CHAPTER 4F O R E C A S T I N G 27

C H A P T E R

Forecasting

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
DISCUSSION
QUESTIONS
1.Qualitative models
incorporatesubjectivefactors
into the forecasting model.
Qualitativemodelsareuseful
when subjective factors are
important.Whenquantitative
data are difficult to obtain,
qualitative models may be
appropriate.
2.Approaches are
qualitative and quantitative.
Qualitative is relatively
subjective; quantitative uses
numericmodels.
3.Shortrange (under 3
months), mediumrange (3
months to
3years),andlongrange(over
3years).
4.Thestepsthatshouldbe
used to develop a
forecasting
systemare:
(a)Determine the
purpose and use of the
forecast
(b)Select the item or
quantities that are to be
forecasted
(c)Determine the time
horizonoftheforecast
(d)Select the type of
forecastingmodeltobeused
(e)Gatherthenecessary
data
(f) Validate
forecastingmodel
(g)Maketheforecast
(h)Implement
evaluatetheresults
5.Any three of: sales
planning, production
planningandbudgeting,cash
budgeting, analyzing various
operatingplans.
6.There is no mechanism
for growth in these models;
they are built exclusively
from historical demand
values. Such methods will
alwayslagtrends.
7.Exponentialsmoothingis
a weighted moving average
whereallpreviousvaluesare
weighted with a set of
weights that decline
exponentially.
8.MAD,MSE,andMAPE
are common measures of
forecastaccuracy.Tofindthe
more accurate forecasting
model, forecast with each
toolforseveralperiodswhere
the demand outcome is
known, and calculate MSE,
MAPE, or MAD for each.
The smaller error indicates
thebetterforecast.
9.The Delphi technique
involves:
(a)Assembling a group
of experts in such a
mannerastopreclude
directcommunication
between identifiable
membersofthegroup length and regularity.
(b)Assembling the
responses of each
expert to the
questions or
problemsofinterest
(c)Summarizing these
responses
(d)Providing each
expert with the summary of
allresponses
(e)Asking each expert
tostudythesummary placesallitsemphasisonlast
of the responses
andrespondagainto
the questions or
the problemsofinterest.
(f) Repeating steps (b)
through (e) several
timesasnecessaryto
and obtain convergence
in responses. If
convergence has not
beenobtainedbythe
end of the fourth
cycle, the responses
at that time should
probablybeaccepted
and the process
terminatedlittle
additional
convergenceislikely
if the process is
continued.
10.A time series model
predicts on the basis of the
Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
4 assumptionthatthefutureis
a function of the past,
whereasanassociativemodel
incorporates into the model
the variables of factors that
might influence the quantity
beingforecast.
11.A time series is a
sequenceofevenlyspaceddata
points with the
four components of trend,
seasonality, cyclical, and
randomvariation.
12.When the smoothing
constant,,islarge(closeto
1.0),moreweightisgivento
recent data; when is low
(closeto0.0),moreweightis
giventopastdata.
13.Seasonalpatternsareof
fixed duration and repeat
regularly. Cycles vary in
Seasonal indices allow
generic forecasts to be
made specific to the month,
week,etc.,oftheapplication.
14.Exponential smoothing
weighs all previous values
with a set of weights that
decline exponentially. It can
place a full weight on the
most recent period (with an
alphaof1.0).This,ineffect,
isthenaveapproach,which
periodsactualdemand.
15.Adaptive forecasting
refers to computer
monitoring of tracking
signalsandselfadjustmentif
a signal passes its present
limit.
16.Tracking signals alert
theuserofaforecastingtool
to periods in which the
forecast was in significant
error.
17.The correlation
coefficient measures the
degree to which the
independent and dependent
variables move together. A
negative value would mean
thatasXincreases,Ytends
to fall. The variables move
together, but move in
oppositedirections.
18.Independent variable
(x) is said to explain
variations in the dependent
variable(y).
19.Nearly every industry
has seasonality. The
seasonality must be filtered
out for good mediumrange
planning (of production and
inventory) and performance
evaluation.
20.There are many
examples. Demand for raw
materials and component
partssuchassteelortiresisa
functionofdemandforgoods
suchasautomobiles.
21.Obviously, as we go
farther into the future, it
becomes more difficult to
makeforecasts,andwemust
diminish our reliance on the
forecasts.
ETHICAL DILEMMA
This exercise, derived from
an actual situation, deals as
much with ethics as with
forecasting. Here are a few
pointstoconsider:
Noonelikesasystem
theydontunderstand,
and most
college presidents
would feel
uncomfortable with
thisone.Itdoesoffer
the advantage of
depoliticizing the
funds al
locationifusedwisely
and fairly. But to do
so means all parties
musthaveinputtothe
process (such as
smoothing constants)
andalldataneedtobe
opentoeveryone.
The smoothing
constants could be
selectedbyanagreed
uponcriteria (suchas
lowestMAD)orcould
be based on input
from experts on the
board as well as the
college.
Abuseofthesystem
is tied to assigning
28
 CHAPTER 4F O R E C A S T I N G 29

alphas based on what 2.What happens to the 4.Atwhatlevelofalphais No, they are not the
results they yield, graph when alpha equals the mean absolute deviation same values. For example,
rather than what one? (MAD)minimized? aninterceptof57.81witha
alphasmakethemost Theforecastfollowsthe alpha=.16 slopeof9.44yieldsaMAD
sense. samepatternasthedemand of7.17.

4.2(a)No,thedataappeartohavenoconsistentpattern
(seepartdforgraph).
Year 1 2 3 4 5 6 7 8 9 10 11 Forecas
t
Demand 7 9 5 9.0 13.0 8.0 12.0 13.0 9.0 11.0 7.0
(b) 3-year moving 7.0 7.7 9.0 10.0 11.0 11.0 11.3 11.0 9.0
(c) 3-year weighted 6.4 7.8 11.0 9.6 10.9 12.2 10.5 10.6 8.4
Regression is open to (except for the first ACTIVEMODEL4.3: END-OF-CHAPTER
abuseaswell.Models forecast)butisoffsetbyone ExponentialSmoothing
canusemanyyearsof period. This is a nave with
PROBLEMS
data yielding one forecast. TrendAdjustment 374+368+381
4.1(a) 374.33pints
result or few years 3.Generalizewhathappens 1.Scroll through different 3
yielding a to a forecast as alpha values for alpha and beta. (b)
totally different increases. Which smoothing constant
forecast. Selection of Weight
As alpha increases the appears to have the greater Week Pint ed
associative variables forecastismoresensitiveto effectonthegraph? of s Moving
can have a major changesindemand. alpha Use Averag
impact on results as
*ActiveModels4.1,4.2,4.3, d e
well.
and 4.4 appear on our Web August 360Error
Forecasti
site, Week of Pints Forecast 31ng .20 Foreca
Active Model www.pearsonhighered.com/h Septe
Error 389 st 381
Exercises* eizer. August 31 360 360 mber
0 7 0 360 .1
September 7 389 360 29 5.8 =
365.8
ACTIVEMODEL4.1: September 14 410 365.8 44.2 8.84 38.1
374.64
MovingAverages September 21 381 374.64 Septe
6.36 4101.272 375.91368
mber 2 .3
1.What does the graph 14 =
September 28 368 375.912 7.912 1.5824 374.32
looklikewhenn=1?
96 110.
The forecast graph October 5 374 374.3296.3296 .06592 374.264
mirrorsthedatagraphbut Septe 381 36 374
oneperiodlater. mber .6
2.With beta set to zero, 21 =
2.What happens to the find the best alpha and 224.
graph as the number of observetheMAD.Nowfind 4
periods in the moving the best beta. Observe the Septe 368
averageincreases? MAD.Doestheadditionofa mber
The forecast graph trendimprovetheforecast? 28
becomes shorter and alpha = .11, MAD = Octobe 374
smoother. r5
2.59;betaabove.6changes
Forec
3.What value for n the MAD (by a little) to
ast
minimizestheMADforthis 2.54.
372.9
data?
ACTIVEMODEL4.4: (c)
n=1(anaveforecast)
TrendProjections Theforecastis374.26.
ACTIVEMODEL4.2: 1.Whatistheannualtrend
ExponentialSmoothing inthedata?
1.What happens to the 10.54
graph when alpha equals 2.Usethescrollbarsforthe
zero? slope and intercept to
Thegraphisastraight determine the values that
line. The forecast is the minimize the MAD. Are
sameineachperiod. these the same values that
regressionyields?

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
30 CHAPTER 4F O R E C A S T I N G

(d)The threeyear (c)The banking 4.5(c)Weighted 2 year (b)[i]Nave

moving average industryhasagreat M.A.with.6weightformost
appears to give deal of seasonality recentyear. The coming January =
better in its processing
Year Mileage Forecast December=23
results. requirements
1 3,000 [ii]3month
3,700 + 3,800
4.5(a) 2
=3,750miles 4,000 moving(20+21
2 3 3,400 3,600 +23)/3=21.33
(b) 4 3,800 3,640 [iii]6month
5 3,700 3,640 weighted [(0.1
17)+(.118)
Forecast for year 6 is 3,740 +
miles.

