chapter four : forecasting demand

CHAPTER 4 : FORECASTING DEMAND   

WHAT IS FORECASTING???? 

• used by companies to determine how to allocate their budgets for an upcoming period of time. we also can say it like an organization predicting a future event.
  
• it is effect decision and activities throughout an organization such as accounting, finance, human resources, marketing, and product or service design. 
• This is use of forecast : 

            1) Accounting - it will predict about cost and profit estimate.

            2) finance - it will predict cash flow and funding.

            3) Human resources - it will forecast about hiring, recruiting and 

                                           training.

            4) Product and services design -predict new products and services. 

• an organization will use three major type of forecasts in planning future operations : 

            1) Economic Forecasts =  it is planning indicators that are valuable 

                                                in helping organizations prepare medium             

                                                long-range forecasts.for example address 

                                                business cycle such as inflation rate,

                                                money supply, housing starts and etc. 

            2) Technological Forecasts = it is predict rate of 

                                                             technological progress.  

                                                            another one is impacts

                                                            development of new products.

             3) Demand Forecast = projection of company sales for  

                                                   each time period in the planning 

                                                   horizon. It is like we predict sales of 

                                                   existing products.

• ELEMENT OF GOOD FORECAST. 

                    1) Timely

              2) Reliable

              3) Accurate

              4) Meaningful 

              5) Easy to use

• SEVEN STEPS IN FORECASTING SYSTEM. 
  
  
           1) Determine the use of the forecast.
     
           2) Select item to be forecasted. 
  
  
           3) Determine the time horizon of the forecast.
  
  
           4) Select the forecasting model(s).
  
  
           5) Gather the data needed to make the forecast.
  
  
           6) Make the forecast.
  
  
           7) Validate and implement the result.
  
  
• Forecasting approaches are divided by two which is Qualitative approaches and Quantitative approaches. 

QUALITATIVE APPROACHES 

-Used when situation is vague and little data exist like new product and new technology.

-it is also involved intuition and experienced such as forecasting sales on internet.

- there are four different qualitative forecasting techniques : 

         1) Jury of executive opinion. 

         2) Delphi Method.

         3) Sales force composite.

         4) Consumer market survey.

QUANTITATIVE APPROACHES

-Used when situation is 'stable' and historical data exist like existing product and current technology. 

-Involves mathematical technique for an example forecasting sales of color televisions.

-there are two types of quantitative approaches model. : 

•        Times series model

        1) Naive approaches

        2) Moving average.

        3) Exponential smoothing.

        4) Trend Projection.

•        Associative model

         5) Linear Regression

MOVING AVERAGE METHOD 

-Is a series or arithmetic means.

-uses if little or no trend.

-used often for smoothing that provide overall impression of data over time. 

-This is the way of calculation :

          

           Moving average = ∑ demand in previous n periods

                                                                           n

Moving Average Example

               Actual                                3-Month

  Month             Shed Sales                    Moving Average

January                10  

   

February              12 

March                    13 

April                       16                           (10+12+13)/3 = 11 2/3

May                        19                           (12+13+16)/3 = 13 2/3

June                       23                           (13+16+19)/3 = 16

July                        26                           (16+19+23)/3 = 19 1/3

WEIGHTED MOVING AVERAGE

- Used when tense is present 

-weight based on experienced or intuition.

        

      weighted  Moving average = ∑ (weight for period n) x (demand in period n)

                                                                                       ∑  weights

Weighted moving average example 

                                         Actual                     3-Month Weighted

  Month                      Shed Sales                  Moving Average

January                           10 

February                         12 

Marc                                 13 

April                                 16                       [(3 x 13) + (2 x 12) + (10)]/6 = 121/6

May                                  19                      [(3 x 16) + (2 x 13) + (12)]/6 = 141/3

June                                 23                      [(3 x 19) + (2 x 16) + (13)]/6 = 17

July                                   26                      [(3 x 23) + (2 x 19) + (16)]/6 = 201/2   

COMMON MEASURE OF ERROR

Mean Absolute Deviation (MAD) 

MAD = ∑ | actual - forecast | 

                              n

Mean Squared Error (MSE) 

MSE = ∑  (forecast error)  2

                          n-1