FORECASTING

What is a
forecast?
 FORECASTING COMPONENTS
• Short-range forecasts are daily
operations.

• Medium-range forecasts are usually from

a month up to a year

• Long-range forecasts are more strategic

and for over a year.
 FORECASTING COMPONENTS
A trend is a gradual, long-term, up-or down movement of demand.

Random variations are unpredictable movements in demand that follow

no pattern.

A cycle is an up-and-down repetitive movement in demand.

A seasonal pattern is an up-and-down, repetitive movement within a

trend occurring periodically.
TYPES OF FORECASTING METHODS ARE TIME SERIES, REGRESSION, AND
QUALITATIVE.

Time series forecasts are statistical techniques that

use historical data.

Regression develops a mathematical relationship

between the forecasted item and factors that cause
it to behave the way it does.

Qualitative methods use judgment, expertise, and

opinion to make forecasts.
 MANAGERS
“The jury of
executive opinion.”
Top managers are the
key group involved in
the development of
forecasts for strategic
plans.
 TIME SERIES METHOD

Time series methods are

statistical techniques
that make use of
As the name time
historical data series suggests,
accumulated over a these methods
period of time. relate the forecast
to only one factor—
time. he orange
handles

Time series methods

assume that what has
occurred in the past
will continue to occur in
the future.
 The WSS dealer in Quezon Avenue
area wants to accurately forecast the
demand for WSS hybrid motorcycle during
the next month. Because the distributor is in
Germany, it is difficult to send motorcycle
back or recorded if the proper number of
motorcycles is not ordered a month ahead.
From sales records, the dealer has
accumulated the following data for the pats
11 months. Determine the weighted moving
averages forecast on demand with the
following weights (a) 20%, 30%, and 50%
and (b) 15%, 25%, and 60% .
DATA FOR THE PAST 11 MONTHS

JAN FEB MAR APR MAY JUN JUL

60 70 50 90 10 80 150

AUG SEP OCT NOV DEC

70 110 150 130
 SOLUTION
April = 60 + 70 + 50 = 180 = 60
3 3

May = 70 + 50 + 90 = 210 = 70
3 3
June = 50 + 90 + 10 = 150 = 50
3 3
July = 90 + 10 + 80 = 180 = 60
3 3
 SOLUTION
August = 10 + 80 + 150 = 240 = 80
3 3
September = 80 + 150 + 70 = 300 =100
3 3
October = 150 + 70 + 110 = 330 = 110
3 3
November = 70 + 110 + 150 = 180 = 110
3 3
December = 110 + 150 + 130 = 390 = 130
3 3
 COMPUTATION FOR THE FORECAST ON 5-
MONTH MOVING AVERAGE
June = 60 + 70 + 50 + 90 + 10 = 280 = 56
5 5

July = 70 + 50 + 10 + 80 = 300 = 60
5 5
Aug = 50 + 90 + 10 + 80 + 150 = 380 = 76
5 5

July = 90 + 10 + 80 = 180 = 60
3 3
 COMPUTATION FOR THE FORECAST ON 5-
MONTH MOVING AVERAGE
June = 60 + 70 + 50 + 90 + 10 = 280 = 56
5 5

July = 70 + 50 + 10 + 80 = 300 = 60
5 5
Aug = 50 + 90 + 10 + 80 + 150 = 380 = 76
5 5
Period…. Month Actual 3-Month 5-Month
Moving Moving
Average Average
1 January 60 -

2 February 70 -

3 March 50

4 April 90 60

5 May 10 70

6 June 80 50 56

7 July 150 60 60

8 August 70 80 76

9 September 110 100 80

10 October 150 110 84

11 November 130 110 112

12 December - 130 122

160

140

120

100

80

60

40

20

Actual 3-month 5-month

 The WSS dealer in Quezon Avenue
area wants to accurately forecast the
demand for WSS hybrid motorcycle during
the next month. Because the distributor is in
Germany, it is difficult to send motorcycle
back or recorded if the proper number of
motorcycles is not ordered a month ahead.
From sales records, the dealer has
accumulated the following data for the pats
11 months. Determine the weighted moving
averages forecast on demand with the
following weights (a) 20%, 30%, and 50%
and (b) 15%, 25%, and 60% .
COMPUTATION OF WEIGHTED MOVING AVERAGE (20%, 30%, 50%)

April = (0.20) (60) + (0.30) (70)+ (0.50) (50)= 12+21+25 = 58

May = (0.20) (70) + (0.50) (70)+ (0.50) (90)= 14+15+45 = 74
June = (0.20) (50) + (0.30) (90)+ (0.50) (10)= 10+27+5 = 42
July = (0.20) (90) + (0.30) (10)+ (0.50) (80)= 18+3+40 = 61
Aug = (0.20) (10) + (0.30) (80)+ (0.50) (150)= 2+24+75 = 101
Sept = (0.20) (80) + (0.30) (150)+ (0.50) (70)= 16+45+35 =96
Oct = (0.20) (150) + (0.30) (70)+ (0.50) (110)= 18+3+40 = 106
Nov = (0.20) (70) + (0.30) (110)+ (0.50) (150)= 14+33+75 = 122
Dec = (0.20) 110+ (0.30) (150) + (0.50) (130) = 22+45+65 = 132
COMPUTATION OF WEIGHTED MOVING AVERAGE (15%, 25%, 60%)

