Forecasting Report2

FORECASTING
TECHNIQUES
QUANTITATIVE FORECASTING
Forecasting is a tool used for predicting
future demand based on past demand
information.
WHAT IS A forecast is only as good as the

information included in the forecast
FORECASTING ? (past data)
Forecasting is based on the assumption

that the past predicts the future
TYPES OF
FORECASTING
Depend on Depend on data
subjective and analytical
opinions from techniques
one or more
experts.
FORECASTING MODELS
Forecasting
Techniques
Qualitative Time-Series Causal

Models Methods Methods
Delphi Moving Regression

Methods Average Analysis
Jury of Executive Exponential Multiple

Opinion Smoothing Regression
Sales Force Trend

Composite Projections
Figure 5.1
Consumer
Market Survey Decomposition
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 5-4

QUALITATIVE MODELS
• Delphi Method – This is an iterative group process where (possibly

geographically dispersed) respondents provide input to decision makers.
• Jury of Executive Opinion – This method collects opinions of a small
group of high-level managers, possibly using statistical models for
analysis.
• Sales Force Composite – This allows individual salespersons estimate
the sales in their region and the data is compiled at a district or national
level.
• Consumer Market Survey – Input is solicited from customers or
potential customers regarding their purchasing plans.
Time Series
Models that predict future demand based on past history trends
Causal Relationship:
QUANTITATIVE Models that use statistical techniques to establish relationships
FORECASTING
between various items and demand
Simulation:
Models that can incorporate some
randomness and non-linear effects
Measures of Forecast Accuracy
 We compare forecasted values with actual values

to see how well one model works or to compare
models.
Forecast error = Actual value – Forecast value
 One measure of accuracy is the mean absolute

deviation (MAD):
MAD 
 forecast error
n

Using a naïve forecasting model we can compute the
MAD: ACTUAL
SALES OF ABSOLUTE VALUE OF
CD FORECAST ERRORS (DEVIATION),
YEAR PLAYERS SALES (ACTUAL – FORECAST)
1 110 — —
2 100 110 |100 – 110| = 10
3 120 100 |120 – 110| = 20
4 140 120 |140 – 120| = 20
5 170 140 |170 – 140| = 30
6 150 170 |150 – 170| = 20
7 160 150 |160 – 150| = 10
8 190 160 |190 – 160| = 30
9 200 190 |200 – 190| = 10
10 190 200 |190 – 200| = 10
Table 5.2 11 — 190 —
Sum of |errors| = 160
MAD = 160/9 = 17.8

Using a naïve forecasting model we can compute the MAD:
ACTUAL ABSOLUTE VALUE OF
SALES OF CD ERRORS (DEVIATION),
YEAR PLAYERS FORECAST SALES (ACTUAL – FORECAST)
1 110 — —
2 100 110 |100 – 110| = 10
3 120 100 |120 – 110| = 20
4 140 120 |140 – 120| = 20
5 170 140 |170 – 140| = 30
6 150 170 |150 – 170| = 20
7 160 150 |160 – 150| = 10
8 190 160 |190 – 160| = 30
9 200 190 |200 – 190| = 10
10 190 200 |190 – 200| = 10
11 — 190 —
Sum of |errors| = 160
MAD = 160/9 = 17.8
MAD 
 forecast error

160
 17.8
n 9
Table 5.2
 There are other popular measures of forecast
accuracy.
 The mean squared error:
MSE 
 ( error) 2
n
 The mean absolute percent error:
error
 actual
MAPE  100%
n
 And bias is the average error.

TIME-SERIES MODELS
• TIME-SERIES MODELS ATTEMPT TO PREDICT THE FUTURE BASED ON

THE PAST.
• COMMON TIME-SERIES MODELS ARE:
• MOVING AVERAGE.
• EXPONENTIAL SMOOTHING.
• TREND PROJECTIONS.
• DECOMPOSITION.
• REGRESSION ANALYSIS IS USED IN TREND PROJECTIONS AND
ONE TYPE OF DECOMPOSITION MODEL.
TIME-SERIES FORECASTING MODELS
• A TIME SERIES IS A SEQUENCE OF EVENLY

SPACED EVENTS.
• TIME-SERIES FORECASTS PREDICT THE
FUTURE BASED SOLELY ON THE PAST VALUES
OF THE VARIABLE, AND OTHER VARIABLES
ARE IGNORED.
Copyright ©2012 Pearson Education, Inc.

