By

Group-2
 A forecast is an estimate of a future event
achieved by systematically combining and
casting forward in a predetermined way data
about the past.
 Forecasting
Techniques

Qualitative Time Series

Models Methods

Delphi
Naive
Method
Moving
Historical Data Average
Weighted
Nominal group technique Moving Average
Exponential
Smoothing

Trend Analysis
Causal
Methods Seasonality
Simple Analysis
Regression
Analysis Multiplicative
Decomposition
Multiple
Regression
Analysis
 1. Qualitative – incorporates judgmental &
subjective factors into forecast.
2. Time-Series – attempts to predict the future
by using historical data.
3. Causal – incorporates factors that may
influence the quantity being forecasted into the
model
 Delphi method
Iterative group process allows experts to
make forecasts
 Participants:
 decision makers: 5 -10 experts who make the
forecast
 staff personnel: assist by preparing,
distributing, collecting, and summarizing a
series of questionnaires and survey results
 respondents: group with valued judgments
who provide input to decision makers
 Nominal group technique (NGT) is a
structured method for group brainstorming
that encourages contributions from everyone.
 When some group members are much more vocal
than others.
 When some group members think better in silence.
 When there is concern about some members not
participating.
 When the group does not easily generate quantities
of ideas.
 When all or some group members are new to the
team.
 When the issue is controversial or there is heated
conflict.
Materials needed: paper and pen or pencil for each
individual, flipchart, marking pens, tape.
 1. State the subject of the brainstorming. Clarify
the statement as needed until everyone
understands it.
 2. Each team member silently thinks of and writes
down as many ideas as possible in a set period of
time (5 to 10 minutes).
 3. Each member in turn states aloud one idea.
Facilitator records it on the flipchart.
 4. Discuss each idea in turn. Wording may be
changed only when the idea’s originator agrees.
Ideas may be stricken from the list only by
unanimous agreement. Discussion may clarify
meaning, explain logic or analysis, raise and
answer questions, or state agreement or
disagreement.
 5. Prioritize the ideas using multivoting or list
reduction.
 Time Series Method
◦ Naïve
 Whatever happened
recently will happen
again this time (same
Ft  Yt 1
time period)
 The model is simple
and flexible
 Provides a baseline to Ft  Yt  4 : Quarterly data
measure other models
 Attempts to capture Ft  Yt 12 : Monthly data
seasonal factors at the
expense of ignoring
trend
Wallace Garden Supply
Forecasting
Storage Shed Sales

Actual Naïve Absolute Percent Squared

Period Value Forecast Error Error Error Error
January 10 N/A
February 12 10 2 2 16.67% 4.0
March 16 12 4 4 25.00% 16.0
April 13 16 -3 3 23.08% 9.0
May 17 13 4 4 23.53% 16.0
June 19 17 2 2 10.53% 4.0
July 15 19 -4 4 26.67% 16.0
August 20 15 5 5 25.00% 25.0
September 22 20 2 2 9.09% 4.0
October 19 22 -3 3 15.79% 9.0
November 21 19 2 2 9.52% 4.0
December 19 21 -2 2 10.53% 4.0
0.818 3 17.76% 10.091
BIAS MAD MAPE MSE

Standard Error (Square Root of MSE) = 3.176619

 Wallace Garden - Naive Forecast

25

20

15
Actual Value
Sheds

Naïve Forecast
10

0
February March April May June July August September October November December
Period
 Time Series Method
◦ Moving Averages
 Assumes item
forecasted will stay
steady over time.
 Technique will smooth
out short-term
irregularities in the time
series.

k
k - period moving average   (Actual value in previous k periods) /k
k 1
Wallace Garden Supply
Forecasting
Storage Shed Sales

Actual
Period Value Three-Month Moving Averages
January 10
February 12
March 16
April 13 10 + 12 + 16 / 3 = 12.67
May 17 12 + 16 + 13 / 3 = 13.67
June 19 16 + 13 + 17 / 3 = 15.33
July 15 13 + 17 + 19 / 3 = 16.33
August 20 17 + 19 + 15 / 3 = 17.00
September 22 19 + 15 + 20 / 3 = 18.00
October 19 15 + 20 + 22 / 3 = 19.00
November 21 20 + 22 + 19 / 3 = 20.33
December 19 22 + 19 + 21 / 3 = 20.67
Wallace Garden Supply
Forecasting 3 period moving average
Actual Value - Forecast

