Ronald E.

Tio
Reporter
 Forecasting Models
Forecasting
Techniques

Time Series Causal Methods Qualitative

Methods Methods

Moving Regression Multiple Delphi

Average Analysis Regression Methods

Exponential Jury of Executive

Smoothing Opinion

Trend Sales Force

Projections Composite
 Measures of Forecast Accuracy
Bias – a technique for determining the accuracy of a forecasting
model by measuring the average error and its direction.

Bias = ∑ forecast _ errors

Mean Absolute Deviation (MAD) – a technique for determining the

accuracy of a forecasting model by taking the average of the absolute
deviations.

MAD =
∑ forecast _ errors
n
 Measures of Forecast Accuracy
Mean Square Error (MSE) - a technique for determining the accuracy of
a forecasting model by taking the average of the squared errors.

MSE =
∑ ( forecast _ errors) 2

n
Mean Absolute Percent Error (MAPE) - a technique for determining the
accuracy of a forecasting model by taking the average of the squared
errors.

1  actual − forecast 
MAPE = ∑   x100
n  actual 

1  forecast _ errors 
MAPE = ∑   x100
n  actual 
 Decomposition of a Time Series
•Trend – is the gradual upward or downward movement of the data over
time. Population shifts, changing incomes, and cultural changes often
account for such movement.

•Seasonality – is a pattern of the demand fluctuation above or below the

trend line that occurs every year. Also refers to short-term, fairly regular
variations generally related to factors such as the calendar or time of the
day.

•Cycle – are wavelike variations or patterns in the data that occur every
several years. They are usually tied into the business cycle, political and
economic conditions.

•Random Variations – are “blips” in the data caused by chance or unusual

situations; they follow no discernible pattern and does not reflect the typical
behavior; their inclusion in the data series can distort the overall picture;
whenever possible, these should be identified and removed from the data.
 Moving Averages
MA =
∑ demand _ in _ previous _ n _ periods
n
Month Actual Sales Forecast

January 10

February 12

March 13

April 16 (10 + 12 + 13) / 3 = 11.667

May 19 (12 + 13 + 16) / 3 = 13.667

June 23 (13 + 16 + 19) / 3 = 16

July 26 (16 + 19 + 23) /3 = 19.333

August 30 (19 + 23 + 26) /3 = 22.667

September 28 (23 + 26 + 30) /3 = 26.333

October 18 (26 + 30 + 28) /3 = 28

November 16 (30 + 28 + 18) /3 = 25.333

December 14 (28 + 18 + 16) /3 = 20.667

Forecast (18 + 16 + 14) /3 = 16

 Weighted Moving Averages
∑ ( weight _ for _ period _ n) x(demand _ in _ period _ n )
WMA =
∑ weights
Weights Period Month Actual Forecast
Applied Sales

3 Last Month January 10

February 12
2 2 Months March 13
Ago
April 16 [(10x1)+(12x2)+(13x3)]/6 = 12.167
1 3 Months
Ago May 19 [(12x1)+(13x2)+(16x3)]/6 = 14.333

6 Sum of June 23 [(13x1)+(16x2)+(19x3)]/6 = 17

Weights July 26 [(16x1)+(19x2)+(23x3)]/6 = 20.5
August 30 [(19x1)+(23x2)+(26x3)]/6 = 23.833
September 28 [(23x1)+(26x2)+(30x3)]/6 = 27.5
October 18 [(26x1)+(30x2)+(28x3)]/6 = 28.333
November 16 [(30x1)+(28x2)+(18x3)]/6 = 23.333
December 14 [(28x1)+(18x2)+(16x3)]/6 = 18.667
Forecast [(18x1)+(16x2)+(14x3)]/6 = 15.333
 Exponential Smoothing
New Forecast = Previous Forecast + α(Previous Actual - Previous Forecast)

Ft = Ft-1 + α(At-1 – Ft-1 )