5-12
publishing as Prentice Hall
COMPONENTS OF A TIME-SERIES
A TIME SERIES TYPICALLY HAS FOUR COMPONENTS:
1. TREND (T) IS THE GRADUAL UPWARD OR DOWNWARD

MOVEMENT OF THE DATA OVER TIME.
2. SEASONALITY (S) IS A PATTERN OF DEMAND FLUCTUATIONS
ABOVE OR BELOW THE TREND LINE THAT REPEATS AT REGULAR
INTERVALS.
3. CYCLES (C) ARE PATTERNS IN ANNUAL DATA THAT OCCUR EVERY
SEVERAL YEARS.
4. RANDOM VARIATIONS (R) ARE “BLIPS” IN THE DATA CAUSED BY
CHANCE OR UNUSUAL SITUATIONS, AND FOLLOW NO
DISCERNIBLE PATTERN.
DECOMPOSITION OF A TIME-SERIES
Product Demand Charted over 4 Years, with Trend
and Seasonality Indicated
Demand for Product or Service Trend

Component
Seasonal Peaks
Actual
Demand
Line
Average Demand
over 4 Years
| | | |
Figure 5.3 Year

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall
Year Year Year 5-14
1 2 3 4
Time
DECOMPOSITION OF A TIME-SERIES
• THERE ARE TWO GENERAL FORMS OF TIME-SERIES

MODELS:
• THE MULTIPLICATIVE MODEL:
DEMAND = T X S X C X R
 The additive model:
Demand = T + S + C + R
 Models may be combinations of these two

forms.
 Forecasters often assume errors are
normally distributed with a mean of zero.
In the simple moving average models the forecast
value is
TIME SERIES :
SIMPLE MOVING
AVERAGE METHOD
MOVING AVERAGES
 Moving averages can be used when demand

is relatively steady over time.
 The next forecast is the average of the most
recent n data values from the time series.
 This methods tends to smooth out short-term
irregularities in the data series.
Sum of demands in previous n periods

Moving average forecast 
n
MOVING AVERAGES
 Mathematically:
Yt  Yt 1  ...  Yt  n1
Ft 1 
n
Where:
Ft 1 for time period t + 1
= forecast
Yt value in time period t
= actual
n = number of periods to average

EXAMPLE: FORECASTING
SALES AT NIKE OUTLET
MONTH Sold Shoe Pairs
January 1325
February 1353
March 1305
April 1275
May 1210
June 1195
July ?
WHAT IF WE USE A 3-MONTH
SIMPLE MOVING AVERAGE?
WHAT IF WE USE A 5-
MONTH SIMPLE
MOVING AVERAGE?
OBSERVATION
5-MONTH AVERAGE SMOOTHES DATA MORE;
3-MONTH AVERAGE MORE RESPONSIVE
WALLACE GARDEN SUPPLY
 Wallace Garden Supply wants to

forecast demand for its Storage Shed.
 They have collected data for the past
year.
 They are using a three-month moving
average to forecast demand (n = 3).

MONTH ACTUAL SHED SALES THREE-MONTH MOVING AVERAGE

January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11.67
May 19 (12 + 13 + 16)/3 = 13.67
June 23 (13 + 16 + 19)/3 = 16.00
July 26 (16 + 19 + 23)/3 = 19.33
August 30 (19 + 23 + 26)/3 = 22.67
September 28 (23 + 26 + 30)/3 = 26.33
October 18 (26 + 30 + 28)/3 = 28.00
November 16 (30 + 28 + 18)/3 = 25.33
December 14 (28 + 18 + 16)/3 = 20.67
January — (18 + 16 + 14)/3 = 16.00
Table 5.3
In Time series weighted moving average the TIME SERIES :
forecast value is
WEIGHTED
MOVING AVERAGE
W EI G H T ED M O V I N G
AV ER A G E S A SS I G N A
H EAV I ER W E I G H TI N G TO
M O RE CU R RE N T D ATA
P O I N T S S I N CE T H E Y A RE
MO RE RE LE VA N T T H A N
D ATA PO I N TS I N TH E
D I STA N T PA ST. TH E S U M O F
T H E W EI G H T I N G S H O U LD
A D D U P TO 1 ( O R 1 0 0
P E RCE N T ) . I N T H E C A S E O F
T H E S I M P LE M O V I N G
AV ERA G E , T H E W E I G H TI N G S
A RE E Q U A L LY D I S T RI B U TE D
WEIGHTED MOVING Date Closing Price of AAPL Weighting
AVERAGE EXAMPLE
June 26 $90.90 5/15
June 25 $90.36 4/15
WHAT IS THE FORECAST June 24 $90.28 3/15

