Focus forecasting

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APICS Definition: A system that allows the user to simulate the effectiveness of
numerous forecasting techniques, enabling selection of most effective one.
This approach believes that:
1. Sophisticated/complex methods of forecasting are not always better than simple
methods
2. There is no single method that should be used for all the products/services
This was originally introduced by Bernard Smith while he was working American
Hardware. His job was to forecast 20,000 independent demand items on a monthly
basis. He had to achieve 98% accuracy.
This approach applies several forecasting methods such as moving average,
exponential smoothing, weighted moving average to few of the previous periods
and then the one method which has the highest accuracy will be chosen to forecast
for the next period. This process is used for each product/service and is repeated
monthly. This approach uses simulation rather than complex mathematical
calculation.
The objectives of Focus Forecasting:
1. Maximize accuracy
2. Minimize the bias
Potential rules for a selecting a time series forecasting method. Select the method
that ->
1. gives the smallest bias, as measured by cumulative forecast error (CFE); or
2. gives the smallest MAD; or
3. gives the smallest tracking signal; or
4. support managements beliefs about the underlying pattern of demand
Example of Focus Forecasting: In this example there will be 5 models which
calculate the previous (currently completed) periods forecast.

Model 1: This years forecast is equal to the actual demand from the same
period last year

This requires 12-month demand data and doesnt consider the rate of
growth

Model 2: This years forecast is equal to the actual demand from the same
period last year, times the rate of change of demand
o

This requires 13-month demand

Model 3: This years forecast is equal to the actual demand from the prior
period this year

This model requires only one month historical demand data

But doesnt count growth or decline (that is trend)

Model 4: This years forecast is equal to the average actual demand from the
two prior periods this year

This model requires two periods historical demand

Doesnt count trend

Model 5: This years forecast is equal to the actual demand from the prior
period this year, times the rate of change between two prior periods this year:
o

This requires two periods historical data

Counts trend

After simulating above 5 models, the Focus forecasting chooses the one model
which has highest forecast accuracy.

Focus Forecasting Methods

There are many ways to forecast future demand based on the past. It is sometimes
difficult to decide which forecasting method to use. Focus forecasting decides the
optimal method for compiling your forecasts.
The focus forecasting technique simulates alternate forecasting methods on prior
periods for which the actual demand is known. It then chooses the forecasting
method that would have produced the most accurate forecast for that period.
The following five simple forecasting models are provided:
The forecast for this period is the actual demand for the same period last year.

The forecast for this period is the actual demand for the previous period.

The forecast for this period is the average of the actual demands for the previous
two periods.

The forecast for this period is the actual demand for the same period last year
multiplied by the growth (or decline) since last year as
measured by the ratio of the previous period actual demand to the actual demand
for the same period last year.

The forecast for this period is the actual demand for the previous period multiplied
by the current growth (or decline) as measured by the ratio of the previous period
actual demand to the actual demand for the period before the previous period.

Important: When you use daily time buckets, a week is used instead of a year in
calculating Models 1 and 4. Fifty-two week years are presumed in yearly calculations
with weekly time buckets. This means that the same week last year is taken to be
the week fifty-two weeks before the current week.

These models are illustrated in the following table. Note that Models 1 and 4 require
over a year of historical data while the other three methods can be executed with
only two historical periods. Focus forecasting is restricted to only those models
where sufficient demand history exists.
To evaluate which forecasting model produced the best forecast last period, the
absolute percentage error (APE) is calculated for the five forecasts and the
forecasting model with the smallest APE is chosen. APE is the ratio of the difference
between the actual demand and forecast to the actual demand.

Forecast Year

January

February

March April

2000

220

210

250

260

2001

270

255

290

Forecast
Model

March 2001
Forecast

March 2001
Actual

Error
(APE)

April 2001
Forecast

250

290

14%

260

255

290

12%

290

263

290

9%

273

304

290

5%

302

241

17%

330

Important: Numbers have been rounded.

In this table, the forecast for the previous month is calculated for Model 4 as
follows:

Important: For purposes of the previous table, we rounded ? our numbers off to
the nearest integer. However, the forecast compile process rounds forecasts off to
five decimal places.
The error for Model 4 is therefore calculated:

Since 5% is the smallest error of the five models, Model 4 is chosen to calculate the
April 2001 forecast:

Although focus forecasting is intended to provide a one-period forecast, if a focus

forecast is requested for multiple periods, the forecast for the first forecast period is
used for all forecast periods.
When actual demand information is available for the current period, the focus
forecast may be rerun to update the forecast.