Why_Forecast

1. 1
Reason for Forecasting and
Its Techniques

2. 2
Overview
 Why Forecast?
 An Overview of forecasting techniques
 Basic steps in a forecasting task

3. 3
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.

4. 4
Why Forecast?
1) Uncontrollable external events
Example: those that originate with the
national economy, governments,
customers.
2) Controllable internal events such as
marketing or manufacturing decisions
within the firm.

5. 5
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.

6. 6
Role of Forecasting
In the following areas
 Scheduling: Forecasts the level of demand
for …

7. 7
 Acquiring resources: Lead time to acquire
raw materials, etc.
 Determining resource requirements: Long
term planning.
Its role continued….

8. 8
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.

9. 9
Quantitative data
Time series: Predicting the continuation of
historical patterns (trends) such as the
growth of sales or gross national product
(GNP)
GNPt+1 = 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”

10. 10
Qualitative: Little or no quantitative information
is available, but sufficient qualitative knowledge
exists.
Qualitative:
Predicting the impact of gasoline price
if and when it hits $ 3.00 per gallon.

11. 11
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.

12. 12
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.

13. 13
When Can One Do Quantitative
Forecasting?
1. Information about the past is available.
2. This information is available in the form
of numerical data
3. 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

14. 14
Why Forecasting Works?
 Some aspects of the history do repeat
themselves in a sense.