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Reason for Forecasting and

Its Techniques

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Overview

Why Forecast?

An Overview of forecasting techniques

Basic steps in a forecasting task

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Vocabulary

Lead time

There is a time lag between the time

an about to happen event and the actualoccurrence of the event is called the leadtime.

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Why Forecast?

1) Uncontrollable external eventsExample: those that originate with thenational economy, governments,

customers.2) Controllable internal events such asmarketing or manufacturing decisions

within the firm.

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Why Forecast?

Forecasting applies to the 1) while decisionmaking applies to 2) Planning links 1) &2).

Please see page 4 of the textbook:Forecasting: Methods and Applications,by Spyros Makridakis, Steven C.

Wheelwright, and Rob J. Hyndman. ISBN0-471-53233-9 John Wiley and Sons, Inc.

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Role of Forecasting

In the following areas

Scheduling: Forecasts the level of demand

for

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Acquiring resources: Lead time to acquireraw materials, etc.

Determining resource requirements: Longterm planning.

Its role continued.

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An Overview of Forecasting

Techniques Quantitative:Sufficient quantitative

information is available.

It depends on judgment andaccumulated knowledge. Used toformulate Strategy, long-range plans, etc.

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Quantitative data

Time series: Predicting the continuation ofhistorical patterns (trends) such as thegrowth of sales or gross national product(GNP)GNPt+1 = f(GNPt, GNPt-1, .., error)

Explanatory: Understanding how explanatoryvariables such as prices and advertising affectsales. GNP = f(monetary &fiscal policies,inflation, capital spending, import, export, ..,error)

Need to know how to predict and not the why

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Qualitative:Little or no quantitative informationis available, but sufficient qualitative knowledgeexists.

Qualitative:

Predicting the impact of gasoline price

if and when it hits $ 3.00 per gallon.

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Qualitative continued

Predicting the discovery of a new,very cheap form of energy thatproduces no pollution.

Predicting the speed oftelecommunications around the year2020.

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An Overview of Forecasting

TechniquesUnpredictable:little or no information is

available.

Predicting the effects of interplanetary

travel.

Predicting the discovery of a new, very

cheap form of energy that produces nopollution.

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When Can One Do Quantitative

Forecasting?1. Information about the past is available.

2. This information is available in the form

of numerical data3. Assumption of continuity: It can be

assumed that some aspects of the past

pattern will continue into the future.Continuity assumption is also need forqualitative forecasting

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Why Forecasting Works?

Some aspects of the history do repeatthemselves in a sense.