05 Forecasting

Chapter 5
Forecasting
2008 Prentice-Hall, Inc. 2009 Prentice-Hall, Inc.
Introduction
Managers are always trying to reduce
uncertainty and make better estimates of what will happen in the future This is the main purpose of forecasting Some firms use subjective methods Seat-of-the pants methods, intuition, experience There are also several quantitative techniques Moving averages, exponential smoothing, trend projections, least squares regression analysis
2009 Prentice-Hall, Inc.
52
Introduction
Eight steps to forecasting :
1. Determine the use of the forecastwhat objective are we trying to obtain? 2. Select the items or quantities that are to be forecasted 3. Determine the time horizon of the forecast 4. Select the forecasting model or models 5. Gather the data needed to make the forecast 6. Validate the forecasting model 7. Make the forecast 8. Implement the results
2009 Prentice-Hall, Inc. 53
Introduction
These steps are a systematic way of initiating,
designing, and implementing a forecasting system When used regularly over time, data is collected routinely and calculations performed automatically There is seldom one superior forecasting system Different organizations may use different techniques Whatever tool works best for a firm is the one they should use
Forecasting Models
Forecasting Techniques Qualitative Models Delphi Methods Jury of Executive Opinion Sales Force Composite Consumer Market Survey
Time-Series Methods
Moving Average Exponential Smoothing Trend Projections
Causal Methods
Regression Analysis Multiple Regression
Figure 5.1 Decomposition

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

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
Qualitative Models
Qualitative models incorporate judgmental
or subjective factors Useful when subjective factors are thought to be important or when accurate quantitative data is difficult to obtain Common qualitative techniques are
Delphi method Jury of executive opinion Sales force composite Consumer market surveys
58
Qualitative Models
Delphi Method an iterative group process where
(possibly geographically dispersed) respondents provide input to decision makers Jury of Executive Opinion collects opinions of a small group of high-level managers, possibly using statistical models for analysis Sales Force Composite 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
Scatter Diagrams
Scatter diagrams are helpful when forecasting time-series data because they depict the relationship between variables.
450 400 350 300 250 200 150 100 50 0 0 2 4 6 Time (Years) 8
Annual Sales
Televisions
10
12
5 10
Scatter Diagrams
Wacker Distributors wants to forecast sales for
three different products

YEAR
1 2 3 4 5 6 7 8 9 10
Table 5.1
TELEVISION SETS
250 250 250 250 250 250 250 250 250 250
RADIOS
300 310 320 330 340 350 360 370 380 390
COMPACT DISC PLAYERS

110 100 120 140 170 150 160 190 200 190
5 11
Scatter Diagrams
(a)
Annual Sales of Televisions 330
Sales appear to be
250
200 150 100 50
| | | | | | | | | |
constant over time Sales = 250 A good estimate of sales in year 11 is 250 televisions
0 1 2 3 4 5 6 7 8 9 10
Time (Years)
Figure 5.2
2009 Prentice-Hall, Inc. 5 12
Scatter Diagrams
(b)
Annual Sales of Radios 420 400
Sales appear to be

380
360 340 320
300 280
| |
0 1 2 3 4 5 6 7 8 9 10
increasing at a constant rate of 10 radios per year Sales = 290 + 10(Year) A reasonable estimate of sales in year 11 is 400 televisions
Time (Years)
Figure 5.2
Scatter Diagrams
This trend line may
Annual Sales of CD Players
(c)
200 180 160 140 120 100

| | | | | | |
0 1 2 3 4 5 6 7 8 9 10
not be perfectly accurate because of variation from year to year Sales appear to be increasing A forecast would probably be a larger figure each year
Time (Years)
Figure 5.2
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)
forecast error MAD n
5 15

