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management
Assignment 2
Submitted by:
Saima Jafari
MUM13AP13
BFT 5
NIFT MUMBAI
Enrolment
4,500
5,000
5,200
5,600
5,800
Six years ago, the forecast for year 1 was 4,100 enrolments, and the estimated trend
was an increase of 200 per year.
Deliberations included following options:
1. Exponential smoothing forecasting model with = 0.6
2. Exponential smoothing forecasting model with = 0.9
3. Three- year moving average.
4. Three-year weighted moving average, using weights (3/6), (2/6), and (1/6), with
more recent data given more weight.
5. Regression analysis
Questions:
1. Compare above five different approaches. Which method would you recommend
and why?
(1 + 1 + 1 + 1 + 3 + 5)
2. If MAD (mean absolute deviation) is the performance criterion chosen by the
management, which forecasting method should it choose?
2
3. If MSE (mean squared error) is the performance criterion chosen by the
management, which forecasting method should it choose?
2
4. If MAPE (mean absolute percent error) is the performance criterion chosen by
the management, which forecasting method should it choose?
2
SOLUTIONS:
Q.1. Comparison of the 5 different approaches
Exponential smoothing forecasting model with = 0.6
Formula used: F (t+1) = Dt + (1- ) Ft
F 2011 = D2010 + (1- ) F2010
= 0.6 x 4500 + (1- 0.6) x 4100
= 2700 + 1640
= 4340
F 2012 = D2011 + (1- ) F2011
= 0.6 x 5000 + (1- 0.6) x 4340
= 3000 + 1736
= 4736
F 2013 = D2012 + (1- ) F2012
= 0.6 x 5200 + (1- 0.6) x 4736
= 3120 + 1894.4
= 5014.4
F 2014 = D2013 + (1- ) F2013
= 0.6 x 5600 + (1- 0.6) x 5014.4
= 3360 + 2005.76
= 5365.76
F 2015 = D2014 + (1- ) F20145
= 0.6 x 5800 + (1- 0.6) x 5365.76
= 3480 + 2146.304
= 5626.304
5626
Exponential smoothing forecasting model with = 0.9
Formula used: F (t+1) = Dt + (1- ) Ft
F 2011 = D2010 + (1- ) F2010
= 0.9 x 4500 + (1- 0.9) x 4100
= 4050 + 410
= 4460
F 2012 = D2011 + (1- ) F2011
= 0.9 x 5000 + (1- 0.9) x 4460
= 4500 + 446
= 4946
F 2013 = D2012 + (1- ) F2012
= 0.9 x 5200 + (1- 0.9) x 4946
= 4680 + 494.6
= 5174.6
F 2014 = D2013 + (1- ) F2013
= 0.9 x 5600 + (1- 0.9) x 5174.6
= 5040 + 517.46
= 5557.46
F 2015 = D2014 + (1- ) F20145
= 0.9 x 5800 + (1- 0.9) x 5557.46
= 5220 + 555.746
= 5775.746
5776
Three- year moving average
F2013= (D2010 + D2011 + D2012)
3
= (4500+5000+5200)
3
=4900
Year
2010
2011
2012
2013
2014
2015
Enrolment
4,500
5,000
5,200
5,600
5,800
-
Three-year weighted moving average, using weights (3/6), (2/6), and (1/6), with
more recent data given more weight.
F2013= (3/6 * D2012) + (2/6 * D2011) + (1/6 * D2010)
= (3/6 * 5200) + (2/6 * 5000) +(1/6 * 4500)
=5016.66
5017
Enrolment
4,500
5,000
5,200
5,600
5,800
-
y
4,500
5,000
5,200
5,600
5,800
y=26,100
yt
4,500
10,000
15,600
22,400
29,000
yt= 81,500
t2
1
4
9
16
25
t2= 55
Exponential
smoothing
=0.6
Exponential
smoothing
=0.9
Simple
moving
average
Weighted
moving
average
Regression
analysis
Forecast
2015
5626
5776
5533
5633
6180
Recommended method:
The recommended method for the above problem is Regression analysis because of
the following reasons:
Assertion 1: The previous 5 years data and also the estimation that was made 6 years
ago, both say that there is an increasing trend in the number of enrolments (demands)
each year. Only the Regression analysis method gives a forecast of 2015 (i.e. 6180)
which is greater than forecast of 2014 (i.e. 5800) and fulfills the trend pattern.
Assertion 2: If we calculate the forecasts of previous years, we see that regression
analysis method gives a forecast which is closer to the actual demand of that year.
t
1
2
3
4
5
Forecast (y=a+bx)
4260 + (320*1) = 4580
4260 + (320*2) = 4900
4260 + (320*3) = 5220
4260 + (320*4) = 5540
4260 + (320*5) = 5860
Demand
4500
5000
5200
5600
5800
i.e. the errors in this this method are less. It would be more evident from the tables
given below.
Assertion 3: Before choosing the forecasting method, checking the validity of
relationship between variables is important. If we calculate the coefficient of
determination for time period t= 1,2,3,4,5 and demand y
We get, r2= ay + bty- n (y-bar)2
y2 n (y-bar) 2
=
0.977, which is a very strong correlation between the increasing time period and
demand, which supports the fact that linear regression analysis should be the preferred
forecasting method.
FORECASTING ERRORS:
Formulae for finding the errors:
(Error) = (Actual demand) (Forecast)
% error = (forecast error / demand) x 100%
TABLE 1: Error table for Exponential smoothing when =0.6
Period
2010
2011
2012
2013
2014
Demand
4500
5000
5200
5600
5800
Forecast
4100
4340
4736
5014.4
5365.76
Error (e)
400
660
464
585.6
434.24
e=2543.74
e2
160000
435600
215296
342927.4
188564.4
2
e = 1342387.8
% error
8.89%
13.2%
8.92%
10.46%
7.49%
e%=48.96%
Demand
4500
5000
5200
5600
5800
Forecast
4100
4460
4946
5174.6
5557.46
Error (e)
400
540
254
425.4
242.54
e=1861.94
e2
160000
291600
64516
180965.2
58825.65
2
e = 755906.85
% error
8.89%
10.8%
4.88%
7.6%
4.18%
e%=36.35%
Error e
e2
700
490000
533
284089
e=1233 e2= 774089
% error
12.5%
9.19%
e%=21.69%
Enrolment
3 year moving
Weighted average
Error e
e2
% error
2010
2011
2012
2013
2014
2015
4,500
5,000
5,200
5,600
5,800
-
Insufficient data
Insufficient data
Insufficient data
5017
5367
5633
583
433
e=1016
339889
187489
e2= 527378
10.41%
7.47%
e%=17.88%
Forecast
4260 + (320*1) = 4580
4260 + (320*2) = 4900
4260 + (320*3) = 5220
4260 + (320*4) = 5540
4260 + (320*5) = 5860
The values from the above tables are taken for the calculations.
Q.2. If MAD (mean absolute deviation) is the performance criterion chosen by the
management, which forecasting method should it choose?
320 /5= 64
Ans: regression analysis method should be chosen as it gives the minimum mean
absolute deviation
Q.3. If MSE (mean squared error) is the performance criterion chosen by the
management, which forecasting method should it choose?
755906.85 /5 =151181.37
36.35 /5 = 7.27