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8/13/2019 Class 06 - Forecasting 1
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Forecasting
What is Forecasting?
Process of predicting a future event . It is making statements about events whoseactual outcomes have not yet been observed.
Time Horizon for Forecasting
Short-range forecast
Up to 1 year; usually less than 3 months
Job scheduling, worker assignments
Medium-range forecast
3 months to 3 years
Sales & production planning, budgeting
Long-range forecast3+ years
New product planning, facility location
Forecasting
Industrial Engineering
Forecasting
Methods
Moving
AverageMethod
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Forecasting
Seven Steps in Forecasting
Determine the use of the forecast
Select the items to be forecast
Determine the time horizon of the forecast
Select the forecasting model(s)
Gather the data
Make the forecast
Validate and implement results
Forecasting
Industrial Engineering
Forecasting
Methods
Moving
AverageMethod
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Forecasting
Product Demand over 4 Years with Trend and Seasonality
Forecasting
Industrial Engineering
Forecasting
Methods
Moving
AverageMethodYear
1Year
2Year
3Year
4
Seasonal peaks Trend component
Actualdemand line
Average demandover four years
Demandforprodu
ctorservice
Randomvariation
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Forecasting Methods
Forecasting Approaches
Forecasting
Industrial Engineering
Forecasting
Methods
Moving
AverageMethod
Used when situation is stable& historical data exist
Existing products
Current technology
Involves mathematicaltechniques
e.g., forecasting sales of
color televisions
Quantitative Methods
Used when situation is vague& little data exist
New products
New technology
Involves intuition, experience
e.g., forecasting sales onInternet
Qualitative Methods
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Forecasting Methods
Quantitative Forecasting Methods
Industrial Engineering
Quantitative
Forecasting
Linear
Regression
Associative
Models
Exponential
Smoothing
Moving
Average
Time Series
Models
Trend
Projection
Forecasting
Forecasting
Methods
Moving
AverageMethod
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Forecasting Methods
What is a Time Series?
Time series is a sequence of data points, measured typically at successive timesspaced at uniform time intervals.
Time series forecasting is the use of a model to forecast future events based onknown past events
Time Series Components
Industrial Engineering
Trend
Seasonal
Cyclical
Random
Forecasting
Forecasting
Methods
Moving
AverageMethod
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Forecasting Methods
Trend Component
Persistent, overall upward or downward pattern
Due to population, technology etc.
Several years duration
Seasonal Component
Regular pattern of up & down fluctuationsDue to weather, customs etc.
Occurs within 1 year
Cyclical Component
Repeating up & down movements
Due to interactions of factors influencing economy
Usually 2-10 years duration
Industrial Engineering
Forecasting
Forecasting
Methods
Moving
AverageMethod
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Forecasting Methods
Random Component
Erratic, unsystematic, residual fluctuations
Due to random variation or unforeseen events
Short duration & nonrepeating
Industrial Engineering
Forecasting
Forecasting
Methods
Moving
AverageMethod
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Moving Average Method
Moving Average Method
MA is a series of arithmetic means used if there is little or no trend and often forsmoothing. It provides overall impression of data over time
Forecasting
Industrial Engineering
Forecasting
Methods
Moving
AverageMethod
MAn
n
Demand in Previous Periods
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Moving Average Method
Moving Average Example
Youre manager of an automobile dealership that sells SUV. You want to forecastsales for 2010 in terms of major orders using a 3-period moving average.
2005 42006 62007 52008 32009 7
Industrial Engineering
Time ResponseYi
MovingTotal(n=3)
MovingAverage
(n=3)2005 4 NA NA
2006 6 NA NA
2007 5 NA NA2008 3 4+6+5=15 15/3 = 5
2009 72010 NA
Forecasting
Forecasting
Methods
Moving
AverageMethod
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Moving Average MethodIndustrial Engineering
Time ResponseYi
MovingTotal
(n=3)
MovingAverage
(n=3)2005 4 NA NA
2006 6 NA NA
2007 5 NA NA2008 3 4+6+5=15 15/3 = 5
2009 7 6+5+3=14 14/3=4 2/32010 NA
Time ResponseYi
MovingTotal(n=3)
MovingAverage
(n=3)2005 4 NA NA
2006 6 NA NA
2007 5 NA NA2008 3 4+6+5=15 15/3=5.0
2009 7 6+5+3=14 14/3=4.72010 NA 5+3+7=15 15/3=5.0
Forecasting
Forecasting
Methods
Moving
AverageMethod
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Moving Average MethodIndustrial Engineering
Time ResponseYi
MovingTotal
(n=3)
MovingAverage
(n=3)2005 4 NA NA
2006 6 NA NA
2007 5 NA NA2008 3 4+6+5=15 15/3 = 5
2009 7 6+5+3=14 14/3=4 2/32010 NA
Time ResponseYi
MovingTotal(n=3)
MovingAverage
(n=3)2005 4 NA NA
2006 6 NA NA
2007 5 NA NA2008 3 4+6+5=15 15/3=5.0
2009 7 6+5+3=14 14/3=4.72010 NA 5+3+7=15 15/3=5.0
Forecasting
Forecasting
Methods
Moving
AverageMethod