PRICE OF STOCK FOR
APPLE INC. FOR JUNE 27?
June 23 $90.83 2/15
June 20 $90.91 1/15

EXAMPLE: FORECASTED
STOCK MARKET PRICE
FOR APPLE INC.
 Wallace Garden Supply decides to try a

weighted moving average model to forecast
demand for its Storage Shed.
 They decide on the following weighting
scheme:
WEIGHTS APPLIED PERIOD

3 Last month
2 Two months ago
1 Three months ago
3 x Sales last month + 2 x Sales two months ago + 1 X Sales three months ago
6
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Sum of the weights 5-27
THREE-MONTH WEIGHTED
MONTH ACTUAL SHED SALES MOVING AVERAGE
January 10
February 12
March 13
April 16 [(3 X 13) + (2 X 12) + (10)]/6 = 12.17
May 19 [(3 X 16) + (2 X 13) + (12)]/6 = 14.33
June 23 [(3 X 19) + (2 X 16) + (13)]/6 = 17.00
July 26 [(3 X 23) + (2 X 19) + (16)]/6 = 20.50
August 30 [(3 X 26) + (2 X 23) + (19)]/6 = 23.83
September 28 [(3 X 30) + (2 X 26) + (23)]/6 = 27.50
October 18 [(3 X 28) + (2 X 30) + (26)]/6 = 28.33
November 16 [(3 X 18) + (2 X 28) + (30)]/6 = 23.33
December 14 [(3 X 16) + (2 X 18) + (28)]/6 = 18.67
January —
Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall [(3 X 14) + (2 X 16) + (18)]/6 = 15.33 5-28
Table 5.4
WHY DO WE NEED THE
WMA MODELS?
We give more importance to the

last three months more than the
first two months
The higher the importance we give

to recent data, the more we pick up
the trend in our forecast.
CAUSAL MODELS
• CAUSAL MODELS USE VARIABLES OR FACTORS THAT

MIGHT INFLUENCE THE QUANTITY BEING
FORECASTED.
• THE OBJECTIVE IS TO BUILD A MODEL WITH THE BEST
STATISTICAL RELATIONSHIP BETWEEN THE VARIABLE
BEING FORECAST AND THE INDEPENDENT VARIABLES.
• REGRESSION ANALYSIS IS THE MOST COMMON
TECHNIQUE USED IN CAUSAL MODELING.
Exponential Smoothing 5-31

 Exponential smoothing is a type of moving average
that is easy to use and requires little record keeping of
data.
New forecast = Last period’s forecast

+ (Last period’s actual demand
– Last period’s forecast)
Here  is a weight (or smoothing constant) in

which 0≤≤1.

Mathematically:
Ft 1  Ft   (Yt  Ft )
Where:
Ft+1 = new forecast (for time period t + 1)
Ft = pervious forecast (for time period t)
 = smoothing constant (0 ≤  ≤ 1)
Yt = pervious period’s actual demand
The idea is simple – the new estimate is the old

estimate plus some fraction of the error in the
last period.
Exponential Smoothing Example 5-33

 In January, February’s demand for a certain car model was
predicted to be 142.
 Actual February demand was 153 autos
 Using a smoothing constant of  = 0.20, what is the
forecast for March?
New forecast (for March demand) = 142 + 0.2(153 – 142)
= 144.2 or 144 autos
 If actual demand in March was 136 autos, the

April forecast would be:
New forecast (for April demand) = 144.2 + 0.2(136 – 144.2)
= 142.6 or 143 autos
Selecting the Smoothing Constant 5-34

