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Forecasting Methods Forecasting Methods Chapter 9 Chapter 9

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Page 1: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Forecasting MethodsForecasting Methods

Chapter 9Chapter 9

Page 2: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

ForecastingForecasting

• How Important Is Forecasting?How Important Is Forecasting?

• Is Forecasting Only Financial?Is Forecasting Only Financial?

• How Is It Done?How Is It Done?

• Does Forecasting Help Be Successful?Does Forecasting Help Be Successful?

• What Are Forecasting Limitations?What Are Forecasting Limitations?

• Does Forecasting Differ From Does Forecasting Differ From Planning?Planning?

Page 3: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

ForecastingForecasting

• What Is the Difference Between What Is the Difference Between Seasonal and Cyclical Patterns?Seasonal and Cyclical Patterns?

• How Do Quantitative and Qualitative How Do Quantitative and Qualitative Forecasting Methods Differ?Forecasting Methods Differ?

Page 4: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

ForecastingForecasting

• How Is a Moving Average How Is a Moving Average Calculated?Calculated?

• When Are Causal Forecasting When Are Causal Forecasting Approaches Useful?Approaches Useful?

Page 5: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Implicit versus Explicit Implicit versus Explicit ForecastsForecasts

• Implicit - (Intuitive)Implicit - (Intuitive)

UnsystematicUnsystematic

ImpreciseImprecise

Difficult to EvaluateDifficult to Evaluate

Page 6: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Implicit versus Explicit Implicit versus Explicit ForecastsForecasts

• Explicit - (Analytical)Explicit - (Analytical)

SystematicSystematic

Reasonably Reliable and AccurateReasonably Reliable and Accurate

Rational EvaluationRational Evaluation

Page 7: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

The Nature of ForecastingThe Nature of Forecasting

• Done by All Levels of ManagementDone by All Levels of Management

• Looks at the FutureLooks at the Future

• Involves UncertaintiesInvolves Uncertainties

• Based on Historical DataBased on Historical Data

• Less Accurate Than DesiredLess Accurate Than Desired

• Extensive Use of Naive ModelsExtensive Use of Naive Models

Page 8: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

The Nature of ForecastingThe Nature of Forecasting

• Large Properties Need to Use More Large Properties Need to Use More Sophisticated ModelsSophisticated Models

• Trend - Straight Line ProjectionTrend - Straight Line Projection

• Seasonal - Fluctuate Over TimeSeasonal - Fluctuate Over Time

• Cyclical - Movements Over a TrendCyclical - Movements Over a Trend

• Random Variations Create Random Variations Create UncertaintyUncertainty

Page 9: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Data PatternData Pattern

0

50

100

150

200

250

300

350

400

450

TREND Seasonal Cyclical

Page 10: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Forecasting MethodsForecasting Methods• Naïve Method - Multiply current sales Naïve Method - Multiply current sales

level (or sales price) by a percentage level (or sales price) by a percentage increase (or decrease); or add (or increase (or decrease); or add (or subtract) a fixed amount.subtract) a fixed amount.

• This method does not use any This method does not use any analytical or scientific methodanalytical or scientific method

Page 11: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Forecasting MethodForecasting Method

• Naïve Example– Current year sales level is 1,000 units– Current year sales price is $15.00– Next year levels increase 10%– Next year price decreases $0.50

– Current Year Total Sales Equals

1,000 * $15.00 = $15,000

Page 12: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Forecasting MethodForecasting Method

• Naïve Example - ContinuedNaïve Example - Continued– Next year sales level equalsNext year sales level equals

1,000 * 1.10 = 1,1001,000 * 1.10 = 1,100– Next year price equalsNext year price equals

$15.00 - $0.50 = $14.50$15.00 - $0.50 = $14.50– Next year Total Sales equalsNext year Total Sales equals

1,100 * $14.50 = $15,9501,100 * $14.50 = $15,950

Page 13: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Forecasting MethodsForecasting Methods• Moving Averages - Sum of Activity in Moving Averages - Sum of Activity in

Previous N Periods Divided by Previous N Periods Divided by NN, , Where Where NN Is the Number of Periods Is the Number of Periods

Page 14: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Moving AverageMoving Average

• Page 408; Forecast week 13 using 3 Page 408; Forecast week 13 using 3 week moving averageweek moving average

Thus use data in weeks 10, 11, 12 Thus use data in weeks 10, 11, 12 and divide by 3and divide by 3

