Reason for Forecasting and Its Techniques

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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 actual
  occurrence of the event is called the lead time.

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Why Forecast?

• Uncontrollable external events
• Example those that originate with the
  national economy, governments, customers.
• Controllable internal events such as marketing
  or manufacturing decisions
• within the firm.

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Why Forecast?

• Forecasting applies to the 1) while decision
  making 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. ISBN
  0-471-53233-9 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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Its role continued.

• Acquiring resources Lead time to acquire raw
  materials, etc.
• Determining resource requirements Long term
  planning.

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An Overview of Forecasting Techniques

• Quantitative Sufficient quantitative information
  is available.
• It depends on judgment and accumulated
  knowledge. Used to formulate Strategy, long-range
  plans, etc.

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Quantitative data

• Time series Predicting the continuation of
  historical patterns (trends) such as the growth
  of sales or gross national product (GNP)
• GNPt1 f(GNPt, GNPt-1, .., error)
• Explanatory Understanding how explanatory
  variables such as prices and advertising affect
  sales. 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
Qualitative Little or no quantitative
information is available, but sufficient
qualitative knowledge exists.

• 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 that produces no pollution.
• Predicting the speed of telecommunications around
  the year 2020.

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An Overview of Forecasting Techniques

• Unpredictable 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 no pollution.

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When Can One Do Quantitative Forecasting?

• Information about the past is available.
• This information is available in the form of
  numerical data
• Assumption of continuity It can be assumed that
  some aspects of the past pattern will continue
  into the future.
• Continuity assumption is also need for
  qualitative forecasting

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Why Forecasting Works?

• Some aspects of the history do repeat themselves
  in a sense.