 Selecting the appropriate value for  is key
to obtaining a good forecast.
 The objective is always to generate an
accurate forecast.
 The general approach is to develop trial
forecasts with different values of  and
select the  that results in the lowest MAD.
Port of Baltimore Exponential Smoothing Forecast

for =0.1 and =0.5.
ACTUAL
TONNAGE FORECAST FORECAST
QUARTER UNLOADED USING  =0.10 USING  =0.50
1 180 175 175
2 168 175.5 = 175.00 + 0.10(180 – 175) 177.5
3 159 174.75 = 175.50 + 0.10(168 – 175.50) 172.75
4 175 173.18 = 174.75 + 0.10(159 – 174.75) 165.88
5 190 173.36 = 173.18 + 0.10(175 – 173.18) 170.44
6 205 175.02 = 173.36 + 0.10(190 – 173.36) 180.22
7 180 178.02 = 175.02 + 0.10(205 – 175.02) 192.61
8 182 178.22 = 178.02 + 0.10(180 – 178.02) 186.30
9 ? 178.60 = 178.22 + 0.10(182 – 178.22) 184.15
Table 5.5
Absolute Deviations and MADs for the Port of

Baltimore Example
ACTUAL FORECAST ABSOLUTE ABSOLUTE
TONNAGE WITH  = DEVIATIONS FORECAST DEVIATIONS
QUARTER UNLOADED 0.10 FOR  = 0.10 WITH  = 0.50 FOR  = 0.50
1 180 175 175

5….. 5….
2 168 175.5 7.5.. 177.5 9.5..
3 159 174.75 172.75

15.75 13.75
4 175 173.18 165.88

1.82 9.12
5 190 173.36 170.44

16.64 19.56
6 205 175.02 180.22

29.98 24.78
7 180 178.02 192.61

1.98 12.61
Table 5.6 8 182 178.22

3.78
186.30
4.3..
Best choice
Sum of absolute deviations 82.45 98.63
Exponential Smoothing with Trend 5-37
Adjustment

 Like all averaging techniques, exponential smoothing
does not respond to trends.
 A more complex model can be used that adjusts for
trends.
 The basic approach is to develop an exponential
smoothing forecast, and then adjust it for the trend.
rend (FITt+1) = Smoothed forecast (Ft+1)

+ Smoothed Trend (Tt+1)
Exponential Smoothing with Trend 5-38
Adjustment

 The equation for the trend correction uses a new smoothing constant
.
 Tt must be given or estimated. Tt+1 is computed by:
Tt 1  (1   )Tt   ( Ft 1  FITt )
where
Tt = smoothed trend for time period t
Ft = smoothed forecast for time period t
FITt = forecast including trend for time
period t
α =smoothing constant for forecasts
 = smoothing constant for trend
Selecting a Smoothing Constant 5-39

 As with exponential smoothing, a high value of 
makes the forecast more responsive to changes
in trend.
 A low value of  gives less weight to the recent
trend and tends to smooth out the trend.
 Values are generally selected using a trial-and-
error approach based on the value of the MAD for
different values of .
Midwestern Manufacturing 5-40

 Midwest Manufacturing has a demand for
electrical generators from 2004 – 2010 as given in
the table below.
 To forecast demand, Midwest assumes:
 F1 is perfect.
 T1 = 0. YEAR ELECTRICAL GENERATORS SOLD
 α = 0.3 2004 74
 β = 0.4. 2005 79
2006 80
2007 90
2008 105
2009 142
Table 5.7
2010 122

 According to the assumptions,
FIT1 = F1 + T1 = 74 + 0 = 74.
 Step 1: Compute Ft+1 by:

FITt+1 = Ft + α(Yt – FITt)
= 74 + 0.3(74-74) = 74
 Step 2: Update the trend using:
Tt+1 = Tt + β(Ft+1 – FITt)
T2 = T1 + .4(F2 – FIT1)
= 0 + .4(74 – 74) = 0

 Step 3: Calculate the trend-adjusted exponential smoothing forecast (Ft+1) using
the following:
FIT2 = F2 + T 2
= 74 + 0 = 74

 For 2006 (period 3) we have:
 Step 1: F3 = FIT2 + 0.3(Y2 – FIT2)
= 74 + .3(79 – 74)
= 75.5
 Step 2: T3 = T2 + 0.4(F3 – FIT2)
= 0 + 0.4(75.5 – 74)
= 0.6
 Step 3: FIT3 = F3 + T3
= 75.5 + 0.6
= 76.1
Midwestern Manufacturing Exponential Smoothing
with Trend Forecasts
5-44
Time Demand Ft+1 = Ft + 0.3(Yt– Ft) Tt+1 = Tt + 0.4(Ft+1 – FITt) FITt+1 = Ft+1 + Tt+1