Where:
Ft = New Forecast
Ft-1 = Previous Forecast
At-1 = Actual of Previous Period
α = smoothing constant (value between 0 and 1)
 Trend Projections
General Regression Equation: Ŷ=a + bX

where:

Ŷ = computed value of the variable to be predicted

(Dependent Variable)

a = Y – axis intercept

X = Independent Variable

b = slope of the line

 Trend Projections

b=
∑XY − n XY

∑X
2
2
−n X
b = slope of the line
X = values of the independent variable
Y = values of the dependent variable
X = average of the values of X’s
Y = average of the values of Y’s
n = number of data points or observations

a = Y −bX
 Trend Projections – Time Series
Let us consider the case of Midwestern Manufacturing Company; that firm’s
demand for electrical generators over the period 1996 – 2002 is shown below:

Year Electrical Year Time Gen X2 XY

Generators Period (X) Demand (Y)
Sold
1996 1 74 1 74
1996 74
1997 2 79 4 158
1997 79
1998 3 80 9 240
1998 80
1999 4 90 16 360
1999 90
2000 5 105 25 525
2000 105 2001 6 142 36 852
2001 142 2002 7 122 49 854
2002 122 ΣX = 28 ΣY = 692 ΣX2 = 140 ΣXY = 3,063
 Trend Projections – Time Series
X =
∑ X
=
28
=4 Y=
∑ Y = 692 = 98.86
n 7 n 7

b=
∑ XY − n XY 3,063 − (7)(4)(98.86) 295
= = = 10.54
∑ X − nX 140 − (7)(4) 2
2 2 28

a = Y − b X = 98.86 − (10.54)( 4) = 56.70

Y = a + bX = 56.70 + 10.54X

(Sales in 2003) = 56.70 + 10.54(8) = 141.02 or 141 Gen

(Sales in 2004) = 56.70 + 10.54(9) = 151.56 or 152 Gen

 Trend Projections – Time Series

Generator D emand and C omputed Trend Line

160

140

120
Generator Demand

100
Actu
80
F ore
60

40

20

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
 Trend Projections – Seasonal Variations
Ave _ Monthly _ Demand =
∑ Ave _ Demand Seasonal _ Index =
Ave _ Sales _ Demand
n Ave _ Monthly _ Demand
Month Sales Sales Ave Sales Ave Monthly Seasonal Next Year Forecast
Year 1 Year 2 Demand Index
Jan 80 100 90 94 0.9571,200 / 12 x 0.957 = 96
Feb 85 75 80 94 0.8511,200 / 12 x 0.851 = 85
Mar 80 90 85 94 0.9041,200 / 12 x 0.904 = 90
Apr 110 90 100 94 1.0641,200 / 12 x 1.064 = 106
May 115 131 123 94 1.3091,200 / 12 x 1.309 = 131
June 120 110 115 94 1.2231,200 / 12 x 1.223 = 122
July 100 110 105 94 1.1171,200 / 12 x 1.117 = 112
Aug 110 90 100 94 1.0641,200 / 12 x 1.064 = 106
Sep 85 95 90 94 0.9571,200 / 12 x 0.957 = 96
Oct 75 85 80 94 0.8511,200 / 12 x 0.851 = 85
Nov 85 75 80 94 0.8511,200 / 12 x 0.851 = 85
Dec 80 80 80 94 0.8511,200 / 12 x 0.851 = 85
1,128
 Causal Forecasting Method
General Regression Equation: Ŷ=a + bX

where:

Ŷ = computed value of the variable to be predicted

(Dependent Variable)

a = Y – axis intercept

X = Independent Variable

b = slope of the line

 Causal Forecasting Method

b=
∑XY − n XY

∑X
2
2
−n X
b = slope of the line
X = values of the independent variable
Y = values of the dependent variable
X = average of the values of X’s
Y = average of the values of Y’s
n = number of data points or observations

a = Y −bX
 Causal Forecasting Method
Y
Triple A’s Sales
X
Local PayrollX =
∑ X 18
=
X2
=3
XY