April = (0.15) (60) + (0.25) (70)+ (0.60) (50)= 12+21+25 = 58

May = (0.15) (70) + (0.25) (70)+ (0.60) (90)= 14+15+45 = 74
June = (0.15) (50) + (0.25) (90)+ (0.60) (10)= 10+27+5 = 42
July = (0.15) (90) + (0.25) (10)+ (0.60) (80)= 18+3+40 = 61
Aug = (0.15) (10) + (0.25) (80)+ (0.60) (150)= 2+24+75 = 101
Sept = (0.15) (80) + (0.25) (150)+ (0.60) (70)= 16+45+35 =96
Oct = (0.15) (150) + (0.25) (70)+ (0.60) (110)= 18+3+40 = 106
Nov = (0.15) (70) + (0.25) (110)+ (0.60) (150)= 14+33+75 = 122
Dec = (0.15) 110+ (0.25) (150) + (0.60) (130) = 22+45+65 = 132
Period Month Actual WMA (20%, 30%, WMA (15%, 25%,
50%) 60%)
1 January 60 -

2 February 70 -

3 March 50 -

4 April 90 58 56.5

5 May 10 74 77.0

6 June 42 36.0

7 July 150 61 64.0

8 August 70 101 111.5

9 September 110 96 91.5

10 October 150 106 106.0

11 November 130 122 128.0

12 December - 132 132

160

140

120

100

80

60

40

20

Actual (20%, 30%, 50%) (15%, 25%,60%)

 SIMPLE EXPONENTIAL SMOOTHING
Ft+1 = α yt +(1- α) Ft or Forecast = α(last value) + (1- α) (last forecast)

Ft+1 = Forecast for the next period

yt = Actual data in the present period
Ft = The previously determined forecast for the present period
α = Weighing factor referred to as the smoothing constant
 EXAMPLE
The WSS motorcycle dealer in Quezon Avenue area
wants to accurately forecast the demand for the WSS hybrid
motorcycle during the next month. Because the distributor is
in Germany, it is difficult to send motorcycle back or recorded
if the proper number of motorcycles is not ordered a month
ahead. From sales records, the dealer has accumulated the
following data for the past 11 months. Establish forecasts
using simple exponential smoothing if α = 0.10 and α -= 0.30
 EXAMPLE
Month Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov

Motorcycles 60 70 50 90 10 80 150 70 110 150 130

 SIMPLE EXPONENTIAL SMOOTHING
Ft+1 = α yt +(1- α) Ft or Forecast = α(last value) + (1- α) (last forecast)

Ft+1 = αy2 + (1- α) F2 = (0.10) (70) + (0.90) (60.00) = 7 +54.00 = 61.00

Ft+1 = αy3 + (1- α) F3 = (0.10) (50) + (0.90) (61.00) = 5 +54.90 = 59.90
Ft+1 = αy4 + (1- α) F4 = (0.10) (90) + (0.90) (59.90) = 9 +53.91 = 62.91
Ft+1 = αy4 + (1- α) F4 = (0.10) (90) + (0.90) (59.90) = 9 +53.91 = 62.91
ADJUSTED EXPONENTIAL SMOOTHING

Tt+1 = β (F t+1 - F t) + (1- β) Tt

AF t+1 = F t+1 + 1 - β Tt+1
β
ADJUSTED EXPONENTIAL SMOOTHING
Using β= 0.20, therefore (1- β) = 0.80 substitute to adjusted
forecast:

Tt+1 = β (F t+1 - F t) + (1- β) Tt

Tt+1 = (0.20) (F t+1 - F t) + 0.80 Tt
ADJUSTED EXPONENTIAL SMOOTHING

AF t+1 = F t+1 + 1 - β Tt+1

β

AF t+1 = F t+1 + 1 - 0.20 Tt+1 = F t+1 + AF t+1

0.20
 SOLUTION

T3 = 0.20 (F3 – F2) + 0.80 T2 = 0.20 (60-61) + 0.80(0)= 0.20(1) + 0= 0.20+0=0.20

AF3 = F3 + 4T3 = 61 + 4(0.20) =61 +0.80 = 61.80
T4 = 0.20 (F4 – F3) + 0.80 T3 = 0.20 (59.9-61) + 0.80(0.20)= 0.20(-1.1) + 0.16= -0.22+0.16=-0.06
AF4 = F4 + 4T4 = 59.9 + 4(-0.06) =59.9 -0.24 = 59.66
T5 = 0.20 (F4 – F3) + 0.80 T4 = 0.20 (62.91-59.9) + 0.80(-0.06)= 0.20(3.01) -0.048= 0.602-0.048=0.55
AF5 = F5 + 4T5 = 62.91 + 4(0.55) =62.91 +2.20 = 65.11
THANK YOU FOR WATCHING