(t) (Yt)
1 74 74 0 74
2 79 74=74+0.3(74-74) 0 = 0+0.4(74-74) 74 = 74+0
3 80 75.5=74+0.3(79-74) 0.6 = 0+0.4(75.5-74) 76.1 = 75.5+0.6
4 90 77.270=76.1+0.3(80-76.1) 1.068 = 0.6+0.4(77.27-76.1) 78.338 =

77.270+1.068
5 105 81.837=78.338+0.3(90- 2.468 = 1.068+0.4(81.837- 84.305 =
78.338) 78.338) 81.837+2.468
6 142 90.514=84.305+0.3(105- 4.952 = 2.468+0.4(90.514- 95.466 =
84.305) 84.305) 90.514+4.952
7 122 109.426=95.466+0.3(142- 10.536 = 4.952+0.4(109.426- 119.962 =
95.466) 95.466) 109.426+10.536
8 120.573=119.962+0.3(122- 10.780 = 10.536+0.4(120.573- 131.353 =
119.962) 119.962) 120.573+10.780
Table 5.8
Trend Projections 5-45

 Trend projection fits a trend line to a
series of historical data points.
 The line is projected into the future for
medium- to long-range forecasts.
 Several trend equations can be
developed based on exponential or
quadratic models.
 The simplest is a linear model developed
using regression analysis.
Trend Projection 5-46

The mathematical form is
Yˆ  b0  b1 X
Where
Ŷ
= predicted value
b0 = intercept
b1 = slope of the line
X = time period (i.e., X = 1, 2, 3, …, n)
Midwestern Manufacturing Company Example 5-47

 The forecast equation is
Yˆ  56.71  10.54 X
 To project demand for 2011, we use the coding

system to define X = 8
(sales in 2011) = 56.71 + 10.54(8)
= 141.03, or 141 generators
 Likewise for X = 9
(sales in 2012) = 56.71 + 10.54(9)

= 151.57, or 152 generators

Electrical Generators and the Computed Trend Line
Figure 5.4
Seasonal Variations 5-49

 Recurring variations over time may indicate the
need for seasonal adjustments in the trend line.
 A seasonalindex indicates how a particular
season compares with an average season.
 When no trend is present, the seasonal index
can be found by dividing the average value for a
particular season by the average of all the data.
Eichler Supplies 5-50

 Eichler
Supplies sells telephone answering
machines.
 Sales data for the past two years has been
collected for one particular model.
 The firm wants to create a forecast that includes
seasonality.
Ricoh Supplies Answering Machine Sales and
Seasonal Indices 5-51

SALES DEMAND
AVERAGE
AVERAGE TWO- MONTHLY SEASONAL
MONTH YEAR 1 YEAR 2 YEAR DEMAND DEMAND INDEX
January 80 100 94 0.957
90
February 85 75 94 0.851
80
March 80 90 94 0.904
85
April 110 90 94 1.064
100
May 115 131 94 1.309
123
June 120 110 94 1.223
115
July 100 110 94 1.117
105
August 110 90 94 1.064
1,128 100 Average two-year demand
Average monthly demand = = 94 Seasonal index =
September 85 95
12 months 94
Average 0.957
monthly demand
Table 5.9 90
October 75 85 94 0.851
Seasonal Variations 5-52

 The calculations for the seasonal indices are
1,200 1,200
Jan.  0.957  96 July  1.117  112
12 12
1,200 1,200
Feb.  0.851  85 Aug.  1.064  106
12 12
1,200 1,200
Mar.  0.904  90 Sept.  0.957  96
12 12
1,200 1,200
Apr.  1.064  106 Oct.  0.851  85
12 12
1,200 1,200
May  1.309  131 Nov.  0.851  85
12 12
1,200 1,200
June  1.223  122 Dec.  0.851  85
12 12
Seasonal Variations with Trend 5-53

 When both trend and seasonal components are present, the forecasting task is more
complex.
 Seasonal indices should be computed using a centered moving average (CMA)
approach.
 There are four steps in computing CMAs:
1. Compute the CMA for each observation (where possible).
2. Compute the seasonal ratio = Observation/CMA for that observation.
3. Average seasonal ratios to get seasonal indices.
4. If seasonal indices do not add to the number of seasons, multiply each index
by (Number of seasons)/(Sum of indices).
Turner Industries 5-54
 The following table shows Turner Industries’

quarterly sales figures for the past three years, in
millions of dollars:
QUARTER YEAR 1 YEAR 2 YEAR 3 AVERAGE
1 108 116 123 115.67
2 125 134 142 133.67
3 150 159 168 159.00
4 141 152 165 152.67
Average 140.25
131.00 140.25 149.50
Seasonal
Table 5.10
Definite trend pattern