(1025 + 1000 + 1050) / 3 = 1025(1025 + 1000 + 1050) / 3 = 1025

Page 15: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Forecasting MethodsForecasting Methods• Exponential Smoothing - Uses a Exponential Smoothing - Uses a

Smoothing Constant and Recent Smoothing Constant and Recent Actual and Forecasted Activity to Actual and Forecasted Activity to Estimate Future ActivityEstimate Future Activity

Page 16: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Exponential SmoothingExponential Smoothing

• Forecast for Period 3:Forecast for Period 3:• Using Data belowUsing Data below• Period 1 Forecast 1,025Period 1 Forecast 1,025• Period 1 Actual 1,000Period 1 Actual 1,000• Period 2 Forecast 1,020Period 2 Forecast 1,020• Period 2 Actual 1,050Period 2 Actual 1,050

Page 17: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Exponential SmoothingExponential Smoothing

• Forecast for Period 3:Forecast for Period 3:• Step 1 - Determine Smoothing ConstantStep 1 - Determine Smoothing Constant

Period 2 Forecast - Period 1 ForecastPeriod 2 Forecast - Period 1 Forecast

Period 1 Actual - Period 1 ForecastPeriod 1 Actual - Period 1 Forecast

(1,020 - 1025 ) / (1,000 – 1,025 ) = 0.20(1,020 - 1025 ) / (1,000 – 1,025 ) = 0.20

Page 18: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Exponential SmoothingExponential Smoothing

• Step 2 Step 2

• Forecast for Week 3Forecast for Week 3• Wk 3 F = Wk 2 F + SC(WK2 Act – Wk2 F)• Wk 3 F = 1,020 + 0.2(1,050 - 1,020)• Wk 3 F = 1,020 + 0.2(30)• Wk 3 F = 1,026

Page 19: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Forecasting MethodsForecasting Methods

• Causal - Regression Analysis Which Causal - Regression Analysis Which Is Estimating an Activity (Dependent Is Estimating an Activity (Dependent Variable) on the Basis of Other Variable) on the Basis of Other Activities (Independent Variables)…Activities (Independent Variables)…

• How Closely Related Is Measured by How Closely Related Is Measured by Coefficient of Correlation and Coefficient of Correlation and Coefficient of DeterminationCoefficient of Determination

Page 20: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Forecasting MethodsForecasting Methods

• Coefficient of Correlation ( r )– is the Coefficient of Correlation ( r )– is the measure of the relationship between the measure of the relationship between the dependent and independent variables. dependent and independent variables. Closer to 1 the stronger the relationship.Closer to 1 the stronger the relationship.

• Coefficient of Determination ( rCoefficient of Determination ( r22 ) – reflects ) – reflects the extent to which the change in the the extent to which the change in the independent variable explains the change independent variable explains the change in the dependent variablein the dependent variable

Page 21: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Regression AnalysisRegression Analysis

• FormulaFormula

Y = A + BXY = A + BX

Y is the dependent variableY is the dependent variable

A is a constantA is a constant

B is a multiplierB is a multiplier

X is the independent variableX is the independent variable

Page 22: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Regression AnalysisRegression Analysis

• Page 412 Page 412

Y = 370 + 1.254xY = 370 + 1.254x

If X = 3,000 roomsIf X = 3,000 rooms

Y = 370 + 1.254(3000)Y = 370 + 1.254(3000)

Y = 6,013 mealsY = 6,013 meals

Page 23: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Forecasting LimitationsForecasting Limitations

• Scarcity of DataScarcity of Data

• Assumes Continuation of TrendsAssumes Continuation of Trends

• Unforseeable OccurrencesUnforseeable Occurrences

Page 24: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Qualitative MethodsQualitative Methods

• Based on human judgmentBased on human judgment

–Market ResearchMarket Research

– Jury of Executive OpinionJury of Executive Opinion

–Sales force estimatesSales force estimates

–Delphi MethodDelphi Method

Page 25: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Consideration In Choosing Consideration In Choosing a Forecasting Methoda Forecasting Method

• Effectiveness in Providing Effectiveness in Providing InformationInformation

• Cost of ImplementationCost of Implementation

• Frequency of Forecast UpdatesFrequency of Forecast Updates

• Turnaround Time of ForecastingTurnaround Time of Forecasting

Page 26: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

Consideration In Choosing Consideration In Choosing a Forecasting Methoda Forecasting Method

• Size and Complexity of OperationSize and Complexity of Operation

• Forecasting Skills of PersonnelForecasting Skills of Personnel

• Purpose of Making ForecastPurpose of Making Forecast

Page 27: Forecasting Methods Chapter 9 Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting Only

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