Input Data Forecast Error Analysis

Absolute Squared Absolute
Period Actual Value Forecast Error error error % error
Month 1 10
Month 2 12
Month 3 16
Month 4 13 12.667 0.333 0.333 0.111 2.56%
Month 5 17 13.667 3.333 3.333 11.111 19.61%
Month 6 19 15.333 3.667 3.667 13.444 19.30%
Month 7 15 16.333 -1.333 1.333 1.778 8.89%
Month 8 20 17.000 3.000 3.000 9.000 15.00%
Month 9 22 18.000 4.000 4.000 16.000 18.18%
Month 10 19 19.000 0.000 0.000 0.000 0.00%
Month 11 21 20.333 0.667 0.667 0.444 3.17%
Month 12 19 20.667 -1.667 1.667 2.778 8.77%
Average 12.000 2.000 6.074 10.61%
Next period 19.667 BIAS MAD MSE MAPE
 Three Period Moving Average

25

20

15

Actual Value
Value

Forecast

10

0
1 2 3 4 5 6 7 8 9 10 11 12
Time
• Time Series Method
– Weighted Moving Averages
• Assumes data from some periods are more
important than data from other periods (e.g.
earlier periods).
• Use weights to place more emphasis on some
periods and less on others.

k - period weighted moving average 

k k

 (Weight for each period i)(Actual value in previous k periods) /  (weights)

i 1 i 1
It is used to forecast demand of next
period using data from several of
most recent periods.
 We may take three or more periods.

 Continued with same number of periods.

 All periods are equally weighted.

 Demand of oldest period is discarded and

newest is added.
Simple Moving Average
= Sum of demands of periods
Chosen number of periods
 If we have to forecast the demand of car in a
city ‘X’ for the month of April, with Simple
Moving Average using last three month’s
data:

Month No. of cars

January 96
February 94
March 98
April ?
Simple Moving Average
=96 + 94 + 98 = 96
3

So the forecast for the month of April is 96

cars.
Wallace Garden Supply
Forecasting
Storage Shed Sales

Actual
Period Value Weights Three-Month Weighted Moving Averages
January 10 0.222
February 12 0.593
March 16 0.185
April 13 2.2 + 7.1 + 3 / 1 = 12.298
May 17 2.7 + 9.5 + 2.4 / 1 = 14.556
June 19 3.5 + 7.7 + 3.2 / 1 = 14.407
July 15 2.9 + 10 + 3.5 / 1 = 16.484
August 20 3.8 + 11 + 2.8 / 1 = 17.814
September 22 4.2 + 8.9 + 3.7 / 1 = 16.815
October 19 3.3 + 12 + 4.1 / 1 = 19.262
November 21 4.4 + 13 + 3.5 / 1 = 21.000
December 19 4.9 + 11 + 3.9 / 1 = 20.036

Next period 20.185

Sum of weights = 1.000

Wallace Garden Supply
Forecasting 3 period weighted moving average

Input Data Forecast Error Analysis

Absolute Squared Absolute
Period Actual value Weights Forecast Error error error % error
Month 1 10 0.222
Month 2 12 0.593
Month 3 16 0.185
Month 4 13 12.298 0.702 0.702 0.492 5.40%
Month 5 17 14.556 2.444 2.444 5.971 14.37%
Month 6 19 14.407 4.593 4.593 21.093 24.17%
Month 7 15 16.484 -1.484 1.484 2.202 9.89%
Month 8 20 17.814 2.186 2.186 4.776 10.93%
Month 9 22 16.815 5.185 5.185 26.889 23.57%
Month 10 19 19.262 -0.262 0.262 0.069 1.38%
Month 11 21 21.000 0.000 0.000 0.000 0.00%
Month 12 19 20.036 -1.036 1.036 1.074 5.45%
Average 1.988 6.952 6.952 10.57%
Next period 20.185 BIAS MAD MSE MAPE

Sum of weights = 1.000

 Time Series Method
◦ Exponential Smoothing
 Moving average technique that requires little record
keeping of past data.
 Uses a smoothing constant α with a value between 0
and 1. (Usual range 0.1 to 0.3)

Forecast for period t 

forecast for period t - 1   (actual value in period t - 1 - forecast for period t - 1)
 Exponential Smoothing is a technique that can be applied to time series
data, either to produce smoothed data for presentation, or to make
forecasts.