4.3 Year 1 2 3 4 5 6 7 8 9 10 11 Forecast

Demand 7 9.0 5.0 9.0 13.0 8.0 12.0 13.0 9.0 11.0 7.0
Nave 7.0 9.0 5.0 9.0 13.0 8.0 12.0 13.0 9.0 11.0 7.0
Exp. Smoothing 6 6.4 7.4 6.5 7.5 9.7 9.0 10.2 11.3 10.4 10.6 9.2

Two-Year 420
Year Mileage Moving Average MAD 140
3
(0.120)
1 3,000 +(0.2
4.5(d)
2 4,000 20)
3 3,400 3,500 Forecast

4 3,800 3,700 Year Mileage Forecast Error
+
5 3,700 3,600 1 3,000 3,000
(0.2
2 4,000 3,000 1,000
3 3,400 3,500

4 3,800 3,450 21)
300 5 3,700 3,625 +
MAD 100. Total (0.3
3

23)]/
Theforecastis3,663miles.
1.0
4.6
=20.6
Y Sales X Period
[iv]Exponential
January 20 smoothing with
February 21
alpha=0.3
March 15
April 14 FOct 18 + 0.3(20 - 18) 18.6
May 13 FNov 18.6 + 0.3(20 - 18.6) 19.0
Nave tracks the ups June 16
July 17 FDec 19.02 + 0.3(21 - 19.02) 1
anddownsbestbutlags
August 18 FJan 19.6 + 0.3(23 - 19.6) 20.6
thedatabyoneperiod.
September 20
Exponential smoothing October 20 10 [v]Trend
is probably better November 21 11 x 78,x 6.5, y = 218,y 18.
becauseitsmoothesthe December 23 12
dataanddoesnothave xy - nx y
Sum 218 78 b
asmuchvariation. x 2 - nx 2
Average 18.2
TEACHING NOTE: 1474 - (12)(6.5)(18.2) 54.4
b 0.38
Notice how well 650 - 12(6.5)2 143
(a)
exponential smoothing a y - bx
forecaststhenave. a 18.2 - 0.38(6.5) 15.73
4.4 (a)FJuly FJune + 0.2(Forecastingerror) Forecast = 15.73
42 + 0.2(40 42) 41.6 +.38(1
3) =
(b)FAugust FJuly + 0.2(Forecastingerror) 20.67,
41.6 + 0.2(45 - 41.6) 42.3 where
next
January

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
 CHAPTER 4F O R E C A S T I N G 31

4.9 (d)TableforProblem4.9(d):
= .1 = .3 = .5
TableforProblem4.9(a,b,c)
Month Price per Forecast |Error| Forecast |Error| Forecast |Error|
Chip Forecast |Error|
January $1.80 $1.80 $.00
Two-Month$1.80 $.00
Three- $1.80 $.00
Two-Month Three-
February 1.67 1.80 .13 1.80 .13
Month 1.80 .13 Month
March 1.70 Price per
1.79 .09Moving1.76 Moving
.06 1.74 Moving.04 Moving
April Month 1.85 Chip
1.78 Average
.07 1.74 Average
.11 1.72 Average
.13 Average
May January
1.90 $1.80
1.79 .11 1.77 .13 1.78 .12
June February
1.87 1.67
1.80 .07 1.81 .06 1.84 .03
July March1.80 1.70
1.80 .00 1.735 1.83 .03 1.86 .035.06
August April 1.83 1.85
1.80 .03 1.685 1.82 1.723
.01 1.83 .165.00 .127
May 1.90 1.775 1.740 .125 .160
Septembe 1.70 1.81 .11 1.82 .12 1.83 .13
June 1.87 1.875 1.817 .005 .053
r
July 1.80 1.885 1.873 .085 .073
October 1.65 1.80 .15 1.79 .14 1.76 .11
August 1.83 1.835 1.857 .005 .027
November 1.70 1.78 .08 1.75 .05 1.71 .01
September 1.70 1.815 1.833 .115 .133
December 1.75
October 1.77
1.65 .02 1.765 1.73 .02
1.777 1.70 .115.05 .127
Totals
November 1.70 $.8 1.675 $.8
1.727 $.81
.025 .027
December 1.75 6 1.675 6
1.683 .075 .067
MAD (total/12) $.072 $.072
Totals . $.067 .793
5

=.5ispreferable,usingMAD,to=.1or=.3.Onecould
4.10 Year 1 2 3 4 5 6 7 8 9 10 11 Forecast
Demand 4 6 4 5.0 10.0 8.0 7.0 9.0 12.0 14.0 15.0
(a) 3-year moving 4.7 5.0 6.3 7.7 8.3 8.0 9.3 11.7 13.7
(b) 3-year 4.5 5.0 7.3 7.8 8.0 8.3 10.0 12.3 14.0
weighted
forecastbecomes56.3,or (96 + 88 + 90)
56patients. 4.8(a) 91.3
is the 3 results appear in
13th thefigurebelow.
month.

(c)Onlytrendprovides
an equation
that can
extend
beyond one
month
4.7Present=Period(week)
6.
1 1 1 1
a)So: F7 3 A6 + 4 A5 + 4 A4 + 6 A3 1.0

1 1 1 1
(52) + (63) + (48) + (70) = 56.76patients,
3
4
4
6 or57patients
where
(c)MAD (twomonth
1 1 1 1 moving average) = .750/10
1.0 = weights , , ,
3 4 4 6 MAD=13.5/5=2.7
=.075
b) Iftheweightsare20,15, (d)MSE = 66.75/5 = MAD (threemonth
15, and10, there willbe 13.35 movingaverage)=.793/9=.
nochangeintheforecast (e)MAPE = 14.94%/5 088
because these are the =2.99% Therefore, the twomonth
same relative weights as 4.9(a,b)Thecomputations moving average seems to
in part (a), i.e., 20/60, forboththetwo haveperformedbetter.
15/60,15/60,and10/60. and threemonth
c) Iftheweightsare0.4,0.3, averages appear
0.2, and 0.1, then the in the table; the

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32 CHAPTER 4F O R E C A S T I N G

(b)|Error|=|ActualForecast|
4.11 (a) Year 1 2 3 4 5 6 7 8 9 10 11 Forecast
Year 1 2 3 4 5 6 7 8 9 10 11 MAD
Demand 4 6.0 4.0 5.0 10.0 8.0 7.0 9.0 12.0 14.0 15.0
Exp. smoothing
Exp. Smoothing 5 4.7 5.1 14.8 1.3 4.8 1.1
6.4 0.2 6.9 5.2 6.9 1.6 7.5 0.1 8.9 2.1 10.4 4.5 11.85.1 4.6 2.4
ThesecalculationswerecompletedinExcel.CalculationsareslightlydifferentinExcelOMandPOMforWindowsdueto
roundingdifferences.

4.12 2 50
3 52
Actual 4 56 (45 + 50 + 52)/3 = 4
t Day Demand 5 58 (50 + 52 + 56)/3 =
1 Monday 88 52.7
6 ? (52 + 56 + 58)/3 =
2 Tuesday 72 55.3
3 Wednesday 68
=12.3
4 Thursday 48 MAD=6.2
5 Friday (c)Trendprojection:
Ft=Ft1+(At1Ft1)
Let = .25. Let Monday Year Demand Trend Projection
forecastdemand=88 1 45 42.6 + 3.2 1 = 45.8
(c)The forecasts are
F2=88+.25(8888)=88 2 50 42.6 + 3.2 2 = 49.0
aboutthesame. 3 52 42.6 + 3.2 3 = 52.2
+0=88
4 56 42.6 + 3.2 4 = 55.4
F3=88+.25(7288)=88
5 58 42.6 + 3.2 5 = 58.6
4=84 6 ? 42.6 + 3.2 6 = 61.8
F4=84+.25(6884)=84
=3.2
4=80
MAD=0.64
F5=80+.25(4880)=80 Y a + bX
8=72
XY nXY
4.13(a)Exponential b
X 2 nX 2
smoothing,=0.6:
a Y bX
Exponential
Year Demand Smoothing X Y XY X2
1 45 41
2 50 1
41.0 + 0.6(4541) = 45
43.4 45 1
3 52 2
43.4 + 0.6(5043.4) 5047.4
= 100 4
4 56 3
47.4 + 0.6(5247.4) 5250.2
= 156 9
5 58 4
50.2 + 0.6(5650.2) 5653.7
= 224 16
6 ? 5
53.7 + 0.6(5853.7) 5856.3
= 290 25