 To calculate the CMA for quarter 3 of year 1 we
compare the actual sales with an average quarter
centered on that time period.
 We will use 1.5 quarters before quarter 3 and 1.5
quarters after quarter 3 – that is we take quarters
2, 3, and 4 and one half of quarters 1, year 1 and
quarter 1, year 2.
0.5(108) + 125 + 150 + 141 + 0.5(116)

CMA(q3, y1) = = 132.00
4

Compare the actual sales in quarter 3 to the CMA to
find the seasonal ratio:
Sales in quarter 3 150

Seasonal ratio    1.136
CMA 132

YEAR QUARTER SALES CMA SEASONAL RATIO
1 1 108
2 125
3 150 132.000 1.136
4 141 134.125 1.051
2 1 116 136.375 0.851
2 134 138.875 0.965
3 159 141.125 1.127
4 152 143.000 1.063
3 1 123 145.125 0.848
2 142 147.875 0.960
3 168
4 165
Table 5.11

There are two seasonal ratios for each quarter so
these are averaged to get the seasonal index:
Index for quarter 1 = I1 = (0.851 + 0.848)/2 = 0.85


Scatterplot of Turner Industries Sales Data and
Centered Moving Average
CMA
200 –
  
150 –   
 
  
Sales
100 – 
50 – Original Sales Figures

| | | | | | | | | | | |
0–
1 2 3 4 5 6 7 8 9 10 11 12
Time Period
Figure 5.5
The Decomposition Method of Forecasting with
Trend and Seasonal Components
5-60

 Decomposition is the process of isolating linear trend and seasonal factors to
develop more accurate forecasts.
 There are five steps to decomposition:
1. Compute seasonal indices using CMAs.
2. Deseasonalize the data by dividing each number by its seasonal index.
3. Find the equation of a trend line using the deseasonalized data.
4. Forecast for future periods using the trend line.
5. Multiply the trend line forecast by the appropriate seasonal index.
Deseasonalized Data for Turner Industries 5-61

 Find a trend line using the deseasonalized data:
b1 = 2.34 b0 = 124.78
 Develop a forecast using this trend and multiply
the forecast by the appropriate seasonal index.
Ŷ = 124.78 + 2.34X
= 124.78 + 2.34(13)
= 155.2 (forecast before adjustment for
seasonality)
Ŷ x I1 = 155.2 x 0.85 = 131.92

Deseasonalized Data for Turner Industries 5-62

SALES SEASONAL DESEASONALIZED
($1,000,000s) INDEX SALES ($1,000,000s)
108 0.85 127.059
125 0.96 130.208
150 1.13 132.743
141 1.06 133.019
116 0.85 136.471
134 0.96 139.583
159 1.13 140.708
152 1.06 143.396
123 0.85 144.706
142 0.96 147.917
168 1.13 148.673
165 1.06 155.660
Table 5.12
San Diego Hospital 5-63

A San Diego hospital used 66 months of adult
inpatient days to develop the following seasonal
indices.
MONTH SEASONALITY INDEX MONTH SEASONALITY INDEX

January 1.0436 July 1.0302
February 0.9669 August 1.0405
March 1.0203 September 0.9653
April 1.0087 October 1.0048
May 0.9935 November 0.9598
June 0.9906 December 0.9805
Table 5.13
San Diego Hospital 5-64

Using this data they developed the following
equation:
Ŷ = 8,091 + 21.5X
where
Ŷ
= forecast patient days
X = time in months
Based on this model, the forecast for patient days
for the next period (67) is:
Patient days = 8,091 + (21.5)(67) = 9,532 (trend only)

Patient days = (9,532)(1.0436)
= 9,948 (trend and seasonal)
Using Regression with Trend and 5-65
Seasonal Components

 Multiple regression can be used to forecast both trend and seasonal
components in a time series.
 One independent variable is time.
 Dummy independent variables are used to represent the seasons.
 The model is an additive decomposition model:
Yˆ  a  b1 X 1  b2 X 2  b3 X 3  b4 X 4
where
X1 = time period
X2 = 1 if quarter 2, 0 otherwise
Using Regression with Trend and 5-66
Seasonal Components