Using a nave forecasting model
YEAR 1 2 3 4 5 ACTUAL SALES OF CD PLAYERS 110 100 120 140 170 FORECAST SALES 110 100 120 140 ABSOLUTE VALUE OF ERRORS (DEVIATION), (ACTUAL FORECAST) |100 110| = 10 |120 110| = 20 |140 120| = 20 |170 140| = 30
6
7 8 9 10 11
150
160 190 200 190
170
150 160 190 200 190
|150 170| = 20
|160 150| = 10 |190 160| = 30 |200 190| = 10 |190 200| = 10 Sum of |errors| = 160 MAD = 160/9 = 17.8
Table 5.2
5 16

Using a nave forecasting model
YEAR 1 2 3 4 5 7 8 9 10 11 ACTUAL SALES OF CD PLAYERS 110 100 120 140 170 160 190 200 190 FORECAST SALES 110 100 120 140 150 160 190 200 190 ABSOLUTE VALUE OF ERRORS (DEVIATION), (ACTUAL FORECAST) |100 110| = 10 |120 110| = 20 |140 120| = 20 |170 140| = 30
forecast error 160 MAD 17.8

6 150
170
|150 170| = 20
|160 150| = 10 |190 160| = 30 |200 190| = 10 |190 200| = 10 Sum of |errors| = 160 MAD = 160/9 = 17.8
Table 5.2
5 17

There are other popular measures of forecast
accuracy The mean squared error

2 ( error ) MSE n
The mean absolute percent error
error actual MAPE 100% n

And bias is the average error and tells whether the
forecast tends to be too high or too low and by how much. Thus, it can be negative or positive.
Year 1 2 3 4 5 6 7 8 9 10 11
Actual CD Sales 110 100 120 140 170 150 160 190 200 190
Forecast Sales 110 100 120 140 170 150 160 190 200 190
|Actual -Forecast| 10 20 20 30 20 10 30 10 10
Sum of |errors| MAD
160 17.8
5 19
Hospital Days Forecast Error Example

Ms. Smith forecasted total hospital inpatient days last year. Now that the actual data are known, she is reevaluating her forecasting model. Compute the MAD, MSE, and MAPE for her forecast.
Month JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Forecast 250 320 275 260 250 275 300 325 320 350 365 380 Actual 243 315 286 256 241 298 292 333 326 378 382 396
5 20
Hospital Days Forecast Error Example

JAN FEB Forecast 250 320 Actual 243 315 |error| 7 5 error2 49 25 |error/actual| 0.03 0.02
MAR
APR MAY JUN JUL AUG SEP
275
260 250 275 300 325 320
286
256 241 298 292 333 326
11
4 9 23 8 8 6
121
16 81 529 64 64 36
0.04
0.02 0.04 0.08 0.03 0.02 0.02
OCT
NOV DEC AVERAGE
350
365 380
378
382 396 MAD= 11.83
28
17 16 MSE= 192.83
784
289 256 MAPE= .0381*100 = 3.81
0.07
0.04 0.04
5 21
Time-Series Forecasting Models

A time series is a sequence of evenly
spaced events (weekly, monthly, quarterly, etc.) Time-series forecasts predict the future based solely of the past values of the variable Other variables, no matter how potentially valuable, are ignored
5 22
Decomposition 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 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 and unusual situations
5 23
Demand for Product or Service
Trend Component Seasonal Peaks Actual Demand Line Average Demand over 4 Years
Year 1 Figure 5.3
Year 2
Time
Year 3
Year 4
5 24
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
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 The most recent period of data is added and the oldest is dropped
This methods tends to smooth out short-term
irregularities in the data series
Moving average forecast
Sum of demands in previous n periods n

Moving Averages
Mathematically
Ft 1
Yt Yt 1 ... Yt n1 n
where
Ft 1 = forecast for time period t + 1 Yt = actual value in time period t n = number of periods to average
5 27
Wallace Garden Supply Example

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)
5 28

MONTH January ACTUAL SHED SALES 10 THREE-MONTH MOVING AVERAGE
February
March April May June July August September October November December January Table 5.3
12
13 16 19 23 26 30 28 18 16 14 (10 + 12 + 13)/3 = 11.67 (12 + 13 + 16)/3 = 13.67 (13 + 16 + 19)/3 = 16.00
(16 + 19 + 23)/3 = 19.33