=25.3 Then: X = 15, Y = 261,

2
MAD=5.06 XY=815,X =55, X =3,
Exponential smoothing, = Y =52.2Therefore:
0.9: 815 5 3 52.2
b 3.2
55 5 3 3
Exponential
Year Demand Smoothing a 52.20 3.20 3 42.6
1 45 41 Y6 42.6 + 3.2 6 61.8
2 50 41.0 + 0.9(4541) =(d)
44.6
Comparing the
3 52 44.6 + 0.9(5044.6 ) = 49.5
results of the forecasting
4 56 49.5 + 0.9(5249.5) = 51.8
5 58
methodologies for parts (a),
51.8 + 0.9(5651.8) = 55.6
6 ? (b),and(c).
55.6 + 0.9(5855.6) = 57.8
Forecast Methodology MAD
=18.5
MAD=3.7 Exponential smoothing, = 0.6 5.06
Exponential smoothing, = 0.9 3.7
(b)3year moving
3-year moving average 6.2
average: Trend projection 0.64
Three-Year
Based on a mean absolute
Year Demand Moving Average
deviation criterion, the trend
1 45

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
 CHAPTER 4F O R E C A S T I N G 33

projection is to be preferred 4.15

over the exponential
Forecast Three-Year Forecast Expon
smoothing with = 0.6,
Year Sales Moving Average
exponential smoothing with Year Sales Smoothing =
=0.9,orthe3yearmoving
average forecast 2005 450
2006 495 2005 450 410.0
methodologies. 2006 495 410 + 0.9(450 410)
2007 518
4.14 2008 563 (450 + 495 + 518)/3 = 2007 518 446 + 0.9(495 446)
Method1: MAD: (0.20 + 487.7 2008 563 490.1 + 0.9(518
2009 584 (495 + 518 + 563)/3 = 515.2
0.05+0.05+0.20)/4=.125
525.3 2009 584 515.2 + 0.9(563
better 558.2
2010 (518 + 563 + 584)/3 =
MSE:(0.04+ 555.0 2010 558.2 + 0.9(584
0.0025+0.0025+0.04)/4=. 581.4
021

Method2: MAD: (0.1 +
0.20 + 0.10 + 0.11) / 4 = .
4.16 (Refer to Solved Problem
1275
4.1)
MSE:(0.01+0.04 Year Time Period X Sales
For = 0.3, absolute
+0.01+0.0121)/4=.018 2005 1 deviationsfor20052009are
better 2006 2 40.0, 73.0, 74.1, 96.9, 88.8,
2007 3 respectively.SotheMAD=
2008 4 372.8/5=74.6.
2009 5

MAD 0.3 74.6

2610
MAD 0.6 51.8
X 3, Y 522
MAD 0.9 38.1
Y a + bX
Because it gives the lowest
XY - nXY 8166 - (5)(3)(522) 336 MAD, the smoothing
b 33.6
X 2 - nX 2 55 - (5)(9) 10 constant of
a Y - bX 522 - (33.6)(3) 421.2 = 0.9 gives the most
accurateforecast.
y 421.2 + 33.6 x
4.18We need to find the
y 421.2 + 33.6 6 622.8
smoothing constant . We
Year Sales Forecast Trend know in general that Ft =
Ft1+(At1Ft1);t=2,
3,4.Chooseeither
2005 450 454.8
t=3ort=4(t=2wontlet
2006 495 488.4
2007 518 522.0 usfindbecauseF2=50=
2008 563 555.6 50+(5050)holdsforany
2009 584 589.2 ).Letspickt=3.ThenF3
2010 622.8 =48=50+(4250)
or48=50+42
50

4.17 or2=8
So,.25=
Forecast Exponential
Year Sales Smoothing NowwecanfindF5:F5=
50+(4650)
2005 450 410.0
2006 495 410 + 0.6(450 410) = 434.0 F5=50+4650
2007 518 434 + 0.6(495 434) = 470.6 =504
2008 563 470.6 + 0.6(518 470.6) = For=.25,F5=50
499.0 4(.25)=49
2009 584 499 + 0.6(563 499) = 537.4
2010 537.4 + 0.6(584 537.4) = Theforecastfortimeperiod5
565.6 =49units.

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34 CHAPTER 4F O R E C A S T I N G

4.19Trendadjusted 4.20Trend adjusted

exponentialsmoothing:=
0.1,=0.2 Unadjusted Adjusted
Month Demand (y) Forecast Trend Forecast Error |Error| Error2
Unadjust
February 70.0 65.0 0 65.0 5.00 5.0 25.00
ed
March 68.5 65.5 0.4 65.9 2.60 2.6 6.76
Month Income Forecast Trend
April 64.8 66.16 0.61 66.77 1.97 1.97 3.87
May 71.7 66.57 0.45 67.02 4.68 4.68 21.89
Februar 70.0 65.0 0.0 June 71.3 67.49 0.82 68.31 2.99 2.99 8.91
y July 72.8 68.61 1.06 69.68 3.12 3.12 9.76
March 68.5 65.5 0.1 Totals 419.1 20.3 76.19
April 64.8 65.9 0.16 16.42
6
May 71.7 65.92 0.13 Average 69.85 2.74 3.39 12.70
June 71.3 66.62 0.25 August Forecast 71.30 (Bias) (MAD) (MSE)
July 72.8 67.31 0.33
August 68.16 Based upon the MSE criterion, the exponential smoothing with = 0.1, = 0.8 is to be preferred
overtheexponentialsmoothingwith =0.1, =0.2. ItsMSEof12.70islower. ItsMADof3.39is
alsolowerthanthatinProblem4.19.
MAD =24.3/6=4.05,MSE FIT8 F8 + T8 27.14 + 2.45 29.59
=113.2/6=18.87.Notethat exponential smoothing: =
allnumbersarerounded. 0.1,=0.8 F A + ( 1 ) ( F + T ) ( 0.2 ) ( 28)
9 8 8 8
Note: To use POM for
4.21 F5 A4 + ( 1 ) ( F4 + T4 ) ( 0.2 ) ( 19) + ( 0.8) ( 20.14 ) + ( 0.8) ( 29
Windows to solve this
problem, a period 0, which 3.8 + 16.11 19.91
contains the initial forecast T9 ( F9 F8 ) + ( 1 ) T8 ( 0.4 ) ( 29.28
and initial trend, must be T5 ( F5 F4 ) + ( 1 ) T4 ( 0.4 ) ( 19.91 17.82 )
+ ( 0.6 ) ( 2.4
added. + ( 0.6 ) ( 2.32 ) 0.4 ( 2.09 )
FIT9 F9 + T9 29.28 + 2.32 31.60
+ 1.39 0.84 + 1.39 2.23
FIT5 F5 + T5 19.91 + 2.23 22.14

F6 A5 + ( 1 ) ( F5 + T5 ) ( 0.2) ( 24) + ( 0.8) ( 22.14 )

4.8 + 17.71 22.51

T6 ( F6 F5 ) + ( 1 ) T5 0.4 ( 22.51 19.91) + 0.6 ( 2.23)

0.4 ( 2.6 ) + 1.34
1.04 + 1.34 2.38
FIT6 F6 + T6 22.51 + 2.38 24.89

4.22 F7 A6 + (1 )( F6 + T6 ) (0.2)(21) + (0.8)(24.89)

4.2 + 19.91 24.11
T7 ( F7 F6 ) + (1 )T6 (0.4)(24.11 22.51)
+ (0.6)(2.38) 2.07
FIT7 F7 + T7 24.11 + 2.07 26.18
F8 A7 + (1 )( F7 + T7 ) (0.2)(31)
+ (0.8)(26.18) 27.14

T8 ( F8 F7 ) + ( 1 ) T7 0.4 ( 27.14 24.11)

+ 0.6 ( 2.07) 2.45

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
 CHAPTER 4F O R E C A S T I N G 35

Assume Averages y = 55 xy - n x y 650 4(2.5)(55) 650

b
4.23Students must 2
x nx 2
30 4(2.5) 2 30
Appearances Demand Y
determine the nave forecast X 100
for the four months. The 20
nave forecast for March is 3 3 5
4 6 a y bx
theFebruaryactualof83,etc.
7 7
55 (20)(2.5)
(a) Actual Forecas |Error| 6 5
8 10 5
t
5 7
March 101 120 9 ?
Theregressionlineisy=5+
20x.TheforecastforMay(x
April 96 114 X = 33, Y = 38, XY = =5)isy=5+20(5)=105.
227,X2=199, X =5.5, Y = 4.26
May 89 110 6.33.Therefore:
A
June 108 108 227 65.5 6.333
b 1.0286
199 6 5.5 5.5 S
a 6.333 1.0286 5.5 .6762 Year1 Year2 Average
58 Y .676 + 1.03 x (rounded) Seaso Deman DemanYear1-Year2 D
MAD(formanagement) 14.5 n d d Demand
4 The following figure shows
61.16% Fall 200 250 225.0
MAPE(formanagement) boththedataandtheresulting
15.29% Winter 350 300 325.0
4
equation: Spring 150 165 157.5
(b) Actual Nave |Error| Summe 300 285 292.5
r
March 101 83 18
AverageYr1 to Yr2 Yr1 Demand + Yr2 Demand