($100,000) (100,000,000) n 6
2.0

3.0
1

3
1

9
2.0

9.0 Y=
∑Y =
15
= 2. 5
n 6
∑
2.5 4 16 10.0
XY − n XY
2.0 2 4 4.0 b=
∑ X − nX
2 2
2.0 1 1 2.0

3.5 7 49 24.5
51.5 − (6)(3)(2.5)
Σ Y = 15.0 Σ X = 18 Σ X2 = 80 Σ XY = 51.5
80 − (6)(9)
a = Y − b X = 2.5 − (0.25)(3) = 1.75 b = 0.25

Ŷ = 1.75 + 0.25X sales = 1.75 + 0.25 (payroll)

sales = 1.75 + 0.25 (6) = 3.25

 Causal Forecasting Method
T rip le A C o n s tru c tio n C o m p a n y S a le s

4
3 .5

3
2 .5
Sales ($100,000)

A
2
R
1 .5

1
0 .5
0
0 1 2 3 4 5 6 7 8
 Standard Error of the Estimate
Standard Deviation of the Regression (SY,X ) is used to measure the
accuracy of the regression estimates.

SY , X =
∑ (Y − Yˆ ) 2

=
∑ Error 2

n−2 n−2

SY , X =
∑ − a∑ Y − b∑ XY
Y 2

n−2

0.375 0.375
SY , X = = = 0.09375 = 0.306
6−2 4

The standard error of estimate is $30,600 in sales.

 Correlation of Coefficient
Measures the strength and direction of relationship between two variables.
It refers to any kind of association or interdependence between two sets of
data or variables. Correlation can range from -1.00 to + 1.00. A correlation of
+1.00 indicates that changes of one variable are always matched by
changes in the other; a correlation of -1.00 indicates that increases in one
variable are matched by decreases in the other; a correlation close to zero
indicates little linear relationship between the two variables.

n∑ XY − ∑ X ∑ Y
r=
[n∑ X 2 − (∑ X ) 2 ][ n∑ Y 2 − (∑ Y ) 2 ]
Correlation of Coefficient
 Monitoring & Controlling Forecast
Tracking Signal – is a measurement of how well the forecast is predicting
actual values. The intent is to detect any bias in errors over time – values can
be positive or negative. A value of zero would be ideal; control limits of ± 4 or
± 5 are often used for a range of acceptable values.

RSFE t Running _ Sum _ of _ Forecast _ Errorst

Tracking _ Signalt = =
MAD t MADt

∑ (actual _ demand _ in _ period _ t − forecast _ demand _ in _ period _ t )

MADt
 Monitoring & Controlling Forecast
Control Chart – tells you how a forecast is behaving. It has a forecast average
and upper and lower control limits, which represents the amount of variation
that can be expected.
 Control Chart – Out of Bounds
One or more points above A run of 6 points in a row
the Upper Control Limit above the process average

One or more points below A run of 6 points in a row

the Lower Control Limit below the process average
 Monitoring & Controlling Forecast
Qtr Actual Forecast Error RSFE |e| Cumulative MADt TSt
e e
1 90 100 -10 -10 10 10 (10) / 1 = 10.0 (-10) / 10 = -1.0

2 95 100 -5 -15 5 15 (15) / 2 = 7.5 (-15) / 7.5 = -2.0

3 115 100 15 0 15 30 (30) / 3 = 10.0 (0) / 10 = 0.0

4 100 110 -10 -10 10 40 (40) / 4 = 10.0 (-10) / 10 = -1.0

5 125 110 15 5 15 55 (55) / 5 = 11.0 (5) / 11 = 0.5

6 140 110 30 35 30 85 (85) / 6 = 14.2 (35) / 14.2 = 2.5

Control Chart

3.0
2.5
2.0
1.5
1.0
0.5
MAD

0.0
-0.5 1 2 3 4 5 6
-1.0
-1.5
-2.0
-2.5