(19 + 23 + 26)/3 = 22.67 (23 + 26 + 30)/3 = 26.33 (26 + 30 + 28)/3 = 28.00 (30 + 28 + 18)/3 = 25.33 (28 + 18 + 16)/3 = 20.67 (18 + 16 + 14)/3 = 16.00
5 29
Weighted Moving Averages

Weighted moving averages use weights to put
more emphasis on recent periods Often used when a trend or other pattern is emerging
Ft 1 ( Weight in period i )( Actual value in period) ( Weights)
Mathematically
w1Yt w2Yt 1 ... wnYt n1 Ft 1 w1 w2 ... wn

where wi = weight for the ith observation
Weighted Moving Averages

Both simple and weighted averages are
effective in smoothing out fluctuations in the demand pattern in order to provide stable estimates Problems
Increasing the size of n smoothes out
fluctuations better, but makes the method less sensitive to real changes in the data Moving averages can not pick up trends very well they will always stay within past levels and not predict a change to a higher or lower level

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
3 2 1 6 Sum of the weights
PERIOD
Last month Two months ago Three months ago
3 x Sales last month + 2 x Sales two months ago + 1 X Sales three months ago

MONTH January February March April May June ACTUAL SHED SALES 10 12 13 16 19 23 [(3 X 13) + (2 X 12) + (10)]/6 = 12.17 [(3 X 16) + (2 X 13) + (12)]/6 = 14.33
THREE-MONTH WEIGHTED MOVING AVERAGE
[(3 X 19) + (2 X 16) + (13)]/6 = 17.00

[(3 X 23) + (2 X 19) + (16)]/6 = 20.50 [(3 X 26) + (2 X 23) + (19)]/6 = 23.83 [(3 X 30) + (2 X 26) + (23)]/6 = 27.50 [(3 X 28) + (2 X 30) + (26)]/6 = 28.33 [(3 X 18) + (2 X 28) + (30)]/6 = 23.33 [(3 X 16) + (2 X 18) + (28)]/6 = 18.67 [(3 X 14) + (2 X 16) + (18)]/6 = 15.33
July
August September October November
26
30 28 18 16
December
January Table 5.4
14
Program 5.1A
Program 5.1B
Exponential Smoothing
Exponential smoothing is easy to use and
requires little record keeping of data It is a type of moving average New forecast = Last periods forecast + (Last periods actual demand Last periods forecast)
Where is a weight (or smoothing constant) with a value between 0 and 1 inclusive
A larger gives more importance to recent data while a smaller value gives more importance to past data 2009 Prentice-Hall, Inc.
5 36
Exponential Smoothing
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 periods 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

In January, Februarys 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

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
5 39
Port of Baltimore Example

Exponential smoothing forecast for two values of
ACTUAL TONNAGE UNLOADED 180 168 159 175 190 205 180 175 175.5 = 175.00 + 0.10(180 175) 174.75 = 175.50 + 0.10(168 175.50) 173.18 = 174.75 + 0.10(159 174.75) 173.36 = 173.18 + 0.10(175 173.18) 175.02 = 173.36 + 0.10(190 173.36) 178.02 = 175.02 + 0.10(205 175.02) FORECAST USING =0.10
QUARTER
1 2 3 4 5 6 7
FORECAST USING =0.50 175 177.5 172.75 165.88 170.44 180.22 192.61
8
9 Table 5.5
182
?
178.22 = 178.02 + 0.10(180 178.02)

178.60 = 178.22 + 0.10(182 178.22)
186.30
184.15
5 40
Selecting the Best Value of

QUARTER 1 2 3 4 5 6 7 8
ACTUAL TONNAGE UNLOADED

180 168 159 175 190 205 180 182
FORECAST WITH = 0.10 175 175.5 174.75 173.18 173.36 175.02 178.02 178.22 |deviations| n
ABSOLUTE DEVIATIONS FOR = 0.10