 The time series data themselves are a sequence of observations.

 The observed phenomenon may be an essentially random process, or it

may be an orderly, but noisy, process.

 Whereas in Single Moving Averages the past observations are weighted

equally, Exponential Smoothing assigns exponentially decreasing
weights as the observation get older.

 Exponential smoothing is commonly applied to financial market and

economic data, but it can be used with any discrete set of repeated
measurements. The raw data sequence is often represented by {xt}, and
the output of the exponential smoothing algorithm is commonly written
as {st} which may be regarded as our best estimate of what the next
value of x will be. When the sequence of observations begins at time t =
0, the simplest form of exponential smoothing is given by the formulas.
 If Alpha is set to 1, the forecast for the next period is
based entirely on the actual value from the last period. If
Alpha is set to 0, the actual value from the last period is
completely ignored. Since neither of these cases will provide
much insight into future data, we'll constrain Alpha to be
between .01 and .99.

 In order to minimise costly overstocking and inventory

holding, your retail outlet needs useful forecasts of future
sales.

 For this simple exponential smoothing problem, you have

sales data (in $1,000's) for eight months. You need to find
Alpha, the smoothing constant, that minimises the sum of
the error - which in this case is the difference between the
actual and forecast sales for each period.

 The objective for this sales forecasting technique is to

determine projected sales and the Alpha smoothing
constant while minimising the squared error.
 The demand for a product in each of the last five months is shown
below.

Month 1 2 3 4 5
Demand ('00s) 13 17 19 23 24

# Use a two month moving average to generate a forecast for demand

in month 6.
# Apply exponential smoothing with a smoothing constant of 0.9 to
generate a forecast for demand for demand in month 6.
# Which of these two forecasts do you prefer and why?
Solution

The two month moving average for months two to five is given by:

m2 = (13 + 17)/2 = 15.0

m3 = (17 + 19)/2 = 18.0
m4 = (19 + 23)/2 = 21.0
m5 = (23 + 24)/2 = 23.5
 As before the forecast for month six is just the average for
month 5= M5 = 2386

 To compare the two forecasts we calculate the mean

squared deviation (MSD). If we do this we find that for the
moving average

 * MSD = [(15 - 19)² + (18 - 23)²+ (21 - 24)²]/3 = 16.67

 and for the exponentially smoothed average with a

smoothing constant of 0.9

 * MSD = [(13 - 17)² + (16.60 - 19)² +(18.76 - 23)²+

(22.58 - 24)²]/4 = 10.44

 Overall then we see that exponential smoothing appears to

give the best one month ahead forecasts as it has a lower
MSD. Hence we prefer the forecast of 2386 that has been
produced by exponential smoothing.
Wallace Garden Supply
Forecasting
Storage Shed Sales

Exponential Smoothing
Actual
Period Value Ft α At Ft Ft+1
January 10 10 0.1
February 12 10 + 0.1 *( 10 - 10 ) = 10.000
March 16 10 + 0.1 *( 12 - 10 ) = 10.200
April 13 10 + 0.1 *( 16 - 10 ) = 10.780
May 17 11 + 0.1 *( 13 - 11 ) = 11.002
June 19 11 + 0.1 *( 17 - 11 ) = 11.602
July 15 12 + 0.1 *( 19 - 12 ) = 12.342
August 20 12 + 0.1 *( 15 - 12 ) = 12.607
September 22 13 + 0.1 *( 20 - 13 ) = 13.347
October 19 13 + 0.1 *( 22 - 13 ) = 14.212
November 21 14 + 0.1 *( 19 - 14 ) = 14.691
December 19 15 + 0.1 *( 21 - 15 ) = 15.322
Wallace Garden Supply
Forecasting Exponential smoothing

Input Data Forecast Error Analysis

Absolute Squared Absolute
Period Actual value Forecast Error error error % error
Month 1 10 10.000
Month 2 12 10.000 2.000 2.000 4.000 16.67%
Month 3 16 10.838 5.162 5.162 26.649 32.26%
Month 4 13 13.000 0.000 0.000 0.000 0.00%
Month 5 17 13.000 4.000 4.000 16.000 23.53%
Month 6 19 14.675 4.325 4.325 18.702 22.76%
Month 7 15 16.487 -1.487 1.487 2.211 9.91%
Month 8 20 15.864 4.136 4.136 17.106 20.68%
Month 9 22 17.596 4.404 4.404 19.391 20.02%
Month 10 19 19.441 -0.441 0.441 0.194 2.32%
Month 11 21 19.256 1.744 1.744 3.041 8.30%
Month 12 19 19.987 -0.987 0.987 0.973 5.19%
Average 2.608 9.842 14.70%
Alpha 0.419 MAD MSE MAPE