April 96 101
May 89 96 Demandforseason
2
SumofAveYr1 to Yr2 Demand
June 108 89 19 Averageseasonaldemand
4
AverageYr1 to Yr2 Demand
Seasonalindex=
AverageSeasonalDemand
49 NewAnnualDemand
ve)
MAD(forna 12.25 Yr3 Seasonalindex
4 4
48.49% 1200
MAPE(forna ve) 12.12%. Seasonalindex
4 4
Naveoutperforms (c)Iftherearenine
management. performances by Stone 20,000
Temple Pilots, the estimated Averageoverallseasons: 1, 250
(c)MAD for the managers 16
salesare:
technique is 14.5, while 6,000
Y9 .676 + 1.03 9 .676 + 9.27 9.93 drums Averageoverspring: 1,500
MAD for the nave 4
forecast is only 12.25. 10drums 1,500
Springindex: 1.2
MAPEs are 15.29% and (d) R = .82 is the 1, 250
12.12%, respectively. So correlation coefficient, and 5,600
thenavemethodisbetter. R2 = .68 means 68%of the Answer: (1.2) 1,680sailboats
4
4.24(a)Graphofdemand variation in sales can be
The observations obviously explained by TV
4.27
donotformastraightlinebut appearances.
do tend to cluster about a 4.25 Winter Spring Sum
straight line over the range Number of 2006 1,400 1,500 1,
shown. Accidents 2007 1,200 1,400 2,
(b)Leastsquares Month (y) 2008 1,000 1,600 2,
regression: 2009 900 1,500 1,
January 30 4,500 6,000 7,
Y a + bX February 40
XY - nXY March 60 4.28
b April 90
X 2 - nX 2 Totals 220
a Y - bX Avera

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
36 CHAPTER 4F O R E C A S T I N G

Quarte 2007 2008 2009 4.292011 is 25 years Then y = a + bx,where y =

r beyond 1986. Therefore, the numbersold,x=price,and
2011quarternumbersare101
Winter 73 65 89
through104.
Spring 104 82 146
Summer 168 124 205 (2) (3)
Fall 74 52 98 (1) Quarter Forecast
Quarter Number (77 + .
43Q
Winter 101 120.43
Spring 102 120.86
Summer 103 121.29
Fall 104 121.72
4.30GivenY=36+4.3X
(a) Y = 36 +
4.3(70)=337
(b) Y = 36 +
4.3(80)=380
(c) Y = 36 +
4.3(90)=423
4.31 Letx1, x2 , K , x6 bethepricesandy1, y2 , K ,y6
bethenumbersold.
4.33(a)Seethetablebelow.
6
xi
X i 12,880 Averageprice=3.2583
- 5(3)(180) 2,880 - 2,700(1)
b6
6 55 - 5(3)2 55 - 45
yi
180
Y i1 Averagenumbersold=550
18 (2)
610
6 a 180 - 3(18) 180 - 54 126
xi yi 9,783 (3)
i 1 y 126 + 18 x
6
2
xi =67.1925 (4)
i1

6
xi yi - nx y
i 1 (9, 783) - 6(3.25833)(550)
b 6

2
x i - nx
2 67.1925 - 6 (3.25833)2
i 1
-969.489
-277.6
3.49222
a y - bx 550 - [(-277.6)(3.25)] 1, 454.6

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
 4.32(a) x y xy x2
16 330 5,280 256
12 270 3,240 144
18 380 6,840 324
14
CHAPTER 4F300
O R E C A S4,200
TING 196 37
60 1,280 19,560 920

Soatx=2.80,y=1,454.6 the additional Therefore, the d t

277.6($2.80)= 677.32.Now value. expected cost of 1 20 20 0.00
round to the nearest integer: (c)Some other thetripis$452.50. 2 21 20 1.00
Answer:677lattes. quantitative (b)The 3 28 20.5 7.50
variables would reimbursement 4 37 24.25 12.75
60 be age of the request is much 5 25 30.63 5.63
x 15
4 house, number of higher than 6 29 27.81 1.19
1,280 bedrooms, size of 7 36 28.41 7.59
y 320 predicted by the
8 22 32.20 10.20
4 thelot,andsizeof model. This 9 25 27.11 2.10
xy - nx y 19,560 - 4(15)(320) thegarage,etc.
360 request should 10 28 26.05 1.95
b 18
x 2 - nx 2 920 - 4(15)2 (d)Coefficient
20 of probably be
determination = questioned by the
a y - bx 320 - 18(15) 50
(0.63)2 = 0.397. accountant. Cumulative error = 14.05;
Y 50 + 18 x MAD = 5Tracking =
This means that (c)Anumberofother
only about 39.7% 14.05/5 2.82
(b)If the forecast is variables should be
of the variability included,suchas: 4.38(a)least squares
for 20 guests, the
in the sales price 1.the type of equation: Y = 0.158 +
bar sales forecast
of a house is travel(airorcar) 0.1308X
is 50 + 18(20) =
explained by this (b)Y = 0.158 +
$410. Each guest 2.conferencefees,
regression model 0.1308(22) = 2.719
accounts for an ifany
that only includes million
additional $18 in
square footage as 3.costs of (c)coefficient of
barsales.
the explanatory entertainingcustomers correlation=r=0.966
variable. 4.other coefficient of
(b)MSE=160/5=32
(c)MAPE=13.23%/5 4.36(a) Given: Y = 90 + transportation determination= r2
=2.65% 48.5X1+0.4X2where: costscab, =0.934
limousine, 4.39
4.34Y = 7.5 + 3.5X1 + Y expectedtravelcost
special tolls, or
4.5X2+2.5X3 X1 numberofdaysontheroad Ye Pat X 2 Y2 X
parking ar ien Y
(a)28 X2 distancetraveled,inmiles In addition, the correlation X ts
(b)43 r 0.68(coefficientofcorrelation)coefficient of 0.68 is not Y
(c)58
If: exceptionally high. It 1 36 1
4.35(a) Y = 13,473 + indicates that the model 1,29 36
Numberofdaysonthe
37.65(1860)=83,502 explains approximately 46% 6
road X1 = 5 and
(b)The predicted distance oftheoverallvariationintrip 2 33 4
selling price is cost. This correlation 1,08 66
traveledX2=300 9
$83,502, but this coefficient would suggest
then: that the model is not a 3 40 9
is the average
1,60 12
pricefora TableforProblem4.33 0 0
house of 4 41 16
this size. Year Transistors
1,68 16
(x) (y) xy x2 126 + 18x Error Error 2 |% Error|
There are 1 4
other 1 140 140 1 144 4 16 100 (4/140)
5 40 25 =
2.86%
1,60 20
factors
2 160 320 4 162 2 4 100 (2/160)
0 0 =
besides
6 55 36 1.25%

square 3 190 570 9 180 10 100 1003,02
(10/190)
33 =
footage 5.26%
5 0
that will 4 200 800 16 198 2 4 100 (2/200)
7 60 49 =
impact 1.00%
3,60 42
the 5 210 1,050 25 216 6 36 100 (6/210)
0 0 =
selling 8 54 64 2.86%

priceofa Totals 1 90 2,80 5 16 2,91 43 13.23
house. If 5 0 0 5 0 6 2 %
x = 3 y = 180 9 58 81
such a
Y=90+48.55+ 3,36 52
house sold for
0.4300=90+242.5+120= particularlygoodone. 4 2
$95,000, then 10 61 100
theseotherfactors 452.5 4.37(a,b) 3,72 61
could be 1 0
Perio Demand Forecas
contributing to

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
38 CHAPTER 4F O R E C A S T I N G