5.. 7.5.. 15.75 1.82 16.64 29.98 1.98 3.78 82.45 = 10.31
FORECAST WITH = 0.50 175 177.5 172.75 165.88 170.44 180.22 192.61 186.30
ABSOLUTE DEVIATIONS FOR = 0.50

5. 9.5.. 13.75 9.12 19.56 24.78 12.61 4.3.. 98.63
Sum of absolute deviations MAD =
MAD =
12.33
Table 5.6
Best choice
Program 5.2A
Program 5.2B
PM Computer: Moving Average Example

PM Computer assembles customized personal
computers from generic parts

The owners purchase generic computer parts in volume at a discount from a variety of sources whenever they see a good deal.
It is important that they develop a good
forecast of demand for their computers so they can purchase component parts efficiently.
PM Computers: Data
Period Month Actual Demand 1 Jan 37 2 Feb 40 3 Mar 41 4 Apr 37 5 May 45 6 June 50 7 July 43 8 Aug 47 9 Sept 56 Compute a 2-month moving average

Compute a 3-month weighted average using weights of 4,2,1 for the past three months of data Compute an exponential smoothing forecast using = 0.7, previous forecast of 40 Using MAD, what forecast is most accurate? 2009 Prentice-Hall, Inc. 5 45
PM Computers: Moving Average Solution

2 month MA Abs. Dev 3 month WMA Abs. Dev Exp.Sm. 37.00 37.00 38.50 40.50 39.00 41.00 47.50 46.50 45.00 51.50 2.50 3.50 6.00 9.00 4.50 0.50 11.00 5.29 40.14 38.57 42.14 46.71 45.29 46.29 51.57 5.43 3.14 6.43 7.86 3.71 1.71 9.71 39.10 40.43 38.03 42.91 47.87 44.46 46.24 53.07 4.95 3.00 1.90 3.43 6.97 7.09 4.87 2.54 9.76 Abs. Dev
MAD
Exponential smoothing resulted in the lowest MAD.

Exponential Smoothing with Trend 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 then adjust it for the trend Forecast including trend (FITt) = New forecast (Ft) + Trend correction (Tt)
5 47
Exponential Smoothing with Trend Adjustment

The equation for the trend correction uses a
new smoothing constant Tt is computed by
Tt 1 (1 )Tt ( Ft 1 Ft )
where Tt+1 = Tt = = Ft+1 = smoothed trend for period t + 1 smoothed trend for preceding period trend smooth constant that we select simple exponential smoothed forecast for period t + 1 Ft = forecast for pervious period
Selecting a Smoothing Constant

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-anderror approach based on the value of the MAD for different values of Simple exponential smoothing is often referred to as first-order smoothing Trend-adjusted smoothing is called second-order, double smoothing, or Holts method
Trend Projection
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
5 50
Trend Projection
Trend projections are used to forecast time-
series data that exhibit a linear trend.

A trend line is simply a linear regression
equation in which the independent variable (X) is the time period Least squares may be used to determine a trend projection for future forecasts.
Least squares determines the trend line forecast by
minimizing the mean squared error between the trend line forecasts and the actual observed values.
The independent variable is the time period
and the dependent variable is the actual observed value in the time series.
Trend Projection
The mathematical form is
b0 b1 X Y
where = predicted value Y b0 = intercept b1 = slope of the line X = time period (i.e., X = 1, 2, 3, , n)
5 52
Trend Projection
Dist7
Value of Dependent Variable
Dist5
* *
Dist6
*
Dist1
Dist3 Dist4
Dist2
Time
Figure 5.4
Midwestern Manufacturing Company Example

Midwestern Manufacturing Company has
experienced the following demand for its electrical generators over the period of 2001 2007
YEAR 2001 2002 2003 2004 2005 2006 2007 ELECTRICAL GENERATORS SOLD 74 79 80 90 105 142 122
Table 5.7
Notice code instead of actual years
Program 5.3A
r2 says model predicts about 80% of the variability in demand Significance level for F-test indicates a definite relationship
Program 5.3B