Next period 19.573

 Exponential Smoothing

25

20

15
Sh ed s

Actual value
Forecast

10

0
 Trend analysis
◦ technique that fits a trend equation (or curve) to a series of
historical data points.
◦ projects the curve into the future for medium and long
term forecasts.
 Seasonality analysis
◦ adjustment to time series data due to variations at certain
periods.
◦ adjust with seasonal index – ratio of average value of the
item in a season to the overall annual average value.
◦ example: demand for coal & fuel oil in winter months.
 Sales(in units) vs. Time

Scatter Diagram 160

Actual Period 140

value (or) number
Y (or) X 120
74 1995
79 1996 100
80 1997
90 1998 80 Period number (or) X
105 1999
142 2000 60
122 2001
40
20
0
1994 1996 1998 2000 2002
 Values of Dependent Variables

Time
Least Squares Method
 ^
Y  a  bX
Where

^
Y = predicted value of the dependent variable (demand)

X = value of the independent

variable (time)

_ _
a = Y-axis intercept
[ XY - n X Y ]
b= 
b = slope of the regression line 2
_


2
X - n X 
 
Midwestern Manufacturing Company
Forecasting Linear trend analysis

Input Data Forecast Error Analysis

Actual value Period number Absolute Squared Absolute
Period (or) Y (or) X Forecast Error error error % error
Year 1 74 1 67.250 6.750 6.750 45.563 9.12%
Year 2 79 2 77.786 1.214 1.214 1.474 1.54%
Year 3 80 3 88.321 -8.321 8.321 69.246 10.40%
Year 4 90 4 98.857 -8.857 8.857 78.449 9.84%
Year 5 105 5 109.393 -4.393 4.393 19.297 4.18%
Year 6 142 6 119.929 22.071 22.071 487.148 15.54%
Year 7 122 7 130.464 -8.464 8.464 71.644 6.94%
Average 8.582 110.403 8.22%
Intercept 56.714 MAD MSE MAPE
Slope 10.536

Next period 141.000 8

 Trend Analysis

160

140

y = 10.536x + 56.714
120

100
Value

80

60

40

20

0
1 2 3 4 5 6 7
Tim e

Actual values Linear (Actual values)

 Ratio = demand / average demand
Eichler Supplies
Average Seasonal
Year Month Demand Demand Ratio Index
1 January 80 94 0.851 0.957
February 75 94 0.798 0.851
Seasonal Index – ratio of the
March 80 94 0.851 0.904 average value of the item in a
April 90 94 0.957 1.064 season to the overall average
May 115 94 1.223 1.309
June 110 94 1.170 1.223 annual value.
July 100 94 1.064 1.117
August 90 94 0.957 1.064 Example: average of year 1
September 85 94 0.904 0.957
October 75 94 0.798 0.851 January ratio to year 2 January
November 75 94 0.798 0.851 ratio.
December 80 94 0.851 0.851
(0.851 + 1.064)/2 = 0.957
2 January 100 94 1.064
February 85 94 0.904
March 90 94 0.957
April 110 94 1.170 If Year 3 average monthly demand is
May 131 94 1.394
June 120 94 1.277 expected to be 100 units.
July 110 94 1.170 Forecast demand Year 3 January:
August 110 94 1.170 100 X 0.957 = 96 units
September 95 94 1.011 Forecast demand Year 3 May:
October 85 94 0.904
November 85 94 0.904
100 X 1.309 = 131 units
December 80 94 0.851
 Going back to the conceptual model, solve for
trend:
◦ Trend = Y / Season (96
units/ 0.957 = 100.31)
 This eliminates seasonal variation and
isolates the trend
 Now use the Least Squares method to
compute the Trend
 Now that we have the Seasonal Indices and
Trend, we can reseasonalize the data and
generate the forecast
◦ Y = Trend x Seasonal Index
THANK YOU