Forecasting-GT-GeorgiaInstituteofTechnology.pptVIP

Objectives Give the fundamental rules of forecasting Calculate a forecast using a moving average, weighted moving average, and exponential smoothing Calculate the accuracy of a forecast What’s Forecasting All About? From the March 10, 2006 WSJ: Ahead of the Oscars, an economics professor, at the request of Weekend Journal, processed data about this years films nominated for best picture through his statistical model and predicted with 97.4% certainty that Brokeback Mountain would win. Oops. Last year, the professor tuned his model until it correctly predicted 18 of the previous 20 best-picture awards; then it predicted that The Aviator would win; Million Dollar Baby won instead. Sometimes models tuned to prior results dont have great predictive powers. Some general characteristics of forecasts Forecasts are always wrong Forecasts are more accurate for groups or families of items Forecasts are more accurate for shorter time periods Every forecast should include an error estimate Forecasts are no substitute for calculated demand. Some Important Questions What is the purpose of the forecast? Which systems will use the forecast? How important is the past in estimating the future? Answers will help determine time horizons, techniques, and level of detail for the forecast. Stability versus responsiveness in moving averages Impact of the smoothing constant Trend.. What do you think will happen to a moving average or exponential smoothing model when there is a trend in the data? Exponential Smoothing with Trend MFE MAD:A Dartboard Analogy An Analogy (cont’d) MFE MAD:An Analogy Key Point Forecast must be measured for accuracy! The most common means of doing so is by measuring the either the mean absolute deviation or the standard deviation of the forecast error Which Forecasting Method Should You Use Gather the historical data of what you want to forecast Divide data into initiation set and evaluation set Use the first set to develop the models Use the second