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Introduction
Chapter 5
Forecasting
To accompany
Quantitative Analysis for Management, Tenth Edition,
by Render, Stair, and Hanna
Power Point slides created by Jeff Heyl
Introduction
Introduction
n
n
n
n
54
Time-Series Models
Forecasting
Techniques
Time-Series
Methods
53
Forecasting Models
Qualitative
Models
52
Causal
Methods
Delphi
Methods
Moving
Average
Regression
Analysis
Jury of Executive
Opinion
Exponential
Smoothing
Multiple
Regression
Sales Force
Composite
Trend
Projections
Consumer
Market Survey
Decomposition
Figure 5.1
55
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Qualitative Models
Causal Models
or subjective factors
57
Qualitative Models
58
Scatter Diagrams
Scatter diagrams are helpful when forecasting time-series
data because they depict the relationship between variables.
Annual Sales
Radios
450
400
350
300
250
200
150
100
50
0
Televisions
Compact
0
Discs
10
12
Time (Years)
59
Scatter Diagrams
5 10
Scatter Diagrams
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
(a)
Annual Sales of Televisions
YEAR
n Sales appear to be
330
250 l l l l l l l l l l
200
150
100
50
|
0 1 2 3 4 5 6 7 8 9 10
Time (Years)
Figure 5.2
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Scatter Diagrams
(c)
n Sales appear to be
420
increasing at a
constant rate of 10
radios per year
Sales = 290 + 10(Year)
n A reasonable
estimate of sales in
year 11 is 400
radios
400
380
360
340
320
300 l
280
|
0 1 2 3 4 5 6 7 8 9 10
(b)
Scatter Diagrams
200
l
180
l
160
140
120
100
l
l
not be perfectly
accurate because
of variation from
year to year
n Sales appear to be
increasing
n A forecast would
probably be a
larger figure each
year
l l
l
l
0 1 2 3 4 5 6 7 8 9 10
Time (Years)
Time (Years)
Figure 5.2
Figure 5.2
2009 Prentice-Hall, Inc.
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deviation (MAD)
forecast error
MAD =
n
YEAR
ACTUAL
SALES OF CD
PLAYERS
FORECAST SALES
110
ABSOLUTE VALUE OF
ERRORS (DEVIATION),
(ACTUAL FORECAST)
100
110
|100 110| = 10
120
100
|120 100| = 20
140
120
|140 120| = 20
170
140
|170 140| = 30
150
170
|150 170| = 20
160
150
|160 150| = 10
190
160
|190 160| = 30
200
190
|200 190| = 10
10
190
200
11
190
|190 200| = 10
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YEAR
FORECAST SALES
ABSOLUTE VALUE OF
ERRORS (DEVIATION),
(ACTUAL FORECAST)
110
100
110
|100 110| = 10
120
100
|120 110| = 20
140
120
|140 120| = 20
170
140
|170 140| = 30
150
170
|150 170| = 20
160
150
|160 150| = 10
190
160
|190 160| = 30
200
190
|200 190| = 10
10
190
200
|190 200| = 10
11
190
accuracy
MSE =
Table 5.2
160
= 17 .8
9
error
MAPE =
actual
n
100%
(error )
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ACTUAL
SALES OF CD
PLAYERS
forecast error
MAD =
Table 5.2
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Actual CD Sales
110
Forecast Sales
|Actual -Forecast|
100
110
10
120
100
20
140
120
20
170
140
30
150
170
20
160
150
10
190
160
30
200
190
10
10
190
200
10
11
190
Sum of |errors|
160
MAD
17.8
Forecast
250
Actual
243
FEB
320
315
MAR
275
286
APR
260
256
MAY
250
241
JUN
275
298
JUL
300
292
AUG
325
333
SEP
320
OCT
NOV
DEC
AVERAGE
|error|
error2
|error/actual|
49
0.03
25
0.02
11
121
0.04
16
0.02
81
0.04
23
529
0.08
64
0.03
64
0.02
326
36
0.02
350
378
28
784
0.07
365
382
17
289
380
396
16
MAD=
11.83
Actual
250
320
275
260
250
275
300
325
320
350
365
380
243
315
286
256
241
298
292
333
326
378
382
396
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0.04
256
MSE=
192.83
Forecast
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Month
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
0.04
MAPE=
.0381*100 =
3.81
2009 Prentice-Hall, Inc.
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Decomposition of a Time-Series
Decomposition of a Time-Series
Demand for Product or Service
Figure 5.3
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Trend
Component
Seasonal Peaks
Actual
Demand
Line
Average Demand
over 4 Years
Year
1
Year
2
Time
Year
3
Year
4
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Nave Forecast *
Nave Forecast *
Actual Demand
35
40
35
55
40
65
55
60
65
60
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Moving Averages
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Moving Averages
n Mathematically
over time
n The next forecast is the average of the most recent n data values
from the time series
n Conditions:
n There is a historical record of actual events.