The forecast equation is
56.71 10.54 X Y
To project demand for 2008, we use the coding
system to define X = 8
(sales in 2008) = 56.71 + 10.54(8) = 141.03, or 141 generators
Likewise for X = 9
(sales in 2009) = 56.71 + 10.54(9) = 151.57, or 152 generators


160 150 140 Generator Demand 130 120 110

Actual Demand Line Trend Line 56.71 10.54 X Y
100
90 80 70 60
50
| | | | | | | | |
Figure 5.5
2001 2002 2003 2004 2005 2006 2007 2008 2009 Year
Program 5.4A
Program 5.4B
Seasonal Variations
Recurring variations over time may
indicate the need for seasonal adjustments in the trend line A seasonal index 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
5 61
Seasonal Variations
Eichler Supplies sells telephone
answering machines Data has been collected for the past two years sales of one particular model They want to create a forecast that includes seasonality
5 62
Seasonal Variations
SALES DEMAND MONTH January February March April May YEAR 1 80 85 80 110 115 YEAR 2 100 75 90 90 131 AVERAGE TWOYEAR DEMAND 90 80 85 100 123 MONTHLY DEMAND 94 94 94 94 94 AVERAGE SEASONAL INDEX 0.957 0.851 0.904 1.064 1.309
June
July August September October November December
120
100 110 85 75 85 80
110
110 90 95 85 75 80 1,128 = 94 12 months
115
105 100 90 80 80 80
94
94 94 94 94 94 94
1.223
1.117 1.064 0.957 0.851 0.851 0.851
Total average demand = 1,128 Average monthly demand =
Average two-year demand Seasonal index = Average monthly demand

Table 5.8
Seasonal Variations
The calculations for the seasonal indices are
Jan.
Feb. Mar. Apr. May
1,200 0.957 96 12 1,200 0.851 85 12 1,200 0.904 90 12 1,200 1.064 106 12 1,200 1.309 131 12 1,200 1.223 122 12 1,200 1.117 112 12 1,200 1.064 106 12 1,200 0.957 96 12 1,200 0.851 85 12 1,200 0.851 85 12 1,200 0.851 85 12
July
Aug. Sept. Oct. Nov.
June
Dec.
Regression with Trend and 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
a b1 X 1 b2 X 2 b3 X 3 b4 X 4 Y
where X1 X2 X3 X4 = time period = 1 if quarter 2, 0 otherwise = 1 if quarter 3, 0 otherwise = 1 if quarter 4, 0 otherwise
Program 5.6A
Program 5.6B (partial)


The resulting regression equation is
104.1 2.3 X 1 15.7 X 2 38.7 X 3 30.1X 4 Y

Using the model to forecast sales for the first two
quarters of next year

104.1 2.3(13) 15.7(0) 38.7(0) 30.1(0) 134 Y 104.1 2.3(14 ) 15.7(1) 38.7(0) 30.1(0) 152 Y
These are different from the results obtained
using the multiplicative decomposition method Use MAD and MSE to determine the best model

American Airlines original spare parts inventory
system used only time-series methods to forecast the demand for spare parts
This method was slow to responds to even moderate
changes in aircraft utilization let alone major fleet expansions
They developed a PC-based system named RAPS
which uses linear regression to establish a relationship between monthly part removals and various functions of monthly flying hours
The computation now takes only one hour instead of
the days the old system needed Using RAPS provided a one time savings of $7 million and a recurring annual savings of nearly $1 million
Monitoring and Controlling Forecasts

Tracking signals can be used to monitor
the performance of a forecast Tacking signals are computed using the following equation
RSFE Tracking signal MAD
where
forecast error MAD n
5 70

Signal Tripped Upper Control Limit + 0 MADs Tracking Signal
Acceptable Range
Lower Control Limit
Time
Figure 5.7

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

How do you decide on the upper and lower
limits?
Too small a value will trip the signal too often and
too large will cause a bad forecast

Plossl & Wight use maximums of 4 MADs for
high volume stock items and 8 MADs for lower volume items
One MAD is equivalent to approximately 0.8
standard deviation so that 4 MADs =3.2 s.d.