55 478 385 Year Patients Trend

X Y Forecast 8 94.8 54 8,987.0

Given:Y=a+bXwhere: 9 103.3 58 10,670.9

1 36 29.8 + 3.28
XY - nXY 33.1 10 116.2 61 13,502.4
b 2 2 2 33 29.8 + 3.28
X - nX 36.3
Column Totals 854.0 478 76,129.
a Y - bX 3 40 29.8 + 3.28
9
39.6
andX=55,Y=478,XY 4 41 29.8 + 3.28 Given:Y=a+bXwhere
= 2900, X 2 = 385, Y 2 = 42.9
XY - nXY
23892, 5 40 29.8 + 3.28 b
X 5.5,Y 47.8, Then: 46.2 X 2 - nX 2
6 55 29.8 + 3.28 a Y - bX
2900 - 10 5.5 47.8 2900 - 2629 271 49.4
b 3.28 7 60 29.8 + 3.28 and X = 854, Y = 478,
385 - 10 5.52 385 - 302.5 82.5
52.7 XY = 42558.6, X2 =
a 47.8 - 3.28 5.5 29.76 8 54 29.8 + 3.28 76129.9,
andY=29.76+3.28X.For: 56.1 Y 2 =23892, X =85.4, Y
9 58 29.8 + 3.28 =47.8.Then:
X 11:Y 29.76 + 3.28 11 65.8 59.3
10 61 29.8 + 3.28 42558.6 - 10 85.4 47.8 42558.6
X 12:Y 29.76 + 3.28 12 69.1 b
62.6 2 76129.
76129.9 - 10 85.4
Therefore:
1737.4
Year1165.8patients 0.543
3197.3
Year1269.1patients The MAD is 3.26this is a 47.8 - 0.543 85.4 1.43
Themodelseemstofitthe approximately 7% of the
andY=1.43+0.543X
dataprettywell.Oneshould, average number of patients
and 10% of the minimum For:
however,bemoreprecisein
number of patients. We also X 131.2 : Y 1.43 + 0.543(131.2) 72
judging the adequacy of the
model. see absolute deviations, for X 90.6 : Y 1.43 + 0.543(90.6) 50.6
Twopossibleapproachesare years5,6,and7intherange Therefore:
computation of (a) the 5.67.3. The comparison of
the MAD with the average Crimerate=131.2
correlationcoefficient,or(b)
and minimum number of 72.7patients
themeanabsolutedeviation.
patients and the Crime rate = 90.6
Thecorrelationcoefficient:
comparatively large 50.6patients
n XY - X Y deviations during the middle Note that rounding
r differences occur when
Alsonotethatacrimerateof131.2isoutsidetherangeofthe
yearsindicatethattheforecast
n X 2 - ( X ) 2 n Y 2 - ( Y ) 2
solvingwithExcel.
datasetusedtodeterminetheregressionequations,socautionis
model is not exceptionally

advised.
accurate.Itismoreusefulfor 4.41(a)Itappearsfromthe
10 2900 - 55 478 following graph
predictinggeneraltrendsthan
10 385 - 552 10 23892 - 4782 theactualnumberofpatients that the points do
tobeseeninaspecificyear. scatter around a
29000 - 26290 straightline.
4.40
3850 - 3025 238920 - 228484
Crime Patient
2710 2710 s
0.924 Year Rate X Y
825 10436 2934.3
2 1 58.3 36
r 0.853
The coefficient of 2 61.1 33
determination of 0.853 is
quite respectableindicating 3 73.4 40
our original judgment of a
goodfitwasappropriate. 4 75.7 41

5 81.1 40
(b)Developing the
6 89.0 55 regression
relationship,wehave:
7 101.1 60 (Summe Tourists Ridership

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
 CHAPTER 4F O R E C A S T I N G 39

r the data. Moving averages

Y 2 - a Y - b XY smooth out seasonality.
months) (Millions) (1,000,000s Syx
) n-2 Exponential smoothing can
Year (X) (Y) 71.59 - 0.511 27.1 - 0.159 352.9 forecast January next year,

1 7 1.5 12 - 2 but not farther. Because
2 2 1.0 71.59 - 13.85 - 56.11 seasonalityisstrong,anave
.163
3 6 1.3 10 modelthatstudentscreateon
4 4 1.5 .404(roundedto.407inPOMforWindowssoftware) theirownmightbebest.
5 14 2.5 (b)Onemodelmightbe:
6 15 2.7 Ft+1=At11
7 16 2.4 (f) The correlation That is forecastnext
8 12 2.0 coefficientandthe
9 14 2.7 period=actualoneyearearlier
coefficient of toaccountfor
10 20 4.4 determination are
11 15 3.4 seasonality. But this ignores
givenby:
12 7 1.7 thetrend.
n XY - X Oneverygoodapproach
Y
Given:Y=a+bXwhere: r
n X 2 - ( X ) 2 would be to 2 calculate the
n Y 2 - ( Y )
XY - nXY increasefromeachmonthlast

b
X 2 - nX 2 yeartoeachmonththisyear,
12 352.9 - 132 27.1
sum all 12 increases, and
a Y - bX 12 1796 - 1322 12 71.59 - 27.12
divideby12.Theforecastfor

and X = 132, Y = 27.1, next year would equal the
4234.8 - 3577.2
XY = 352.9, X2 = 1796, valueforthesamemonththis
Y 2 = 71.59, X = 11, Y = 21552 - 17424 859.08 - 734.41
yearplustheaverageincrease
2.26. 657.6 over the 12 months of last
657.6
year. 0.917
Then: 4128 124.67 64.25 11.166
(c)Usingthismodel,the
352.9 - 12 11 2.26 352.9 - 298.3 54.6
b 0.159 andr 2 0.840 Januaryforecastfornextyear
1796 - 12 112 1796 - 1452 344 becomes:
a 2.26 - 0.159 11 0.511 4.42(a)This problem
gives students a 148
and Y=0.511+0.159X F25 17 + 17 + 12 29
chancetotacklea 12
(c)Given a tourist realistic problem where 148 = total monthly
population of in business, i.e., increases from last year to
10,000,000, the notenoughdatato thisyear.
model predicts a make a good Theforecastsforeachof
ridershipof: forecast.Ascanbe themonthsofnextyear
Y=0.511+0.159 seen in the thenbecome:
10 = 2.101, or 2,101,000 accompanying
figure, the data Jan. 29 July.
persons. Feb. 26 Aug.
contains both
(d)If there are no Mar. 32 Sep.
seasonalandtrend
tourists at all, the Apr. 35 Oct.
factors. May. 42 Nov.
model predicts a
ridershipof0.511, Jun. 50 Dec.
or 511,000 Bothhistoryandforecastfor
persons. One thenextyearareshowninthe
would not place accompanyingfigure:
much confidence
in this forecast,
however, because
the number of
tourists (zero) is
outside the range
of data used to
develop the
model.
(e)Thestandarderror
of the estimate is Averaging methods are
givenby: not appropriate with trend,
seasonal,orotherpatternsin

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
40 CHAPTER 4F O R E C A S T I N G

standard error
oftheestimateand
the MAD, the 0.2
constant is
better. However,
other smoothing
constants need to
beexamined.

4.43(a) and (b) See the

followingtable:

Actual Smoothed

Week Value Value Forecast

t A(t) Ft ( =
0.2)
1 50 +50.0
2 35 +50.0
3 25 +47.0
4 40 +42.6
5 45 +42.1
6 35 +42.7
7 20 +41.1
8 30 +36.9
9 35 +35.5
10 20 +35.4
11 15 +32.3
12 40 +28.9
13 55 +31.1
14 35 +35.9
15 25 +36.7
16 55 +33.6
17 55 +37.8
18 40 +41.3
19 35 +41.0
20 60 +39.8
21 75 +43.9
22 50 +50.1
23 40 +50.1
24 65 +48.1
25 +51.4

MAD
(c)Students should
note how stable
the smoothed
valuesarefor =
0.2. When
comparedtoactual
week 25 calls of
85, the smoothing
constant, = 0.6,
appears to do a
slightlybetterjob.
Onthebasisofthe

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
 CHAPTER 4F O R E C A S T I N G 41

4.44 XY - nXY
b
Week Actual Value Smoothed 87Trend Estimate Forecast Forecas X 2 - nX 2
So:MAD:
Value
10.875 t
8 a Y - bX
t At Ft ( = 0.3)
39 Tt ( = 0.2) FITt Error
3.586
1 50.000 50.00010.875 0.000 50.000 0.000
2 35.000 50.000 0.000 50.000 15.000
3 25.000 45.500 0.900 44.600 19.600
4 40.000 38.720 2.076 36.644 3.356
5 45.000 37.651 1.875 35.776 9.224
6 35.000 38.543 1.321 37.222 2.222
7 20.000 36.555 1.455 35.101 15.101
8 30.000 30.571 2.361 28.210 1.790
9 35.000 28.747 2.253 26.494 8.506
10 20.000 29.046 1.743 27.303 7.303
11 15.000 25.112 2.181 22.931 7.931
12 40.000 20.552 2.657 17.895 22.105
13 55.000 24.526 1.331 23.196 31.804
14 35.000 32.737 0.578 33.315 1.685
15 25.000 33.820 0.679 34.499 9.499
16 55.000 31.649 0.109 31.758 23.242
17 55.000 38.731 1.503 40.234 14.766
18 40.000 44.664 2.389 47.053 7.053
19 35.000 44.937 1.966 46.903 11.903
20 60.000 43.332 1.252 44.584 15.416
21 75.000 49.209 2.177 51.386 23.614
22 50.000 58.470 3.594 62.064 12.064
23 40.000 58.445 2.870 61.315 21.315
24 65.000 54.920 1.591 56.511 8.489
25 59.058 2.100 61.158