 The resulting regression equation is:
Yˆ  104.1  2.3 X 1  15.7 X 2  38.7 X 3  30.1X 4
 Using the model to forecast sales for the first two

quarters of next year:
Ŷ  104.1  2.3(13)  15.7(0)  38.7(0)  30.1(0)  134
Ŷ  104.1  2.3(14 )  15.7(1)  38.7(0)  30.1(0)  152
 These are different from the results obtained

using the multiplicative decomposition method.
 Use MAD or MSE to determine the best model.
Monitoring and Controlling Forecasts 5-67

 Tracking signals can be used to monitor the
performance of a forecast.
 A tracking signal is computed as the running
sum of the forecast errors (RSFE), and is
computed using the following equation:
RSFE
Tracking signal 
MAD
where
MAD 
 forecast error
n

Plot of Tracking Signals
Signal Tripped
Upper Control Limit Tracking Signal
+
Acceptable
0 MADs Range
–
Lower Control Limit
Time
Figure 5.6

 Positive tracking signals indicate demand is
greater than forecast.
 Negative tracking signals indicate demand is less
than forecast.
 Some variation is expected, but a good forecast
will have about as much positive error as
negative error.
 Problems are indicated when the signal trips
either the upper or lower predetermined limits.
 This indicates there has been an unacceptable
amount of variation.
 Limits should be reasonable and may vary from
item to item.
Kimball’s Bakery 5-70
Quarterly sales of croissants (in thousands):

TIME FORECAST ACTUAL |FORECAST | CUMULATIVE TRACKING
PERIOD DEMAND DEMAND ERROR RSFE | ERROR | ERROR MAD SIGNAL
1 100 90 – –10 10 10 10.0 –1
10
2 100 95 – –15 5 15 7.5 –2
5
3 100 0 15 30 10.0 0
115 +15
4 110 – –10 10 40 10.0 –1
100 10
5 110 +5 15 55 11.0 +0.5

125 +15
forecast error 85
6 110
MAD 
140 +30   14.2
+35 35 85 14.2 +2.5
n 6
RSFE 35
Tracking signal    2.5MADs
MAD 14.2
Adaptive Smoothing 5-71

 Adaptive smoothing is the computer monitoring of
tracking signals and self-adjustment if a limit is tripped.
 In exponential smoothing, the values of  and  are
adjusted when the computer detects an excessive amount
of variation.

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FORECASTING

WHAT IS A forecast is only as good as the

Forecasting is based on the assumption

Qualitative Time-Series Causal

Delphi Moving Regression

Jury of Executive Exponential Multiple

Sales Force Trend

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 5-4

• Delphi Method – This is an iterative group process where (possibly

 We compare forecasted values with actual values

 One measure of accuracy is the mean absolute

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 5-7

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 5-8

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• TIME-SERIES MODELS ATTEMPT TO PREDICT THE FUTURE BASED ON

• A TIME SERIES IS A SEQUENCE OF EVENLY

Copyright ©2012 Pearson Education, Inc.

1. TREND (T) IS THE GRADUAL UPWARD OR DOWNWARD

Demand for Product or Service Trend

Figure 5.3 Year

• THERE ARE TWO GENERAL FORMS OF TIME-SERIES

 Models may be combinations of these two

 Moving averages can be used when demand

Sum of demands in previous n periods

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 5-18

MONTH Sold Shoe Pairs

 Wallace Garden Supply wants to

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 5-22

MONTH ACTUAL SHED SALES THREE-MONTH MOVING AVERAGE

June 25 $90.36 4/15

WHAT IS THE FORECAST June 24 $90.28 3/15

June 20 $90.91 1/15

 Wallace Garden Supply decides to try a

WEIGHTS APPLIED PERIOD

We give more importance to the

The higher the importance we give

• CAUSAL MODELS USE VARIABLES OR FACTORS THAT

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

New forecast = Last period’s forecast

Here  is a weight (or smoothing constant) in

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

The idea is simple – the new estimate is the old

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

 If actual demand in March was 136 autos, the

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Port of Baltimore Exponential Smoothing Forecast

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Absolute Deviations and MADs for the Port of

Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

1 180 175 175

2 168 175.5 7.5.. 177.5 9.5..

3 159 174.75 172.75

4 175 173.18 165.88

5 190 173.36 170.44

6 205 175.02 180.22

7 180 178.02 192.61

Table 5.6 8 182 178.22

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rend (FITt+1) = Smoothed forecast (Ft+1)

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