SIMPLE MOVING AVERAGE:

EXAMPLE: The data in the first two columns of the following table depicts the sales of the company. The first
two columns show the months and the sales. Calculate the forecasted value for the month of January using 3
year & 6 Year moving average method & verify the calculations.

PAST SALES OF FORECAST PRODUCED BY

GENERATORS
3 MONTHS MOVING 6 MONTHS MOVING
MONTH ACTUAL UNITS SOLD AVERAGE AVERAGE

JANUARY 450
FEBRUARY 440
MARCH 460
APRIL 410 450.00
MAY 380 436.67
JUNE 400 416.67
JULY 370 396.67 423.33
AUGUST 360 383.33 410.00
SEPTEMBER 410 376.67 396.67
OCTOBER 450 380.00 388.33
NOVEMBER 470 406.67 395.00
DECEMBER 490 443.33 410.00
JANUARY 470.00 425.00

EXAMPLE: Using the data given in the illustration 1 forecast the demand for the
period 1987 to 1991 using
3- year moving average and
5- year moving average
Find which one gives a lower error in the forecast

PAST SALES OF GENERATORS FORECAST PRODUCED BY

3 MONTHS MOVING 5 MONTHS MOVING

YEAR DEMAND AVERAGE AVERAGE
FORECAST FORECAST
PRODUCED ERROR PRODUCE ERROR
BY D BY
1983 100
1984 105
1985 103
1986 107 102.67 4.33
1987 109 105.00 4.00
1988 110 106.33 3.67 104.80 5.20
1989 115 108.67 6.33 106.80 8.20
1990 117 111.33 5.67 108.80 8.20
1991 - 114.00 - 111.60 -

Characteristics of Moving Averages:

The different moving averages produce different forecasts
The greater the number of periods in the moving average, the greater the
smoothing effect.
If the underlying trend of the past data is through to be fairly constant with
substantial randomness, then greater number of periods should be chosen.
WEIGHTED MOVING AVERAGE:
EXAMPLE: The demand for defense machinery is shown in the table. Forecast the
demand for month 11, weighting the past three months as follows: Last month 0.5, two
months ago 0.3 and three month ago 0.2. The defense officer is asked to forecast the
demand for the 11th month using three period moving average technique.

3 MONTH WEIGHTED
MONTH DEMAND MOVING AVERAGE
1 120
2 110
3 90
4 115 102
5 125 106.5
6 117 115
7 121 119
8 126 120.6
9 132 122.7
10 128 128
11 - 128.8

EXPONENTIAL SMOOTHING:
EXAMPLE: The data are given in the forecast two columns and the forecasts have been
prepared using the values of as 0.2 and 0.8
MONTH ACTUAL UNITS EXPONENTIAL FORECASTS
 SOLD = 0.2 = 0.8
JANUARY 450 450.00 450.00
FEBRUARY 440 450.00 450.00
MARCH 460 448.00 442.00
APRIL 410 450.40 456.40
MAY 380 442.32 419.28
JUNE 400 429.86 387.86
JULY 370 423.88 397.57
AUGUST 360 413.11 375.51
SEPTEMBER 410 402.49 363.10
OCTOBER 450 403.99 400.62
NOVEMBER 470 413.19 440.12
DECEMBER 490 424.55 464.02
JANUARY - 437.64 484.80
It is apparent that the higher value, 0.8, produces a forecast which adjusts more readily
to the most recent sales.
EXAMPLE: Data on production of item for 30 periods are tabulated below. Determine
which value of the smoothing constant , out of 0.1 and 0.3, will lead to the best simple
exponential smoothing model. The first 15 values can be used for initialization of the
model and then check the error in the forecast as asked after the table.

Production Production Production

Month Month Month
(in tones) (in tones) (in tones)
1 30.5 11 25 21 27.6
2 28.8 12 0.7 22 29.9
3 31.5 13 30.9 23 30.2
4 29.9 14 31.5 24 35.5
5 31.4 15 28.1 25 30.8
6 33.5 16 30.8 26 28.8
7 25.7 17 29.8 27 30.8
8 32.1 18 30 28 32.2
9 29.1 19 29.9 29 31.2
10 30.8 20 31.5 30 29.8

Use the squared error or the mean squared error as the basis of comparison of the
performances.
SOLUTION:
The following table gives the forecasted values for the two different values of the
smoothing constant for the first 15 periods.
 Production = 0.1 = 0.3
Month (in tones) Forecast Forecast
1 30.5 30.50 30.50
2 28.8 30.50 30.50
3 31.5 30.33 29.99
4 29.9 30.45 30.44
5 31.4 30.39 30.28
6 33.5 30.49 30.62
7 25.7 30.79 31.48
8 32.1 30.28 29.75
9 29.1 30.47 30.45
10 30.8 30.33 30.05
11 25.7 30.38 30.27
12 30.9 29.91 28.90
13 31.5 30.01 29.50
14 28.1 30.16 30.10
15 30.8 29.95 29.50

The following table now gives the forecasted values and also checks the errors in the
forecast for the last 15 periods.

