 23

What is ‘not true’ in respect to seasonality?

Answer 23

Seasonality is not random

Question 24

What is meant by the term ‘Cyclical Variations’ and how long is a cyclical term?

Answer 24

Variations that occur within one cycle (Economic cycle). Cycle lengths vary and therefore it is difficult to predict.
Cyclical trends typically occur over a year or more.

Question 25

Irregular activity can also be referred to as …

Answer 25

Noise

Question 26

What is meant by the term ‘Irregular Activity’?

Answer 26

Irregular activity is what is left over after accounting for trends, seasonality and cyclical variations.

Irregular activities represent the variations that we cannot define and as such cannot predict

Question 27

What are the four steps to forecasting?

Answer 27

1. Understand the data - Are we expecting variations? Draw a graph?
2. Select the forecasting method - Should we pick one forecasting method over another because we are expecting variations?
3. Apply the most appropriate method - We pick the method most appropriate for the data. How will this method be applied? Software? Manually calculated?
4. Review subsequently - How well did the forecast go?

Question 28

What is meant by the term ‘Naive forecasting’?

Answer 28

Using the exact value of the last periods data to compute the sales expected in the next period.

No adjustments or attempts to establish causal factors are made.

Question 29

What is meant by ‘The Extrapolation method’?

Answer 29

The Extrapolation method involves using just two values, the growth/loss on the past periods results added to the last periods results.

Example:

2015: 50 sales
2016: 65 sales (15 increase)
2017: 65+15 = 80 sales

Question 30

What is meant by the term ‘Central moving average’?

Answer 30

The central moving average involves using extrapolation but over a longer period of time. An average over a number of periods (2 or more) is used to compute an average which is added to the previous periods results.

Question 31

When choosing the number of periods to be used in the calculation of the moving average , what two things must we consider?

Answer 31

What are we aiming to do?

• Identifying trends?
• Smooth out noise?

What time scales are we looking for?

• Averages using fewer periods will more accurately reflect short term trends.
• Averages using more periods will more accurately reflect long term trends.