1

A Simple Moving Average Example

demand in previous n periods

n
Moving Average Forecast =
Where n is the number of periods in the moving average

Example: The demand for Gingerbread Men is shown in the table. Forecast the demand for
month 7.
Month
1
2
3
4

Demand
1500
2200
2700
4200

7800

6
7

5400

Calculation

Forecast

1500 2200 2700

2133
3

2133

2200 2700 4200

3033.3
3

3033

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Bak ery Ginge rbre ad M an Sales
9000
8000
7000
6000
5000
Sales

Demand

4000

Forec ast

3000
2000
1000
0
1

Period

A
Weighted Moving Average Example

Weighted Moving Average Forecast =

(weight for period n ) (demand in period n )

weights

Example: The demand for Gingerbread Men is shown in the table. Forecast the demand for
month 7, weighting the past three months as follows: last month 3, two months ago 2, three
months ago 3
Period
Last Month
Two Months Ago
Three Months Ago
Sum of Weights
Month
1
2
3
4

Demand
1500
2200
2700
4200

7800

Weight
3
2
1

Calculation

Forecast

(1500 x1) (2200 x 2) ( 2700 x3)

2333
6

2333

3
6

5400

7
Bak ery Gingrbread M an Sales
9000

8000

7000

6000

5000
Sales

4000

3000

2000

1000

0
1

Period

An Exponential Smoothing Example

Exponential Smoothing Forecast Ft = Ft-1 + (At-1 Ft-1)
Where

Ft
Ft-1

At-1

= New Forecast
= Previous Forecast
= Smoothing Constant: (0 1)
= Previous Periods Actual Demand

Example: The demand for Gingerbread Men is shown in the table. Forecast the demand for
month 7, using a smoothing constant of 0.4. The forecast for month 1 is 1500 units.
Month
1
2

Demand
1500
2200

Calculation
1500 + 0.4(1500 1500)

Forecast
1500
1500

2700

1500 + 0.4(2200 1500)

1780

4200

7800

5400

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7

Bak ery Ginge rbre ad M an Sales

6000

5000

4000

Sales

3000

Demand

Forec ast

2000

1000

0
1

Period

A Mean Absolute Deviation Example

forecast errors
n

MAD =

Example: Calculate the MAD for the value of used in the Exponential Smoothing Example.
Month
1
2
3

Demand
1500
2200
2700

Forecast
1500
1500
1780

4200

2148

7800

2969

5400

4901

Error
1500 1500 = 0
2200 1500 = 700

| Error |
0
700

Total:

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MAD:

A Mean Squared Error Example

forecast errors

MSE =

Example: Calculate the MAD for the value of used in the Exponential Smoothing Example.
Month
1
2
3

Demand
1500
2200
2700

Forecast
1500
1500
1780

4200

2148

7800

2969

5400

4901

Error2
0
490000

Error
1500 1500 = 0
2200 1500 = 700

Total:
MSE:

An Exponential Smoothing With Trend Adjustment Example

Forecast Including Trend Ft = (At-1) + (1 - )(Ft-1 + Tt-1)
Trend Tt = (Ft Ft-1) + (1 - )T t-1
Where

Ft
Tt
At

= Exponentially smoothed forecast for period t

= Exponentially smoothed trend for period t
= Actual demand for period t
= Smoothing constant for the average (0 1)

= Smoothing constant for the trend (0 1)

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Example: The demand for Gingerbread Men is shown in the table. Forecast the demand for
month 7, using a smoothing constant for the average of 0.4, and a smoothing constant for the
trend of 0.2. The forecast for month 1 is 1500 units and the trend for month 1 is 200 units.
Month
1
2
3

Demand Forecast
1500
1500
2200
0.4(1500) + 0.6(1700)
= 1620
2700

4200

7800

5400

Trend
200
0.2(1620 1500) + 0.8(200)
= 184

FIT
1700
1804

Bakery Gingerbread Man Sales

7000

6000

5000

4000

Sales

Demand

Forecast

Trend

FIT

3000

2000

1000

0
1

Period

Least Squares Trend Projection Example

y a bx
Where

y
a
b

= computed value of variable to be predicted (ie dependant variable)

= y-axis intercept
= slope of regression line

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x

= independent variable

We can determine a and b with the equations:

b

xy - nxy
x nx
2

a y - bx

Example: The demand for Gingerbread Men is shown in the table. Forecast demand for
period 7 by fitting a single line trend to the data.
Month (x)
1
2
3

Demand (y)
1500
2200
2700

4200

7800

5400

x =

y =

x2
1
4

xy
(1)(1500) = 1500
(2)(2200) = 4400

x2 =

xy =

xy - nxy
x nx
2

y
n

a y - bx =

Thus, our trend equation is: y =

To calculate the forecast for month x = 7, we have: y =

Seasonal Forecast Example

Average Annual

Demand

12 months

Average Monthly Demand =

Average Annual Demand

Seasonal Index = Average Monthly Demand
Example: The demand for gingerbread men over the past three years is shown in the table. If
we expect the total yearly demand in 2002 to be 45,000 units, what will be our forecasted
monthly demands in 2002?
Mont
h
1
2

1999

2000

2001

Average Annual Demand

1100
1800

1300
2000

1500
2200

(1100 + 1300 + 1500) / 3 = 1300

2300

2500

2700

3800

4000

4200

4500

4700

4900

5000

5200

5400

5500

5700

5900

4800

5000

5200

3000

3200

3400

10

2200

2400

2600

11

1500

1700

1900

12

1200

1400

1600
Average Monthly Demand =

Seasonal Index for January = 1300 /

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45000

Forecast for January 2002 = 12

Regression Analysis Example

y a bx

xy - nxy
x nx
2

a y - bx

Example: We think that there may be a relationship between park attendance and number of
gingerbread men sold. Data for the first six months are shown in the table. Forecast the
number of gingerbread men that will be sold in month 7 if monthly park attendance is forecast
as 25000 people.
Sales (y)

x2

xy

1
2

Attendance (x)
(,000)
8
12

1500
2200

64

(8)(1500) = 12000

14

2700

18

4200

19

7800

22

5400

x =

y =

x2 =

xy =

Month

xy - nxy
x nx
2

a y - bx =

y
n

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Thus, our regression equation is: y =

To calculate the forecast for month 7, we have: y =

Standard Error of Estimate Example

S y ,x

a y - b xy
n2

Example: Compute the Standard Error of the Estimate for our regression analysis example

S y ,x

a y - b xy
n2

Correlation Coefficient Example

r

n x

n xy x y
2

x n y 2 y
2

Example: Compute the Correlation Coefficient of the data in our regression analysis example