Applied Modeling & Forecasting. Chapter 1

Transcription

1 DEPARTMENT OF QUANTITATIVE METHODS & INFORMATION SYSTEMS Applied Modeling & Forecasting QMIS 320 Chapter 1 Fall 2010 Dr. Mohammad Zainal

2 2 What is Forecasting? It is the process of analyzing current and historical data to determine future trends. It is the process of calculating or estimating something in advance. It is the process of predicting the future. The History of Forecasting Forecasting techniques are developed in the 19th century Regression analysis, time series analysis, and Box Jenkins procedures. Appearance of computers Developments in computer and software gave forecasting techniques more attention and gave managers the ability to utilize data analysis techniques.

3 3 New forecasting techniques continue to be developed as management concern with the forecasting process continues to grow. Why Forecasting is Necessary? All organizations operate in an atmosphere of uncertainty so that decisions must be made today to affect the future organization. Educated guess versus pure guess. The mosteffective forecasting is tocombine both quantitative i and qualitative techniques. Who needs Forecasting and why? Almost every organization needs explicit or implicit forecasting, because every organization must plan to meet the conditions of future for which it has imperfect knowledge.

4 4 All business and economics branches need forecasting because: Some people want to increase their budget and to know what affects their sales. Some people want to recover the fixed investment in production equipment by predicting the number of units to be sold. Some people want to predict what factors explain the variability in monthly unit sells. What is the purpose of forecasting? Predictions of forecasting are rarely precise, we can only minimize inevitable errors. So the purpose of forecasting is to reduce the range of uncertainty within which management judgments must be made.

5 5 This purpose suggests two primary rules to which the forecasting process must adhere: Rule 1: The forecast must be technically correct and produce forecasts accurate enough to meet the firmʹs need. Rule 2: The forecasting procedure and its results must be effectively presented to management so that the forecasts are used in the decisionmaking process to the firmʹs advantage; results must also be justified on a cost benefit basis. Remark: Forecasters often pay particular attention to the first rule and expend less effort on the second.

6 6 What Types of Forecasts are available? I. Long term or short term forecasts. In this case forecasts can be classified in term of their timescale on longterm or short term forecasts. Long term forecasts are used by top management are necessary to set the general course of an organization for the long. Short term forecasts which are used by middle and first line management to design immediate strategies to meet the needs of the immediate future. Forecasting method that is used to forecast sales next month would probably be an inappropriate method to forecast sales in five years. Term Timescale Type of decision Example Short Up to 3-6 months Operating Inventory control, Production planning, and distribution Medium 3-6 months to 2 yrs Tactical Leasing of plant or equipment Long Above 2 yrs Strategic R & D, acquisitions, mergers, and product changes

7 7 II. III. A micro or macro forecasts Introduction to Forecasting In this case forecasts can be classified in term of their position on micromacro continuum. Different levels of management in an organization tend to focus on different levels of micro macro continuum. The basic reason for the above classification is that different forecasting methods apply in each situation. A forecasting method that is used to forecast number of workers needed for the next several months for a plant manager (micro) would probably be an inappropriate method to forecast the total number of people employed in the entire country for the government (macro). Quantitative or qualitative forecasts. In this case forecasts can be classified according to whether forecasts are no formal mathematical model (because of lack of data) versus forecasts are of formal mathematical model. A forecasting method based on forecaster judgment as a result of the mental manipulation of past historical data is a qualitative forecast.

8 8 A forecasting method using a mechanical procedures based on the manipulation of numerical data such as business data is a quantitative forecast. What do we mean by Macroeconomic Forecasting? A macroeconomic forecasting is the forecasting methods that concern in forecasting important variables for the entire economy of a country or for the global economy. Examples: Forecasting unemployment rate. Gross domestic product (GDP). Large changes in Oil prices. Inflation.

9 9 What are the forecasting steps? There are five steps in the forecasting process, these are as follows: 1. Problem formulation and data collection It is a process of understanding the problem to determine the appropriate collection of data and considering the related forecasting methodology (qualitative or quantitative) in view of the availability and the correctness of the existed data. 2. Data manipulation and cleaning It is the process of checking the data whether it is small or large and cleaning data from missing observations using appropriate estimation techniques. 3. Model building and evaluation It is the process of fitting the collected data into an appropriate forecasting model with minimum forecasting errors to be used for predicting the future.

10 10 4. Model implementation (actual forecast) It is the process of generating the actual model forecasts using the appropriate forecasting model that have been chosen. 5. Forecast evaluation It is the process of evaluating the accuracy of the model forecasts and the adequacy of the fitted model using different methods defined on the forecasting errors. How to manage the forecasting process? It is the process of involving the ability and the common sense of managers in the forecasting process to help forecasters to introduce their advices using some quantitative tools to be used by managers in arriving at better decisions. What are the available computer forecasting packages? There are a lot of computer packages with forecasting tools included are available such as: SPSS, Minitab, SAS, Eviews, Excel etc