4.46(a) X Y

To evaluate the trend 421 2.90

adjusted exponential
smoothing model, actual 377 2.93
week 25 calls are compared
585 3.00
to the forecasted value. The
model appears to be 690 3.45
producing a forecast
approximately midrange 608 3.66
betweenthatgivenbysimple
exponential smoothing using 390 2.88
=0.2and =0.6.Trend
adjustmentdoesnotappearto 415 2.15
give
481 2.53
anysignificantimprovement.
729 3.22
n
( At - Ft ) 501 1.99
4.45 t 1
Tracking signal
MAD
613 2.75
Month At Ft
709 3.90
May 100 100
June 80 104
366 1.60
July 110 99
August 115 101
6885 36.96
Septemb 105 104 Column totals
er
October 110 104
Novembe 125 105 Given:Y=a+bXwhere:
r
Decembe 120 109
r

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
42 CHAPTER 4F O R E C A S T I N G

and X =6885, Y =36.96, (b, c)Amit wants to 4.48(a) 27 7.70 5.497 2.20
XY = 20299.5, X 2 = forecast by 28 10.10 6.818 3.28
Quarter Contracts Sales Y 29 15.20 8.787 6.41
3857893, exponential X
Y 2 = 110.26, X = 529.6, smoothing (setting (Continued)
1 153 8
Y =2.843,Then: Februarys forecast
2 172 10
equal to Januarys
20299.5 - 13 529.6 2.843 20299.5 - 19573.5 3 197 15
b sales)withalpha
4 178 9
3857893 - 13 529.62 3857893 - 3646190
0.1. Barbara wants
5 185 12
726 to use a 3period
0.0034 6 199 13
211703 movingaverage.
7 205 12
a 2.84 - 0.0034 529.6 1.03 Sales Amit 8
Barba 226 16
andY=1.03+0.0034X Totals 1,51 95
January 400 5
As an indication of the
February 380 400 Average 189.375
usefulness of this 11.875
March 410 398
relationship,wecancalculate
April 375 399.2 396.67
b =(183848 189.375
thecorrelationcoefficient: May 405 396.8 388.33
11.875)/(290,413 8
MAD
n XY - X Y 189.375
r
n X 2 - ( X ) n Y 2 - ((d)
2 2 189.375)=0.1121
Y )
NotethatAmithasmore
a = 11.875 0.1121

forecast observations,
189.375=9.3495
13 20299.5 - 6885 36.96 whileBarbarasmoving
average does not start
Sales(y)=9.349+0.1121
13 3857893 - 68852 13 110.26 - 36.962 (Contracts)
untilmonth4.Alsonote

thattheMADforAmit (b)
263893.5 - 254469.6
is an average of 4 r (8 18384 - 1515 95) ((8 290,413 - 15152 )(8 1183 - 952 ))
50152609 - 47403225 1433.4 - 1366.0
numbers, while
9423.9 Barbarasisonly2. 0.8963

2749384 67.0 Amits MAD for Sxy 1183 - (-9.3495 95) - (0.112 18384 / 6) 1.3408
9423.9 exponential smoothing
0.692 r 2 .8034
1658.13 8.21 (16.11) is lower than
that of Barbaras 4.49(a)
r 2 0.479 movingaverage(19.17). Method Exponential Smoothing
A correlation coefficient of Sohisforecastseemsto 0.6 =
0.692isnotparticularlyhigh. bebetter. Year Deposits Forecast
The coefficient of (Y )
2
determination, r , indicates 1 0.25 0.25
thatthemodelexplainsonly 2 0.24 0.25
47.9% of the overall 3 0.24 0.244
variation. Therefore, while 4 0.26 0.241
the model does provide an 5 0.25 0.252
estimate of GPA, there is 6 0.30 0.251
7 0.31 0.280
considerable variation in
8 0.32 0.298
GPA, which is as yet 9 0.24 0.311
unexplained.For 10 0.26 0.268
11 0.25 0.263
(b)X 350:Y 1.03 + 0.0034 350 2.22 12 0.33 0.255
(c)X 800:Y 1.03 + 0.0034 800 3.75 13 0.50 0.300
14 0.95 0.420
Note: When solving this 15 1.70 0.738
problem,caremustbetakento 16 2.30 1.315
interpretsignificantdigits.Also 17 2.80 1.906
notethatX=800isoutsidethe 18 2.80 2.442
range of the data set used to 19 2.70 2.656
determine the regression 20 3.90 2.682
relationship, so caution is 21 4.90 3.413
advised. 22 5.30 4.305
23 6.20 4.90
4.47(a)There is not a 24 4.10 5.680
strong linear trend in sales 25 4.50 4.732
overtime. 26 6.10 4.592

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
 CHAPTER 4F O R E C A S T I N G 43

4.49(a)(Continued) appropriate
choice. Measures
Method Exponential Smoothing
0.6 = of error and
Year Deposits Forecast goodnessoffitare
(Y ) really irrelevant.
30 18.10 12.6350 Exponential
31 24.10 15.9140 smoothing
32 25.60 20.8256 providesaforecast
33 30.30 23.69 only of deposits
34 36.00 27.6561 forthenextyear
35 31.10 32.6624 and thus does not
36 31.70 31.72
Forecasting Summary Table
37 38.50 31.71 Exponential Linear Regression
38 47.90 35.784 Method used: Smoothing (Trend Analysis) Linear Regression
39 49.10 43.0536 Y = 18.968 + Y = 17.636 +
40 55.80 46.6814 1.638 YEAR 13.59364
41 70.10 52.1526 GSP
42 70.90 62.9210 MAD 3.416 10.587 10.255
43 79.10 67.7084 MSE 34.39 171.817 204.919
44 94.00 74.5434 Standard error using 6.075 13.416 14.651
TOTALS 787.30 n 2 in denominator
Correlation coefficient 0.846 0.813
AVERAGE 17.8932 31 31 24.10 13 1.20 0.50 1
32 32 25.60 14 1.20 0.95 1 address the five
Next period forecast = 86.2173 15 1.20 1.70 1
33 33 30.30 year forecast
34 34 36.00 16 1.60 2.30 4 problem. In order
17 1.50 2.80 2
35 35 31.10 to use the
Method Linear Regression 36 (Trend36
Analysis) 31.70
18 1.60 2.80 4
regression model
Year Period (X ) Deposits 37 37 38.50 19 1.70 2.70 5 based upon GSP,
1 1 0.25 38 38 47.90
20 1.90 3.90 8 one must first
2 2 0.24 39 39 49.1021 1.90 4.90 8 develop a model
3 3 0.24 40 40 55.8022 2.30 5.30 13 to forecast GSP,
4 4 0.26 41 41 70.1023 2.50 6.20 16 and then use the
5 5 0.25 42 42 70.9024 2.80 4.10 20 forecastofGSPin
43 43 79.1025 2.90 4.50 21 the model to
6 6 0.30
44 44 94.0026 3.40 6.10 28 forecast deposits.
7 7 0.31
27 3.80 7.70 34
8 8 0.32 TOTALS 990.0 787.30 This requires the
28 4.10 10.10 38
9 9 0.24 0
29 4.00 15.20 36
development of
10 10 0.26 AVERAGE 22.50 17.893 30 4.00 18.10 36 two modelsone
11 11 0.25 31 3.90 24.10 35 of which (the
12 12 0.33 32 3.80 25.60 34 model for GSP)
33 3.80 30.30 34 must be based
13 13 0.50 Method Least squaresSimple
34 Regression
3.70 36.00on 32 solely on time as
14 14 0.95 35 4.10 31.10 38 the independent
a b 36 4.10 31.70 38
15 15 1.70 variable (time is
17.636 13.5936 37 4.00 38.50 36
16 16 2.30 the only other
Coefficients GSP Deposit 38 4.50 47.90 43
17 17 2.80 : s variable we are
39 4.60 49.10 44
18 18 2.80 Year (X) (Y ) Forecast
40 4.50 55.80 43
given).
19 19 2.70 (b)Onecouldmakea
1 0.40 0.25 12 41 4.60 70.10 44
20 20 3.90 2 0.40 0.24 12 42 4.60 70.90 44 case for exclusion
21 21 4.90 3 0.50 0.24 10 43 4.70 79.10 46 of the older data.
22 22 5.30 4 0.70 0.26 8 44 5.00 94.00 50 Were we to
23 23 6.20 5 0.90 0.25 5 TOTALS exclude data from
24 24 4.10 6 1.00 0.30 4 AVERAGE roughlythefirst25
25 25 4.50 7 1.40 0.31 1
years,theforecasts
26 26 6.10 8 1.70 0.32 5
Given that one for the later years
27 27 7.70 9 1.30 0.24
0.036086 wishes to develop would likely be
28 28 10.10 a fiveyear considerably more
10 1.20 0.26 1
29 29 15.20 forecast, trend accurate. Our
11 1.10 0.25 2
30 30 18.10 12 0.90 0.33 5 analysis is the argumentwouldbe

