HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is...

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HFT 3431 HFT 3431 Chapter 9 Chapter 9 Forecasting Methods Forecasting Methods

Transcript of HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is...

Page 1: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

HFT 3431HFT 3431

Chapter 9Chapter 9

Forecasting MethodsForecasting Methods

Page 2: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

ForecastingForecasting

• How Important Is Forecasting?How Important Is Forecasting?

• Is Forecasting Only Financial?Is Forecasting Only Financial?

• How Is It Done?How Is It Done?

• Does Forecasting Help Be Successful?Does Forecasting Help Be Successful?

• What Are Forecasting Limitations?What Are Forecasting Limitations?

• Does Forecasting Differ From Does Forecasting Differ From Planning?Planning?

Page 3: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

ForecastingForecasting

• What Is the Difference Between What Is the Difference Between Seasonal and Cyclical Patterns?Seasonal and Cyclical Patterns?

• How Do Quantitative and Qualitative How Do Quantitative and Qualitative Forecasting Methods Differ?Forecasting Methods Differ?

Page 4: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

ForecastingForecasting

• How Is a Moving Average How Is a Moving Average Calculated?Calculated?

• When Are Causal Forecasting When Are Causal Forecasting Approaches Useful?Approaches Useful?

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Implicit versus Explicit Implicit versus Explicit ForecastsForecasts

• Implicit - (Intuitive)Implicit - (Intuitive)

UnsystematicUnsystematic

ImpreciseImprecise

Difficult to EvaluateDifficult to Evaluate

Page 6: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

Implicit versus Explicit Implicit versus Explicit ForecastsForecasts

• Explicit - (Analytical)Explicit - (Analytical)

SystematicSystematic

Reasonably Reliable and AccurateReasonably Reliable and Accurate

Rational EvaluationRational Evaluation

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The Nature of ForecastingThe Nature of Forecasting

• Done by All Levels of ManagementDone by All Levels of Management

• Looks at the FutureLooks at the Future

• Involves UncertaintiesInvolves Uncertainties

• Based on Historical DataBased on Historical Data

• Less Accurate Than DesiredLess Accurate Than Desired

• Extensive Use of Naive ModelsExtensive Use of Naive Models

Page 8: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

The Nature of ForecastingThe Nature of Forecasting

• Large Properties Need to Use More Large Properties Need to Use More Sophisticated ModelsSophisticated Models

• Trend - Straight Line ProjectionTrend - Straight Line Projection– Long run estimate-several yearsLong run estimate-several years

• Seasonal - Fluctuate Over TimeSeasonal - Fluctuate Over Time• Cyclical - Movements Over a TrendCyclical - Movements Over a Trend– Movements around a trend lineMovements around a trend line

• Random Variations Create UncertaintyRandom Variations Create Uncertainty

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Data PatternData Pattern

0

50

100

150

200

250

300

350

400

450

TREND Seasonal Cyclical

Page 10: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

Formal Forecasting MethodsFormal Forecasting Methods

• QualitativeQualitative

–Emphasize human judgmentEmphasize human judgment

• QuantitativeQuantitative

–Causal & time period approachesCausal & time period approaches

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Qualitative MethodsQualitative Methods

• Market ResearchMarket Research– Gather information from potential Gather information from potential

customerscustomers• Juries of Executive OpinionJuries of Executive Opinion– Top executive jointly prepare forecastsTop executive jointly prepare forecasts

• Sales Force EstimatesSales Force Estimates– Bottom up approach from unit Bottom up approach from unit

managersmanagers• Delphi MethodDelphi Method– Formal process with a group of expertsFormal process with a group of experts

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Quantitative MethodsQuantitative Methods

• Time SeriesTime Series

–NaïveNaïve

–SmoothingSmoothing

–DecompositionDecomposition

• Causal methodsCausal methods

–Regression AnalysisRegression Analysis

–EconometricsEconometrics

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Time SeriesTime Series

• NaïveNaïve–Simples rulesSimples rules

• SmoothingSmoothing–Uses moving average or recent pst Uses moving average or recent pst

values (exponential smoothing)values (exponential smoothing)• DecompositionDecomposition– Time series broken down into Time series broken down into

cyclical, seasonality randomnesscyclical, seasonality randomness

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Forecasting MethodsForecasting Methods• Naïve Method - Multiply current sales Naïve Method - Multiply current sales

level (or sales price) by a percentage level (or sales price) by a percentage increase (or decrease); or add (or increase (or decrease); or add (or subtract) a fixed amount.subtract) a fixed amount.