For a forecast to be in control, 89% of the errors
are expected to fall within 2 MADs, 98% with 3 MADs or 99.9% within 4 MADs whenever the errors are approximately normally distributed
Kimballs Bakery Example

Tracking signal for quarterly sales of croissants
TIME PERIOD FORECAST DEMAND ACTUAL DEMAND ERROR RSFE |FORECAST | | ERROR | CUMULATIVE ERROR MAD TRACKING SIGNAL
1 2 3 4 5 6
100 100 100 110 110 110
90 95 115 100 125 140
10 5 +15 10 +15 +30
10 15 0 10 +5 +35
10 5 15 10 15 30
10 15 30 40 55 85
10.0 7.5 10.0 10.0 11.0 14.2
1 2 0 1 +0.5 +2.5
n 6 RSFE 35 Tracking signal 2.5MAD s MAD 14.2

forecast error 85 MAD 14.2
Forecasting at Disney
The Disney chairman receives a daily
report from his main theme parks that contains only two numbers the forecast of yesterdays attendance at the parks and the actual attendance
An error close to zero (using MAPE as the
measure) is expected
The annual forecast of total volume
conducted in 1999 for the year 2000 resulted in a MAPE of 0
5 75
Using The Computer to Forecast

Spreadsheets can be used by small and
medium-sized forecasting problems More advanced programs (SAS, SPSS, Minitab) handle time-series and causal models May automatically select best model parameters Dedicated forecasting packages may be fully automatic May be integrated with inventory planning and control

05 Forecasting

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

05 Forecasting

Uploaded by

Copyright:

Available Formats

Chapter 5

2008 Prentice-Hall, Inc. 2009 Prentice-Hall, Inc.

2009 Prentice-Hall, Inc.

Figure 5.1 Decomposition

the future based on the past Common time-series models are

Regression analysis is used in trend

projections and one type of decomposition model

2009 Prentice-Hall, Inc.

2009 Prentice-Hall, Inc.

three different products

COMPACT DISC PLAYERS

200 180 160 140 120 100

Measures of Forecast Accuracy

2009 Prentice-Hall, Inc.

Measures of Forecast Accuracy

2009 Prentice-Hall, Inc.

Measures of Forecast Accuracy

forecast error 160 MAD 17.8

2009 Prentice-Hall, Inc.

Measures of Forecast Accuracy

accuracy The mean squared error

The mean absolute percent error

error actual MAPE 100% n

Measures of Forecast Accuracy

Sum of |errors| MAD

2009 Prentice-Hall, Inc.

Hospital Days Forecast Error Example

2009 Prentice-Hall, Inc.

Hospital Days Forecast Error Example

2009 Prentice-Hall, Inc.

Time-Series Forecasting Models

2009 Prentice-Hall, Inc.

2009 Prentice-Hall, Inc.

Year 1 Figure 5.3

2009 Prentice-Hall, Inc.

models The multiplicative model Demand = T x S x C x R

irregularities in the data series

Moving average forecast

Sum of demands in previous n periods n

2009 Prentice-Hall, Inc.

Wallace Garden Supply Example

2009 Prentice-Hall, Inc.

Wallace Garden Supply Example

(16 + 19 + 23)/3 = 19.33

2009 Prentice-Hall, Inc.

Weighted Moving Averages

w1Yt w2Yt 1 ... wnYt n1 Ft 1 w1 w2 ... wn

Weighted Moving Averages

Wallace Garden Supply Example

Wallace Garden Supply Example

THREE-MONTH WEIGHTED MOVING AVERAGE

[(3 X 19) + (2 X 16) + (13)]/6 = 17.00

Wallace Garden Supply Example

Wallace Garden Supply Example

The idea is simple the new estimate is the

Exponential Smoothing Example

If actual demand in March was 136 autos, the

April forecast would be

Selecting the Smoothing Constant

2009 Prentice-Hall, Inc.

Port of Baltimore Example

178.22 = 178.02 + 0.10(180 178.02)

2009 Prentice-Hall, Inc.