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
44 CHAPTER 4F O R E C A S T I N G

that a change that 4.51 0

causedanincrease 0
in the rate of Period Demand Exponentially Smoothed
Forecast
growth appears to M
havetakenplaceat 1 7 5 A
the end of that 2 9 5 + 0.2 D
period. Exclusion 3 5 5.4 + 0.2
of this data, 4 9 6.12 + 0.2 =
5 13 5.90 + 0.2
however, would
6 8 6.52 + 0.2
not change our 7 Forecast 7.82 + 0.2
2
choice of .
forecasting model 4.52 2
because we still 0
Actual Forecast
need to forecast
deposits for a 95 100
future fiveyear 108 110 (b)3month weighted
period. 123 120 movingaverage
130 130

ADDITIONAL
HOMEWORK MAD= 10/4=2.5, MSE=
38/4=9.5
PROBLEMS
Theseproblems,whichappear 4.53(a)3month moving
on www.myomlab.com, average:
provide an additional 13
problemsthatyoumaywishto Three-Month
assign.
Month Sales Moving Average
4.50
Week 1 2 3 4 5 January
6 7 8 11 9 10 Forecast
February 14
Registration 22 21 25 27 35 March
29 33 3716 41 37
(a) Nave 22 21 25 27 April
35 29 3310 37 (1141+ 14 37
+ 16)/3 =
(b) 2-week moving 21.5 23 26 31 32 31 35 39 39
(c) 4-week moving 23.7 May
27 29 3115 33.5(14
35+ 16 37
+ 10)/3 =
5
June 17 (16 + 10 + 15)/3 =

July 11 (10 + 15 + 17)/3 =

August 14 (15 + 17 + 11)/3 =

September 17 (17 + 11 + 14)/3 =

October 12 (11 + 14 + 17)/3 =

November 14 (14 + 17 + 12)/3 =

December 16 (17 + 12 + 14)/3 =

January 11 (12 + 14 + 16)/3 =

February (14 + 16 + 11)/3 =

=

2
2
.

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
 CHAPTER 4F O R E C A S T I N G 45

(c)Based on a Sales
Month Mean 9.17 Average4.56To Absolute
Three-Month yMoving compute (b) Correlation
Absolute x 3.5
Moving seasonalizedoradjustedsales
Deviation coefficient:
Deviation forecast,wejustmultiplyeach n XY - X Y
January 11 y 5.27 + 1.11x
criterion, 14the seasonalized index by the r
February n X 2 - ( X ) 2 n Y 2
3month moving Period 7 forecast = appropriatetrendforecast.
March 16
average 10 with 13.07
April (1 11 + 2 14 + 3 16)/6 = 14.50 Y 4.50 Y
Index 5 70 - 15 20
MAD = 2.2 is15 to Period
(1 14 + 2 16 12+ forecast
3 10)/6 = = 12.67Seasonal Trendforecast
May 2.33
June be preferred 17
over 18.64, but this is far
(1 16 + 2 10 + 3 15)/6 = 13.50 Hence,for 3.50 5 55 - 152 5 130 - 2
July the 3month 11 outside
(1 10 + 2 15 the
+3 range
17)/6 of = 15.17QuarterI:Y4.17
I 1.25 120,000 150,000
August weighted moving 14 validdata.
(1 15 + 2 17 + 3 11)/6 = 13.67 0.33 350 - 300

Septemberaverage 17 with (1 17 + 2 11 + 3 14)/6 = 13.50 II 0.90 140,000 126,000
QuarterII:Y3.50
October MAD=2.72. 12 (1 11 + 2 14 + 3 17)/6 = 15.00 3.00
275 - 225 650 - 400
QuarterIII:Y 0.75 160,000 120,000
III
November 14 (1 14 + 2 17 + 3 12)/6 = 14.00 0.00 50
(d)Other factors 16
that 0.45
December (1 17 + 2 12 + 3 14)/6 = 13.83 IV 1.10 180,000 198,000
QuarterIV:Y2.17
111.80
January mightbeincluded11 (1 12 + 2 14 + 3 16)/6 = 14.67 3.67
February in a more (1 14 + 2 16 + 3
4.57
11)/6 = 13.17
complex model Mon Tue Wed Thu Fri Sat
=27.17
are interest rates Week 1 210 178 250 215 160 180
and cycle or MAD=2.72
Week 2 215 180 250 213 165 185
seasonalfactors. Week 3 220 176 260 220 175 190
4.54(a) Week 4 225 178 260 225 176 190
Averages 217. 17 255 218. 16 186.3 Overall average =
Actua Cumulativ 5 8 3 9 204
l
Wee Miles Foreca Error Error (a)Seasonalindices: The correlation coefficient
k st indicates that there is a
1.066 (Mon)0.873 (Tue)
1 17 17.00 0.00 positive
1.25 (Wed)
2 21 17.00 4.00 correlation between bank
3 19 17.80 1.20 1.07 (Thu)0.828 (Fri)
0.913 (Sat) depositsandconsumerprice
4 23 18.04 4.96
indicesin
5 18 19.03 +1.0 (b)To calculate for
3 Monday of Week
6 16 18.83 +2.8 5 = 201.74 +
3
0.18(25)1.066=
7 20 18.26 1.74
219.9 rounded to
8 18 18.61 +0.6
1 220
9 22 18.49 3.51 Forecast 220 (Mon)
10 20 19.19 0.81 180 (Tue) 258 (Wed)
11 15 19.35 +4.3 221 (Thu) 171
5 (Fri)189 (Sat)
12 22 18.48 3.52
4.58(a)4000 +
(b)The MAD = 0.20(15,000)=7,000
28.56/12=2.38
(b)4000 +
(c)The cumulative 0.20(25,000)=9,000
error andtracking
signals appear to 4.59(a)35 + 20(80) +
be consistently 50(3.0)=1,785
negative, and at (b)35 + 20(70) +
week 10, the 50(2.5)=1,560
tracking signal 4.60Given:X=15,Y=
exceeds5MADs. 2 2
20,XY=70,X =55,Y
Birmingham, Alabamai.e.,
=130, X =3, Y =4
4.55 y x x2 as one variable tends to
(a) XY - nXY increase (or decrease), the
7 1 1 b
9 2 4 X 2 - nX 2 other tends to increase (or
5 3 9 a Y - bX decrease).
11 4 16
70 - 5 3 4 70 4.60(c)Standard
- 60 10 error of
10 5 25 b
theestimate: 1
13 6 36 55 - 5 32 55 - 45 10
55 21 91 a 4 - 1 3 4 - 3 1
Y 1 + 1X

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
46 CHAPTER 4F O R E C A S T I N G

Standard error of the Selectionofanappropriate

Y 2 - a Y - b XY

130 - 1 20 - 1 70
Syx estimate: time series forecasting
n-2 3 modelbaseduponaplotof

130 - 20 - 70

40
13.3 3.65 Y 2 - a Y - b XY 94 thedata.
- 1 20 - 1 70
Syx
3 3 n-2 The 5 - 2importance of

combining a qualitative
4.61 94 - 20 - 70
1.333 1.15 model with a quantitative
X Y 3 model in situations where
2 4 technological change is
1 1 4.62Usingsoftware,the occurring.
4 4
5 6 regressionequationis: 1.A plot of the data
3 5 Gameslost=6.41+0.533 indicatesalineartrend(least
Column Totals 15 20 daysrain. squares) model might be
appropriate for forecasting.
Given:Y=a+bXwhere: Usinglineartrendyouobtain
CASE STUDIES thefollowing:
XY - nXY
b
X 2 - nX 2 1 SOUTHWESTERN x y x2 xy
a Y - bX UNIVERSITY:B 1 480 1 48
Thisisthesecondinaseries 2 436 4 87
andX=15,Y=20,XY= ofintegratedcasestudiesthat 3 482 9 1,44
2 2
70,X =55,Y =94, X = runthroughoutthetext. 4 448 16 1,79
3, 5 458 25 2,29
1.One way to address the
Y =4.Then: 6 489 36 2,93
case is with separate 7 498 49 3,48
70 - 5 4 3 70 - 60 forecasting models for each
b 1.0 8 430 64 3,44
55 - 5 32 55 - 45 game. Clearly, the 9 444 81 3,99
a 4 - 1 3 1.0 homecoming game (week 2) 10 496 100 4,96
and the fourth game (craft 11 487 121 5,35
and Y = 1.0 + 1.0X. The festival)areuniqueattendance 12 525 144 6,30
correlationcoefficient: situations. 13 575 169 7,47
14 527 196 7,37
n XY - X Y 15 540 225 8,10
r Game Model 16 502 256 8,03
n X 2 - ( X ) 2 n Y 2 - ( Y ) 2 17 508 289 8,63
1 y = 30,713 + 2,534x
18 573 324 10,31
2 y = 37,640 + 2,146x
5 70 - 15 20 350 - 300 3 y = 36,940 + 1,560x 19 508 361 9,65

20 498 400 9,96
5 55 - 152 5 94 - 202 275 - 225 470 - 400 4 y = 22,567 + 2,143x
21 485 441 10,18
5 y = 30,440 + 3,146x
Total 22 526 484 11,57
50 50
0.845 23 552 529 12,69
50 70 59.16 24 587 576 14,08
(where y =attendanceand x 25 608 625 15,20
=time) 26 597 676 15,52
27 612 729 16,52
2.Revenue in 2010 =
28 603 784 16,88
(239,000) ($50/ticket) = 29 628 841 18,21
$11,950,000 30 605 900 18,15
Revenue in 2011 = 31 627 961 19,43
(250,530) ($52.50/ticket) 32 578 1,024 18,49
=$13,152,825 33 585 1,089 19,30
34 581 1,156 19,75
3.In games 2 and 5, the 35 632 1,225 22,12
forecast for 2011 exceeds 36 656 1,296 23,61
stadium capacity. With this Totals 666 19,366 16,206 378,6
appearingtobeacontinuing
trend,thetimehascomefora Average 18.5 537.9 450.2 10,5
neworexpandedstadium.

