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Questions and Answers
What is a "forecast"?
What is a "forecast"?
A statement about the future.
What are the two main ways forecasts are used by managers?
What are the two main ways forecasts are used by managers?
What are the six steps involved in the forecasting process, in order?
What are the six steps involved in the forecasting process, in order?
Which type of forecasting approach uses subjective inputs?
Which type of forecasting approach uses subjective inputs?
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Which type of forecasting approach uses historical data to predict the future?
Which type of forecasting approach uses historical data to predict the future?
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Which type of forecasting approach uses explanatory variables to predict the future?
Which type of forecasting approach uses explanatory variables to predict the future?
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Which of the following is NOT a type of judgmental forecasting?
Which of the following is NOT a type of judgmental forecasting?
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Which of the following is a key characteristic of time series forecasts?
Which of the following is a key characteristic of time series forecasts?
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What are the two most important factors to consider when choosing a forecasting technique?
What are the two most important factors to consider when choosing a forecasting technique?
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Forecasts are rarely perfect because of factors like randomness.
Forecasts are rarely perfect because of factors like randomness.
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Study Notes
Forecasting
- Forecasting is a statement about the future.
- Managers use forecasts to plan the system and plan the use of the system.
- Planning the system involves long-range plans related to the types of products and services offered, facility location, and facility and equipment levels.
- Planning the use of the system involves short- and medium-range plans for inventory management, workforce levels, purchasing, and budgeting.
- Forecasts rarely perfectly predict the future due to randomness.
- Forecasting accuracy for groups is often more accurate than for individuals.
- Forecast accuracy decreases as the time horizon increases.
Elements of a Good Forecast
- Timely
- Reliable
- Accurate
- Meaningful
- Written
- Cost-effective
- Easy to use
Steps in the Forecasting Process
- Determine the purpose of the forecast.
- Establish a time horizon.
- Gather and analyze data.
- Select a forecasting technique.
- Make the forecast.
- Monitor the forecast.
Types of Forecasts
- Judgmental forecasts use subjective inputs (qualitative).
- Time series forecasts use historical data assuming the future will be like the past (quantitative).
- Associative forecasts use explanatory variables to predict the future.
Judgmental Forecasts (Qualitative)
- Consumer surveys
- Delphi method
- Executive opinions (opinions of managers and staff)
- Sales force
Time Series Forecasts (Quantitative)
- Trend: long-term movement in data
- Seasonality: short-term regular variations in data
- Irregular variations: caused by unusual circumstances
- Random variations: caused by chance
- Cycle: wave-like variations lasting more than one year
Forecasting Techniques
- Naïve
- Simple moving average
- Weighted moving average
- Exponential smoothing
- ES with Trend and Seasonality
- Moving average
- Weighted moving average
- Exponential smoothing
Naïve Forecasting
- Simple to use
- Virtually no cost
- No data analysis needed
- Easily understandable
- Cannot provide high accuracy
Techniques for Averaging
- Moving average
- Weighted moving average
- Exponential smoothing
Disadvantage of Simple Linear Regression
- Applies only to linear relationships with an independent variable.
- Requires a considerable amount of data (at least 20 observations).
- All observations are weighted equally.
Forecast Accuracy
- Forecast error: difference between forecast and actual demand.
- MAD: mean absolute deviation
- MAPD: mean absolute percent deviation
- Cumulative error
- Average error or bias
Forecast Control
- Tracking signal: monitors the forecast to see if it is biased high or low. Tracking signal = Σ(At - Ft) / MAD
Sources of Forecast Errors
- The model may be inadequate.
- Irregular variation may occur.
- The forecasting technique may be used incorrectly or the results misinterpreted.
- There are always random variations in the data.
End Notes
- Cost and accuracy are important factors when choosing a forecasting technique.
- Keep forecasts simple.
- Use software or computers when possible (e.g., =FORECAST()).
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Description
This quiz covers essential concepts and techniques related to forecasting, crucial for effective management planning. Explore the characteristics of a good forecast and the steps involved in the forecasting process. Test your understanding of how forecasts impact decision-making in business operations.