n The forecast is based on a determined number of past
periods.
n The past periods have equal importance.
n The most recent period of data is added and the oldest is
dropped
nThis methods tends to smooth out short-term irregularities in
the data series
Forecast
Period
Ft +1 =
Yt + Yt 1 + ... + Yt n+1
n
where
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MONTH
January
10
February
12
March
13
April
16
May
19
June
23
July
26
August
30
September
28
October
18
November
16
December
14
January
Table 5.3
2009 Prentice-Hall, Inc.
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Ft +1 =
n Mathematically
Ft +1 =
where
wi = weight for the ith observation
2009 Prentice-Hall, Inc.
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THREE-MONTH WEIGHTED
MOVING AVERAGE
MONTH
January
10
February
12
March
13
April
16
May
19
June
23
July
26
August
30
September
28
October
18
3 x Sales last month + 2 x Sales two months ago + 1 X Sales three months ago
November
16
December
14
January
PERIOD
3
2
1
Last month
Two months ago
Three months ago
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Table 5.4
2009 Prentice-Hall, Inc.
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Exponential Smoothing
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Exponential Smoothing
n Mathematically
Ft +1 = Ft + (Yt Ft )
where
New forecast =
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is
key to obtaining a good forecast
n The objective is always to generate an
accurate forecast
n The general approach is to develop trial
forecasts with different values of and
select the that results in the lowest MAD
= 0.20, what
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QUARTER
ACTUAL
TONNAGE
UNLOADED
FORECAST
USING =0.10
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ACTUAL
TONNAGE
UNLOADED
180
175
168
175.5
FORECAST
USING =0.50
FORECAST
WITH = 0.10
180
175
175
168
177.5
159
174.75
159
172.75
175
173.18
175
165.88
190
170.44
190
173.36
205
180.22
205
175.02
180
192.61
180
178.02
182
186.30
184.15
182
Best choice
ABSOLUTE
DEVIATIONS
FOR = 0.10
5..
7.5..
15.75
1.82
16.64
29.98
1.98
178.22
3.78
Table 5.5
2009 Prentice-Hall, Inc.
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Exponential Smoothing
Problem
MAD =
ABSOLUTE
DEVIATIONS
FOR = 0.50
175
5.
177.5
9.5..
172.75
13.75
165.88
9.12
170.44
19.56
180.22
24.78
192.61
12.61
186.30
4.3..
82.45
|deviations|
n
10.31
98.63
MAD =
12.33
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Table 5.6
FORECAST
WITH = 0.50
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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
n
Compute a 2-month moving average
n
n
Abs. Dev
3 month WMA
Abs. Dev
Exp.Sm.
MAD
37.00
3.00
39.10
1.90
3.14
40.43
3.43
38.57
6.43
38.03
6.97
9.00
42.14
7.86
42.91
7.09
47.50
4.50
46.71
3.71
47.87
4.87
46.50
0.50
45.29
1.71
44.46
2.54
45.00
11.00
46.29
9.71
46.24
9.76
38.50
2.50
40.50
3.50
40.14
39.00
6.00
41.00
51.50
51.57
53.07
5.29
5.43
4.95
Trend Projection
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Trend Projection
n Trend projections are used to forecast time-series data
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Trend Projection
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Trend Projection
Y = b + b1 X
b1 = xy nx y
------------x2 nx 2
Abs. Dev
37.00
Dist7
2 month
MA
b0 = y b1 x
Where:
= summation sign for n data points
x = values of independent variables
y= values of dependent variables
n = number of data points or observations
x = average of the values of the xs
y = average of the values of the ys
2009 Prentice-Hall, Inc.
*
Dist1
Dist5
Dist2
Time
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Dist3
Dist6
Dist4
Figure 5.4
2009 Prentice-Hall, Inc.
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Midwestern Manufacturing
Company Example
Midwestern Manufacturing
Company Example
2001
2002
2003
2004
2005
2006
2007
74
79
80
90
105
142
122
Y = 56.71+ 10.54 X
n To project demand for 2008, we use the coding
system to define X = 8
Table 5.7
5 57
Midwestern Manufacturing
Company Example
Generator Demand
140
Trend Line
Y = 56.71+ 10.54 X
130
120
110
100
90
70
150
80
Example 2
n The rated power capacity (in
160
l
l
60
50
|
Figure 5.5
5 60
Capacity,
-2.5
115
6.25
-287.25
-1.5
120
2.25
-180
120
-0.5
118
0.25
-59
118
+0.5
124
0.25
+62
124
+1.5
123
2.25
+183.5
123
+2.5
130
6.25
+325
130
Year
Rated
Capacity
(hrs/wk)
115
Yr.