2 DIGITALCELL
PHONE,INC.
Objectives:

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
 CHAPTER 4F O R E C A S T I N G 47

xy - nx y 378,661 - 36 18.5AnalysisforManagement,
537.9 20390.0 years ago. This system 2003 51.80 43.4
b 5.25

2
x - nx 2
16,206 - (36 18.52 ) ed., Prentice
10th 3885.0 Hall actually protects managers 2004 54.92 38.5
Publishing. from large sales variations 2005 69.70 51.4
a y - bx 537.9 - 5.25 18.5 440.85 2006 68.90 58.7
Cases = 432.28 + 5.73 outside their control. One
n xy - x y (time), r2 = .93, MAD = could also justify a 50% 2007 63.72 45.4
r 2008 84.73 50.2
[ n x 2 - ( x )2 ][ n y 2 - ( y)212.84
] 30%20% model or some
2009 78.74 79.6
othervariation.
(36)(378,661) - c)Additiveseasonalmodel,
(666)(19,366)
4.Other predictors of cafe
2 Cases = 444.29 + 5.06
[(36) (16,206) - (666) ][(36)(10,558,246) - (19,366)2 ] salescouldincludeseasonof
(time), r2 = .86, MAD = Southeast Airline D
13,631,796 - 12,897,756
20.02 year (weather); hotel
Airframe Cost Engine
[(583,416) - (443,556)][380,096,856) - (375,041,956)] occupancy;springbreakfrom Year per Aircraft per Airc
d) Additive seasonal model,
colleges; beef prices;
737,040 with
734,040 centered moving 2003 13.29 18.8
promotionalbudget;etc.
[139,860][5,054,900] averages.
706,978,314,000 2004 25.15 31.5
Cases = 431.31 + 5.72 5.Ya+bx 2005 32.18 40.4
734,040 (time), r2 = .94, MAD = 2006 31.78 22.1
.873 Month Advertising Guest Count
840,820 12.28 X Y
2007 25.34 19.6
2008 32.78 32.5
r 2 .76 Thetwomethodsthatuse 1 14 21 2009 35.56 38.0
y 440.85 + 5.25(time) the average of all data have 2 17 24
r=0.873indicatinga
very similar results, and the 3 25 27 Utilizing the software
reasonablygoodfit twoCMA methodsalso look 4 25 32 package provided with this
quiteclose.Assuggestedwith 5 35 29 text, we can develop the
The student should thisanalysis,CMAistypically following regression
reportthelineartrendresults, thebettertechnique. 6 35 37
equationsforthevariablesof
but deflate the forecast interest:
7 45 43
obtained based upon VIDEO CASE Northern Airlines
qualitativeinformationabout
industry and technology
STUDY 8 50 AirframeMaintenanceCost:
43
Cost=36.10+0.0026
trends. FORECASTINGAT 9 60 54
Becausethereislimited Airframeage
HARDROCKCAFE Coefficient of
seasonality in the data, the 10 60 66
linear trend analysis above There is a short video (8 determination=0.7695
Totals 36 37
providesagoodr2of.76. minutes) available from Coefficient of
6 6
However,amoreprecise Prentice Hall and filmed Averag 36.6 37.6 correlation=0.8772
forecast can be developed specifically for this text that e Northern AirlinesEngine
addressing the seasonality supplementsthiscase. MaintenanceCost:
issue, which is done below. 1.Hard Rock uses Cost=20.57+0.0026

Methodsaandcyield r2 of. forecastingfor(1)sales(guest Airframeage

85and.86,respectively,and
methodsbandd,whichalso
center the seasonal
adjustment,yieldr2of.93and
.94,respectively.
2.Four approaches to
decompositionofTheDigital
Cell Phone data can address
seasonality,asfollows:
a) Multiplicative seasonal
model,
Cases = 443.87 + 5.08
(time), r2 = .85, MAD =
20.89
b) Multiplicative Seasonal
Model, with centered
moving averages (CMA),
which is not covered in
ourtextbutcanbeseenin
Render, Stair, and
Hannas Quantitative
15,772 - 10 36.6 37.6
counts) at cafes, (2) retail b 0.7996 Coefficient
.8
of
sales, (3) banquet sales, (4) 15,910 - 10 36.62 determination=0.6124
concert sales, (5) evaluating a 37.6 - 0.7996 36.6 8.3363 8.3 Coefficient of
managers, and (6) menu Y 8.3363 + 0.7996 X correlation=0.7825
planning. They could also At$65,000;y8.3+.8(65) Southeast Airlines
employ these techniques to 8.3+ 52=60.3,or60,300 AirframeMaintenanceCost:
forecast: retail store sales of guests. Cost= 4.60+0.0032
individual (SKU) product Airframeage
For the instructor who asks
demands;salesofeachentre; Coefficient of
otherquestionsthanthisone:
salesateachworkstation,etc. determination=0.3905
r20.8869
2.ThePOSsystemcaptures Std.error5.062 Coefficient of
allthebasicsalesdataneeded correlation=0.6249
to drive individual cafes Southeast AirlinesEngine
scheduling/ordering.Italsois ADDITIONAL CASE MaintenanceCost;
aggregated at corporate HQ. STUDY* Cost=0.67+0.0041
Each entre sold is counted Airframeage
asoneguestataHardRock THENORTHSOUTH Coefficient of
Cafe. AIRLINE determination=0.4600
3.Theweightingsystemis Coefficient of
Northern Airline Data
subjective,butisreasonable. correlation=0.6782
Moreweightisgiventoeach Airframe Cost
ofthepast2yearsthanto3 Year per Aircraft

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.
48 CHAPTER 4F O R E C A S T I N G

The following graphs for Northern Airlines. Southeast Airlines: management

portray both the actual data There is certainly The relationships practices.
and the regression lines for reason to conclude, betweenmaintenance The difference
airframe and engine however,thatairframe costsandairframeage between maintenance
maintenance costs for both age is not the only forSoutheastAirlines proceduresofthetwo
airlines. importantfactor. are much less well airlines should be
defined. It is even investigated.
more obvious that The data with which
airframeageisnotthe she is currently
*Thiscasestudyappearsonour only important factor working does not
companionWebsite,at perhaps not even provide conclusive
www.pearsonhighered.com/heize the most important results.
r,andatwww.myomlab.com. factor. ConcludingComment:
Overall,itwouldseemthat: The question always arises,
Northern Airlines has withthiscase,astowhether
the smallest variance thedatashouldbemergedfor
in maintenance costs thetwo airlines, resultingin
indicating that its two regressions instead of
daytoday four.Thesolutionprovidedis
management that of the consultant who
of maintenance is washiredtoanalyzethedata.
workingprettywell. The airlines own internal
analysts also conducted
Maintenance costs regressions, but did merge
seem to be more a thedatasets.Thisshowshow
function of airline statisticianscantakedifferent
thanofairframeage. viewsofthesamedata.
The airframe and
engine maintenance
costs for Southeast
Airlines are not only
lower,butmorenearly
similarthan thosefor
Northern Airlines.
From the graphs, at
least, they appear to
berisingmoresharply
withage.
From an overall
perspective, it appears
that Southeast Airlines
may perform more
efficiently on sporadic
or emergency
repairs, and Northern
Airlines may place
more emphasis on
Notethatthetwographs preventive
havebeendrawntothesame maintenance.
scale to facilitate Ms. Youngs report should
comparisonsbetweenthetwo concludethat:
airlines.
There is evidence to
Comparison: suggest that
Northern Airlines: maintenance costs
There seem to be couldbemadetobea
modest correlations function of airframe
between maintenance age by implementing
costsandairframeage more effective

Copyright2011PearsonEducation,Inc.publishingasPrenticeHall.