Week-1 Introduction to Forecasting
Some of the slides are adapted from the lecture notes provided by Prof. Antoine Saure and Prof. Rob Hyndman
Business Forecasting Analytics
ADM 4307 – Fall 2021
Introduction to Forecasting
Ahmet Kandakoglu, PhD
13 September, 2021
Outline
• What is forecasting?
• What can we forecast?
• Why do we forecast?
• How do we forecast?
• Features common to all forecasts
• Elements of a good forecast
• Forecasting process
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What is forecasting?
• It is about predicting the future as accurately as possible, given all of the
information available, including historical data and knowledge of any future
events that might impact the forecasts
• It is the process of making predictions of the future based on past and present
data.
I see that you will get a 90 in
Forecasting Analytics this semester.
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Forecasting is Difficult
• Forecasting is a difficult activity, and businesses that do it well have a big
advantage over those whose forecasts fail.
• Good forecasts capture the genuine patterns and relationships which exist in
the historical data, but do not replicate past events that will not occur again.
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Some Famous Predictions
Examples of bad predictions:
• I think there is a world market for maybe five computers (Chairman of IBM, 1943)
• Computers in the future may weight no more than 1.5 tons (Popular Mechanics, 1949)
• There is no reason anyone would want a computer in their home (President of DEC, 1977)
• This telephone has too many shortcomings to be seriously considered as a means of
communication (Western Union internal memo, 1876)
• The wireless music box has no imaginable commercial value. Who would pay for a message
sent to nobody in particular? (David Sarnoff’s associates in the 1920s)
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Forecasting Answers…
• How big a facility do I need to manufacture a new videophone?
• How much money do I need to run operations of my accounting office?
• How many pairs of white shoes should I order for the summer season in my
store?
• How many operators should I schedule next month for my call center?
• How much lettuce should I buy for next week in my restaurant?
• How many minutes will my flight be delayed tomorrow?
• …
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What can we forecast?
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Which is easiest to forecast?
• Daily electricity demand in 3 days time
• Timing of next Halley’s comet appearance
• Time of sunrise this day next year
• Google stock price tomorrow
• Google stock price in 6 months time
• Maximum temperature tomorrow
• Exchange rate of CAD/EURO next week
• Total sales of drugs in pharmacies next month
• How do we measure “easiest”?
• What makes something easy/difficult to forecast?
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Factors Affecting Forecastability
• Something is easier to forecast if:
• we have a good understanding of the factors that contribute to it
• there is lots of data available
• the forecasts cannot affect the thing we are trying to forecast
• there is relatively low natural/unexplainable random variation
• the future is somewhat similar to the past
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Why do we forecast?
• Typically there is a time lag between awareness of an impending event or
need and the occurrence of that event:
• If this lead time is very small, there is no need for planning
• If this lead time is long, and the outcome of the final event is conditional on identifiable
factors, planning can perform an important role
• Forecasting is needed to determine when an event will occur or a need arise
so that appropriate actions can be taken, it is important for effective and
efficient planning.
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Importance of Forecasting
• Forecasting is an integral part of the decision making activities of management
• Since each area of an organization is related to all others, a good or bad
forecast can affect the entire organization
• Some of the typical areas in which forecasting plays an important role are:
• Scheduling (short-term)
• Acquiring resources (medium-term)
• Determining resource requirements (long-term)
• Need for multiple approaches to predicting uncertain events and a system for
forecasting
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3 Uses for Forecasts
Design the System
• Long term
(annual)
• (Types of products
& services to offer,
capacities,
equipment,
location)
Use of the System
• Medium term
(monthly)
• (Inventory,
workforce levels,
planning
production)
Schedule the
System
• Short term
(daily, weekly)
• (Production,
purchasing, staff
scheduling)
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Forecasting Function
• Organizations must possess knowledge and skills covering at least the
following areas:
• Identification and definition of forecasting problems
• Application of a range of forecasting methods
• Procedures for selecting the appropriate methods for a specific situation
• Organizational support for applying and using formalized forecasting methods
• A forecasting system must establish linkages among forecasts made by
different management areas since there is a strong interdependence among
areas in an organization
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How do we forecast?
• Forecasting methods can be very simple such as using the most recent
observation as a forecast or highly complex.
• How would you approach the following forecasting situations?
• You are working for Best Buy Canada and your first assignment is to determine the
number of units of the latest iPhone model to order for Christmas sales
• You are working for Safeway Canada and your first assignment is to determine the
number of units of bread to order for next week’s sales
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Approaches to Forecasting
• Judgmental
• Non-quantitative analysis of subjective inputs
• Considers “soft” information such as human factors, experience, gut instinct
• Quantitative: analyze “hard” data
• Time series models
• Extends historical patterns of numerical data
• Associative models
• Create equations with explanatory variables to predict the future
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The Statistical Forecasting Perspective
Sample futures
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The Statistical Forecasting Perspective
Forecast intervals
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Features Common to All Forecasts
• Assumes causal system
past ==> future
• Forecasts rarely perfect because of randomness
• Forecasts more accurate for
groups vs. individuals
• Forecast accuracy decreases
as time horizon increases
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Elements of a Good Forecast
Accurate
and in
writing
Reliable
Meaningful
Cost-effective
Useful time
horizon
Simple to
understand &
use
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Forecasting Process
1. Determine
purpose of
forecast
2. Establish a
time horizon
3. Gather and
analyze relevant
historical data
4. Select a
forecasting
technique
5. Prepare the
forecast
6. Monitor the
forecast
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Business Forecasting Analytics
ADM 4307 – Fall 2021
Introduction to Forecasting
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Analytics Maturity Model
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Predictive Analytics Job Trend
Job postings citing Predictive Analytics as a proportion of all IT jobs advertised.
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https://www.itjobswatch.co.uk/jobs/uk/predictive%20analytics.do