The Forecasting Perspective

A guess about what is going to happen in the future. An integral part of almost all business enterprises. Logical and rational, but still a guess! Objective is to minimize error (as you will always be wrong!)

Lecture 1:

The Forecasting Perspective

What is a Forecast?

• A guess about what is going to

happen in the future.

• An integral part of almost all business enterprises.

• Logical and rational, but still a guess!

• Objective is to minimize error (as you will always be wrong!)

“The successful business executive is a forecaster first; purchasing, producing, marketing, pricing and organizing all

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

Operations Schedules, MRP, workloads

Product/service design New products and services

Uses of Forecasts

Reputation may be made or lost

• “I think there is a world market for maybe

five computers.” (Chairman of IBM, 1943)

• “Computers in the future may weigh no

more than 1.5 tons.” (Popular Mechanics,

1949)

• “There is no reason anyone would want a

computer in their home.” (President, DEC,

1977)

• “There are four ways economists can lose their reputation Gambling is the quickest, sex is the most pleasurable and drink the slowest But forecasting is the surest.”

(Max Walsh, The Age, 1993)

• “Trong thời gian tới, khả năng thị trường chứng

khoán Việt Nam sẽ đi thấp hoặc đi ngang là khó Mặc

dù thị trường sẽ có những điều chỉnh song thị trường chứng khoán vẫn sẽ tăng và còn tăng mạnh cuối

năm ” – đó là nhận định của ông Nguyễn Thanh Tùng – chuyên gia tư vấn Công ty chứng khoán Artex.

• Đồng quan điểm đó, chuyên gia tư vấn – phòng phân tích công ty chứng khoán Artex, ông Nguyễn Văn

Chiến cũng khẳng định: “Hiện khó khăn của thị

trường chỉ tồn tại trong ngắn hạn nhưng về dài hạn thị trường chứng khoán Việt nam sẽ tăng trưởng rất tốt ”

History of Forecasting

• The ancient Egyptians foretold harvests from the level reached by the Nile in the flood season

• Non scientiffic forecasting: e.g Astrology, Book of Changes has a long history

• Development of the quantitative methods: middle-to-second part of the 20th century

Current Situation in Forecasting

• Forecasting is widely used in business

• There exist a well defined set of

quantitative forecasting methods

• There exists computer software that may

be quite simply applied in forecasting

• Excel program allows to solve simple

forecasting tasks

Forecasting Methods

• Qualitative (subjective): people expertise

– Little or no quantitative information available, but sufficient qualitative knowledge exists.

– Example (Delphi Method):

• Individual opinions are compiled and reconsidered.

• Repeat until overall group consensus is reached.

• Quantitative (objective): math models

– Sufficient quantitative information available.

– Example: predict the growth of revenue based on sales data of the previous 10 years

Causal vs Time Series

• Causal model:

– Explain the relationship between the variable to be

forecast and a number of independent variables.

– GNP = f(monetary and tax policies, inflation, capital

spending, imports, exports) + Error

• Time series model:

– Relate the value of a variable(s) at one time point with values of the variable(s) at previous time points.

– GNP t+1 = f(GNP t , GNP t-1 , GNP t-2 , ) + Error

Forecasting Methods

Forecasting Techniques

Naive Moving Average

Weighted Moving Average Exponential Smoothing

Trend Analysis

Seasonality Analysis Simple

Regression Analysis Multiplicative

Jury of Executive Opinion Method

• Appropriate managers within the

organization assemble to discuss

their opinions on what will happen to sales in the future

The Sales Force Method

• Predict future sales by analyzing the opinions of salespeople as a group.

• Salespeople continually interact with customers, and from this interaction they usually develop a skill for

predicting future sales.

Consumer Market Survey

• The method is useful for predicting

the sales of a new product - there is

no historic or past data available to

forecast

• Field surveys are conducted to gather information on the intentions of

potential customers

Delphi Method

• STEP 1 - Various Experts are asked to

answer, independently and in writing, a

series of questions about the future of

sales or whatever other area is being

forecasted

• STEP 2 - A summary of all the answers is then prepared No expert knows, how any other expert answered the questions

• STEP 3 - Copies of summary are given to the individual experts with the request that they modify their original answers if they

• STEP 4 - Another summary is made of

these modifications, and copies again are distributed to the experts This time expert opinions that deviate significantly from the norm must be justified in writing

• STEP 5 - A third summary is made of the opinions and justifications, and copies are once again distributed to the experts

Justification in writing for all answers is

now required

• STEP 6 - The forecast is generated from

Conditions for Time Series

Forecasting

• Information about the past is available

• This information is in form of numerical data

• The past pattern will likely continue in the future

Elements of a Good Forecast

Timely

Accurate Reliable

ng fu

l

Written to u se

• Forecasts rarely perfect because

of randomness

• Forecasts more accurate for

groups than individuals

• Forecast accuracy decreases

as time horizon increases I see that you will

get a 10 this semester.

“Laws” of Forecasting

5 Develop/compute forecast for period

of historical data

8a Forecast over

9 Adjust forecast based on additional 10 Monitor results

8b Select new forecast model or adjust parameters

of existing model

7.

Is accuracy

of forecast acceptable?

No

Yes