Forecasting is the art and science of predicting future events

1. Forecasting is the art and science of predicting future events

2. 1. Identify the 2. Collect 3. Plot data and purpose of forecast historical data identify patterns 9. Adjust forecast based 8a. Forecast over on additional qualitative planning horizon information and insight Forecasting Process 5. Develop / compute forecast for 6. Check forecast accuracy 4. Select a forecast model that period of historical data with one or more measures seems appropriate for data 8b. Select new forecast model or adjust parameters of existing model 7. Is accuracy of forecast acceptable? 10. Monitor results and measure forecast accuracy

3. Forecasting Methods • Time Series Models (data changes with time) • Causal Models (data is dependent on some other data variable) • Qualitative Analysis (no relevant data is available)

4. Causal Forecasts Assumption: One or more variables can be identified which has a relationship with demand Approaches: Simple Linear Regression Multiple Linear Regression

5. “Time Series” Defn: A time-ordered sequence of observations that have been taken at regular intervals. Examples: past monthly demands, past annual demands. Assumption: Future values can be estimated from past values of the series.

6. 1. Identify the 2. Collect 3. Plot data and purpose of forecast historical data identify patterns 9. Adjust forecast based 8a. Forecast over on additional qualitative planning horizon information and insight Forecasting Process 5. Develop / compute forecast for 6. Check forecast accuracy 4. Select a forecast model that period of historical data with one or more measures seems appropriate for data 8b. Select new forecast model or adjust parameters of existing model 7. Is accuracy of forecast acceptable? 10. Monitor results and measure forecast accuracy

7. Demand Behavior • Trend • gradual, long-term up or down movement • Cycle • up & down movement repeating over long time frame • Seasonal pattern • periodic oscillation in demand which repeats based on calendar schedule • Random movements (follow no pattern) • Practice decomposing with TimeSeriesData.xls

8. Some Time Series Terms • Stationary Component - a time series variable exhibiting no significant upward or downward trend over time. • Nonstationary Component - a time series variable exhibiting a significant upward or downward trend over time. • Seasonal Component - a time series variable exhibiting a repeating pattern at regular intervals over time. • Irregular Component- something that is random and thus cannot be predicted.

9. Time Series Approaches • Moving Averages • Exponential Smoothing • Seasonal Adjustments • Linear Trend Lines

10. Moving Averages • No general method exists for determining k. • We must try out several k values to see what works best.

11. Measuring Accuracy • Four common techniques are the: • mean absolute deviation, • mean absolute percent error, • the mean square error, • root mean square error. We will focus on MAD and MAPE.

12. A Comment on Comparing MAD and MAPE Values • Care should be taken when comparing MAD and/or MAPE values of two different forecasting techniques. • The lowest number may result from a technique that fits older values very well but fits recent values poorly. Plotting historical forecasts on the graph will help you identify this case. • It is sometimes wise to compute the measures using only the most recent values.

13. Exponential Smoothing New forecast= Last Period Forecast + Correction for Error made Last Period = Last Period Forecast + α ( Last Period Demand – Last Period Forecast)

14. Examples of TwoExponential Smoothing Functions

15. Stationary Seasonal Effects

16. Stationary Data and Seasonal Effects • Additive Effect: • Multiplicative Effect: • Et is the expected level at time period t. • St is the seasonal factor for time period t. p represents the number of seasonal periods

17. Crystal Ball (CB) Predictor • CB Predictor is an add-in that simplifies the process of performing time series analysis in Excel. • CB Predictor is available in your Crystal Ball software add-in.