Module 2

FORECASTING
Prepared by:

Rebecca Q. Lising, MBA, MAEd

IBCE-Instructor
 Learning Objectives
After this module, you should be able to:
1. List features common to all forecasts.
2. Outline the steps in the forecasting process.
3. Describe four qualitative forecasting
techniques.
4. Use a naïve method to make a forecast.
5. Prepare a moving average forecasts.
 Learning Objectives
After this module, you should be able to:
6. Prepare a weighted average forecasts.
7. Prepare an exponential smoothing forecast.
8. Prepare a linear trend forecasts.
9. Compute and use regression and correlation
coefficients.
 Topic Outline
01 Features common 02 Steps in the 03 Approaches to
to all forecasts forecasting process forecasting
-Forecast Accuracy

04 Qualitative 05 Forecasts based on 06 Associative

forecasts time-series data forecasting
techniques
Introduction
❑ Forecast is a statement about
the future value of a variable of
interest.
❑ Forecasting refers to the
practice of predicting what will
happen in the future by taking
into consideration events in the
past and present.
 FORECASTING
-is also an important component
of yield management, which
relates to the percentage of
capacity being used.
FEATURES COMMON
TO ALL FORECASTS
 Features Common to All Forecasts
1. Forecasting techniques generally assume that the same
underlying casual system that existed in the past will continue
to exist in the future.

2. Forecasts are not perfect; actual results usually differ from

predicted values; the presence of randomness precludes a
perfect forecast.

3. Forecasts for groups of items tend to be more accurate than

the forecasts for individual items.

4. Forecast accuracy decreases as the time period covered by the

forecast-the time horizon- increases.
 ELEMENTS OF A GOOD FORECAST

Timely Accurate Reliable

 ELEMENTS OF A GOOD FORECAST

Simple to
understand
and use
Meaningful
Units

In writing
 STEPS IN THE FORECASTING PROCESS

01 02 03

Determine the purpose Establish a time horizon Obtain, clean, and

of the forecast. analyze
appropriate data.
 STEPS IN THE FORECASTING PROCESS

04 05 06

Selecting a forecasting Make the forecast. Monitor the forecast

technique. errors.
 FORECAST ACCURACY

▪ Forecasted values are compared with the actual or

observed values.

▪ The forecast error (or deviation) is defined as follows:

Forecast Error = Actual value – Forecast value

et = At - Ft
 SUMMARIZING FORECAST ACCURACY

1. Mean Absolute Deviation (MAD)

MAD = ∑ (Actual –
Forecast)
3. Mean Absolute Percent Error (MAPE)
n
MAPE = ∑ (Actual – Forecast) x 100
2. Mean Squared Error (MSE)
Actual
MSE = ∑ (Actual – Forecast)2
n

n-1
Example: Computing MAD, MSE, and MAPE

Period Actual Forecast Error e2 [/error/÷Actual]x100

1 217 215 2 4 .92
2 213 216 -3 9 1.41
3 216 215 1 1 .46
4 210 214 -4 16 1.90
5 213 211 2 4 .94
6 219 214 5 25 2.28
7 216 217 -1 1 .46
8 212 216 -4 16 1.89
/22/ 76 10.26%
 APPROACHES TO FORECASTING

Qualitative forecasts Quantitative forecasts

❑ Projection of historical
➢ Qualitative models data
incorporate judgmental or
subjective factors ❑ Development of
associative models that
➢ Useful when subjective attempt to utilize causal
factors are thought to be variables
important or when accurate
quantitative data is difficult
to obtain
TYPES OF FORECASTS
FORECASTS BASED ON TIME- SERIES DATA
NAÏVE METHODS
➢ A forecast for any period that equals the previous period’s actual value.

YEAR ACTUAL SALES FORECAST SALES

1 110 --
2 100 110
3 120 100
4 140 120
5 170 140
6 150 170
7 160 150
8 190 160
9 200 190
10 190 200
11 -- 190
 TECHNIQUES FOR AVERAGING

MOVING AVERAGE
 TECHNIQUES FOR AVERAGING

MOVING AVERAGE

Example:
Compute a three-period moving average forecast given
demand for shopping carts for the last five periods.

Period Demand
1 42
2 40
3 43
4 40 the 3 most recent demands
5 41
 TECHNIQUES FOR AVERAGING
WEIGHTED MOVING AVERAGE
Given the following demand data,

a. Compute a weighted average forecast using a

weight of 0.40 for the most recent period, 0.30 for the
next most recent, 0.20 for the next, and 0.10 for the
next.
b. If the actual demand for period 6 is 39 forecast
demand for period 7 using the same weights as in part
a.

Period Demand
1 42
2 40
3 43
4 40
5 41
 TECHNIQUES FOR AVERAGING
EXPONENTIAL SMOOTHING
Example:

a. Suppose the previous forecast was 42 units, actual

demand was 40 units, and α = 0.10. The new forecast
will be computed as:

b. if the actual demand turns out to be 43, the next

forecast would be:
ILLUSTRATION:

Given the following data, calculate forecasts for months 4, 5, 6 and 7 using a three-month
moving average and an exponential smoothing forecast with an a of 0.3. Assume a
forecast of 61 for month 3:
Linear Trend Equation
 Linear Trend Equation
The coefficient of the line a and b, are based on the following two equations:

Where
n = number of periods
y = value of the time series
Example:
Cellphone sales for RQL Company over the last 5 weeks are shown in the
following table.

Week Sales
1 150
2 157
3 162
4 166
5 177

a. Determine the equation of the trend line

b. Predict sales for weeks 6 and 7
Solution:
Week(t) Sales (y) t2 ty
1 150
2 157
3 162
4 166
5 177
Solution:
 Worksheet
As a form of formative assessment
for this topic, we will have an
assessment task that will be made
available during our face to face
class.
References:

Operations Management with Total Quality Management 2019 edition by CENGAGE

Learning
Operations Management 7th Edition by Roberta S. Russel and Bernard W. Taylor III
Operations Management by McGraw Hill Education, c.2016

Total Quality Management. Phil. Edition. by James R. Evans and William M. Lindsay
Stevenson, William J., Operations Management 11th Edition(International), McGraw
Hill/Irwin, New York, USA, 2012

Online Video:
Forecasting-Introduction to operations management
https://pressbooks.senecacollege.ca/operationsmanagement/chapter/forecasting/
The goal of forecasting is not to predict the
future but to tell you what you need to
know to take meaningful action in the
present.
 OFFICIAL MCC MODULE DISCLAIMER

It is not the intention of the author/s or the publisher of this

module to have monetary gain in using the textual information,
imageries, and other references used in its production. This
module is only for the exclusive use of a bona fide student of
Mabalacat City College.

In addition, this module or no part of it thereof may be

reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying,
and/or otherwise, without the prior permission of Mabalacat
City College
 THANK YOU!
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