• This method does not use any This method does not use any analytical or scientific methodanalytical or scientific method

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Forecasting MethodForecasting Method

• Naïve Example– Current year sales level is 1,000 units– Current year sales price is $15.00– Next year levels increase 10%– Next year price decreases $0.50

– Current Year Total Sales Equals

1,000 * $15.00 = $15,000

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Forecasting MethodForecasting Method

• Naïve Example - ContinuedNaïve Example - Continued– Next year sales level equalsNext year sales level equals

1,000 * 1.10 = 1,1001,000 * 1.10 = 1,100– Next year price equalsNext year price equals

$15.00 - $0.50 = $14.50$15.00 - $0.50 = $14.50– Next year Total Sales equalsNext year Total Sales equals

1,100 * $14.50 = $15,9501,100 * $14.50 = $15,950

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Forecasting MethodsForecasting Methods• Moving Averages - Sum of Activity in Moving Averages - Sum of Activity in

Previous N Periods Divided by Previous N Periods Divided by NN, , Where Where NN Is the Number of Periods Is the Number of Periods

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Moving AverageMoving Average

• Page 408; Forecast week 13 using 3 Page 408; Forecast week 13 using 3 week moving averageweek moving average

Thus use data in weeks 10, 11, 12 Thus use data in weeks 10, 11, 12 and divide by 3and divide by 3

(1025 + 1000 + 1050) / 3 = 1025(1025 + 1000 + 1050) / 3 = 1025

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Forecasting MethodsForecasting Methods• Exponential Smoothing - Uses a Exponential Smoothing - Uses a

Smoothing Constant and Recent Smoothing Constant and Recent Actual and Forecasted Activity to Actual and Forecasted Activity to Estimate Future ActivityEstimate Future Activity

Page 20: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

Exponential SmoothingExponential Smoothing

• Forecast for Period 3:Forecast for Period 3:• Using Data belowUsing Data below• Period 1 Forecast 1,025Period 1 Forecast 1,025• Period 1 Actual 1,000Period 1 Actual 1,000• Period 2 Forecast 1,020Period 2 Forecast 1,020• Period 2 Actual 1,050Period 2 Actual 1,050

Page 21: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

Exponential SmoothingExponential Smoothing

• Forecast for Period 3:Forecast for Period 3:• Step 1 - Determine Smoothing ConstantStep 1 - Determine Smoothing Constant

Period 2 Forecast - Period 1 ForecastPeriod 2 Forecast - Period 1 Forecast

Period 1 Actual - Period 1 ForecastPeriod 1 Actual - Period 1 Forecast

(1,020 - 1025 ) / (1,000 – 1,025 ) = 0.20(1,020 - 1025 ) / (1,000 – 1,025 ) = 0.20

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Exponential SmoothingExponential Smoothing

• Step 2 Step 2

• Forecast for Week 3Forecast for Week 3• Wk 3 F = Wk 2 F + SC(WK2 Act – Wk2 F)• Wk 3 F = 1,020 + 0.2(1,050 - 1,020)• Wk 3 F = 1,020 + 0.2(30)• Wk 3 F = 1,026

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Forecasting MethodsForecasting Methods

• Causal - Regression Analysis Which Causal - Regression Analysis Which Is Estimating an Activity (Dependent Is Estimating an Activity (Dependent Variable) on the Basis of Other Variable) on the Basis of Other Activities (Independent Variables)…Activities (Independent Variables)…

• How Closely Related Is Measured by How Closely Related Is Measured by Coefficient of Correlation and Coefficient of Correlation and Coefficient of DeterminationCoefficient of Determination

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Forecasting MethodsForecasting Methods

• Coefficient of Correlation ( r )– is the Coefficient of Correlation ( r )– is the measure of the relationship between the measure of the relationship between the dependent and independent variables. dependent and independent variables. Closer to 1 the stronger the relationship.Closer to 1 the stronger the relationship.

• Coefficient of Determination ( rCoefficient of Determination ( r22 ) – reflects ) – reflects the extent to which the change in the the extent to which the change in the independent variable explains the change independent variable explains the change in the dependent variablein the dependent variable

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Regression AnalysisRegression Analysis

• FormulaFormula

Y = A + BXY = A + BX

Y is the dependent variableY is the dependent variable

A is a constantA is a constant

B is a multiplierB is a multiplier

X is the independent variableX is the independent variable

Page 26: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

Regression AnalysisRegression Analysis

• Page 412 Page 412

Y = 370 + 1.254xY = 370 + 1.254x

If X = 3,000 roomsIf X = 3,000 rooms

Y = 370 + 1.254(3000)Y = 370 + 1.254(3000)

Y = 6,013 mealsY = 6,013 meals

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Forecasting LimitationsForecasting Limitations

• Scarcity of DataScarcity of Data

• Assumes Continuation of TrendsAssumes Continuation of Trends

• Unforseeable OccurrencesUnforseeable Occurrences

Page 28: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

Qualitative MethodsQualitative Methods

• Based on human judgmentBased on human judgment

–Market ResearchMarket Research

– Jury of Executive OpinionJury of Executive Opinion

–Sales force estimatesSales force estimates

–Delphi MethodDelphi Method

Page 29: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

Consideration In Choosing Consideration In Choosing a Forecasting Methoda Forecasting Method

• Effectiveness in Providing Effectiveness in Providing InformationInformation

• Cost of ImplementationCost of Implementation

• Frequency of Forecast UpdatesFrequency of Forecast Updates

• Turnaround Time of ForecastingTurnaround Time of Forecasting

Page 30: HFT 3431 Chapter 9 Forecasting Methods Forecasting How Important Is Forecasting?How Important Is Forecasting? Is Forecasting Only Financial?Is Forecasting.

Consideration In Choosing Consideration In Choosing a Forecasting Methoda Forecasting Method

• Size and Complexity of OperationSize and Complexity of Operation

• Forecasting Skills of PersonnelForecasting Skills of Personnel

• Purpose of Making ForecastPurpose of Making Forecast


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