730
X2
17.5
xy
45
y = 121.67 + 2.57x
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Seasonal Variations
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Seasonal Variations
answering machines
includes seasonality
seasons.
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Seasonal Variations
SALES DEMAND
MONTH
YEAR 1
YEAR 2
January
80
100
February
85
75
March
80
90
110
90
May
115
131
June
120
110
July
100
110
August
110
90
September
85
95
October
75
85
November
85
75
December
80
80
April
Seasonal Variations
MONTHLY
DEMAND
AVERAGE
SEASONAL INDEX
94
0.957
94
0.851
94
0.904
94
1.064
94
1.309
94
1.223
94
1.117
94
1.064
94
0.957
94
0.851
94
0.851
94
0.851
1,128
= 94
12 months
Table 5.8
Jan.
1,200
0.957 = 96
12
July
1,200
1.117 = 112
12
Feb.
1,200
0.851 = 85
12
Aug.
1,200
1.064 = 106
12
Mar.
1,200
0.904 = 90
12
Sept.
1,200
0.957 = 96
12
Apr.
1,200
1.064 = 106
12
Oct.
1,200
0.851 = 85
12
May
1,200
1.309 = 131
12
Nov.
1,200
0.851 = 85
12
June
1,200
1.223 = 122
12
Dec.
1,200
0.851 = 85
12
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174
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CHAPTER 5 FORECASTING
TABLE 5.11
Centered Moving
Averages and
Seasonal Ratios for
Turner Industries
YEAR
QUARTER
SALES ($1,000,000s)
108
125
150
CMA
132.000
SEASONAL RATIO
1.136
141
134.125
1.051
116
136.375
0.851
134
138.875
159
141.125
0.965
1.127
152
143.000
1.063
123
145.125
0.848
142
147.875
0.960
168
165
ter 1 for
for year 2.each
The average will
be
1. Compute a CMA
observation
(where
we take quarters 2, 3, and 4 of year 1, plus one-half of quarter 1 for year 1 and one-half of quar-
1.
2.
3.
4.
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Figure 5.5 provides a scatterplot of the Turner Industries data and the CMAs. Notice that
the plot of the CMAs is much smoother than the original data. A definite trend is apparent in the
data.
Seasonal Ratio =
observation/CMA for
that observation
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Seasonal Ratio =
observation/CMA for
that observation
Average seasonal ratios to
get seasonal
indices.
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deseasonalized data.
174
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CHAPTER 5 FORECASTING
TABLE 5.11
Centered Moving
Averages and
Seasonal Ratios for
Turner Industries
YEAR
QUARTER
SALES ($1,000,000s)
108
125
CMA
SEASONAL RATIO
150
132.000
1.136
141
134.125
1.051
116
136.375
0.851
134
138.875
0.965
159
141.125
1.127
152
143.000
1.063
123
145.125
0.848
142
147.875
0.960
168
165
we take quarters 2, 3, and 4 of year 1, plus one-half of quarter 1 for year 1 and one-half of quarter 1 for year 2. The average will be
CMA 1quarter 3 of year 12 =
= 132.00
We compare the actual sales in this quarter to the CMA and we have the following seasonal
ratio:
Seasonal ratio =
Sales in quarter 3
150
=
= 1.136
CMA
132.00
Thus, sales in quarter 3 of year 1 are about 13.6% higher than an average quarter at this time.
All of the CMAs and the seasonal ratios are shown in Table 5.11.
Since there are two seasonal ratios for each quarter, we average these to get the seasonal
index. Thus,
The sum of these indices should be the number of seasons (4) since an average season should
have an index of 1. In this example, the sum is 4. If the sum were not 4, an adjustment would be
made. We would multiply each index by 4 and divide this by the sum of the indices.
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5 78
Figure 5.5 provides a scatterplot of the Turner Industries data and the CMAs. Notice that
the plot of the CMAs is much smoother than the original data. A definite trend is apparent in the
data.
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Example 2
n Demand for Carriers most
Example 3
Period
Year
Quarter
Demand
1986
126
200
243
167
132
211
243
167
131
10
208
11
251
12
171
1987
1988
Month
Sales
Last Year
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This Year
Jan
Feb
11
15
Mar
15
17
Apr
16
16
May
15
16
Jun
25
23
Jul
21
20
Aug
24
25
Sep
24
28
Oct
19
21
Nov
20
Dec
25
28
29
2009 Prentice-Hall, Inc.
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MS Application-Forecasting:
Taco Bell
Example 3 [Steps]
n Determine the seasonal index.
n Determine the deseasonalized sales.
n Determine the trend line formula.
n Determine the adjusted monthly
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12