= 0.1 = 0.3 Forecast

Production
Month (in tones) Squared Squared
Forecast Error Forecast Error
Error Error
16 29.50 30.04 -0.54 0.29 29.89 -0.39 0.15
17 29.80 29.98 -0.18 0.03 29.77 0.03 0.00
18 30.00 29.96 0.04 0.00 29.78 0.22 0.05
19 29.90 29.97 -0.07 0.00 29.85 0.05 0.00
20 31.50 29.96 1.54 2.37 29.86 1.64 2.68
21 27.6 30.12 -2.52 6.33 30.35 -2.75 7.58
22 29.9 29.86 0.04 0.00 29.53 0.37 0.14
23 30.2 29.87 0.33 0.11 29.64 0.56 0.31
24 35.5 29.90 5.60 31.35 29.81 5.69 32.40
25 30.8 30.46 0.34 0.12 31.52 -0.72 0.51
26 28.8 30.49 -1.69 2.87 31.30 -2.50 6.25
27 30.8 30.32 0.48 0.23 30.55 0.25 0.06
28 32.2 30.37 1.83 3.34 30.63 1.57 2.48
29 31.2 30.56 0.64 0.42 31.10 0.10 0.01
30 29.8 30.62 -0.82 0.67 31.13 -1.33 1.76
Total Squared Error 48.13 54.41
Mean Squared Error 3.21 3.63

EXAMPLE: Combination of Nave, 3 period moving average, simple exponential &

computation of errors
Data regarding the sales of a particular item in the 12 time periods is given below. The
manager wants to forecast 1 time period ahead in order to plan properly. Determine the
forecasting using
Nave Method
3 Period moving average
Simple Exponential smoothing taking =0.1
Also compute the errors MAD, MAPE and MSE to check the forecasting accuracy for the
last six periods.
Time
Period Demand
(T)
1 28
2 27
3 33
4 25
5 34
6 33
7 35
8 30
9 33
10 35
11 27
12 29

SOLUTION:
The following table shows the nave forecasting model. In this model the next
periods forecast is the present periods actual observed value.
Time Demand (D) Forecast Absolute Absolute Squared
Period (F) Error Percentage Error
 (T) (E) Error (E^2)

1 28 - - -
2 27 28 1 3.70 1
3 33 27 6 18.18 36
4 25 33 8 32.00 64
5 34 25 9 26.47 81
6 33 34 1 3.03 1
7 35 33 2 5.71 4
8 30 35 5 16.67 25
9 33 30 3 9.09 9
10 35 33 2 5.71 4
11 27 35 8 29.63 64
12 29 27 2 6.90 4
13 - 29 - - -
Total of Time Periods 47.00 157.10 293.00
MAD 4.27
MAPE 14.28
MSE 26.64

The following table shows the 3 period moving average model

Time Forecast by 3 Absolute

Period Demand (D) period moving Error (E)
(T) average (F)
1 28 -
2 27 -
3 33 -
4 25 29.3 4.3
5 34 28.3 5.7
6 33 30.7 2.3
7 35 30.7 4.3
8 30 34.0 4.0
9 33 32.7 0.3
10 35 32.7 2.3
11 27 32.7 5.7
12 29 31.7 2.7
13 - 30.3 -
MSE 13.30
 The simple exponential smoothing model with smoothing constant = 0.1 is
presented below

Time = 0.1
Period Demand (D) Squared
(T) Forecast Error Error
1 28 30 -2.00 4.00
2 27 29.80 -2.80 7.84
3 33 29.52 3.48 12.11
4 25 29.87 -4.87 23.70
5 34 29.38 4.62 21.33
6 33 29.84 3.16 9.97
7 35 30.16 4.84 23.44
8 30 30.64 -0.64 0.41
9 33 30.58 2.42 5.86
10 35 30.82 4.18 17.47
11 27 31.24 -4.24 17.97
12 29 30.81 -1.81 3.29
13 - 30.63
MSE 12.28

LINEAR TREND:
EXAMPLE: The following table gives the number of items produced in a factory
between 1988 and 1999. Determine the value of the item for the period of
2000 using rend analysis.
Perio Items Sold
d (D)
1988 600
1989 1550
1990 1500
1991 1500
1992 1500
1993 3100
1994 2600
1995 2900
1996 3800
1997 4500
1998 4000
1999 4900
 Verify the calculations of a & b on your own.

SOLUTION:

X y Xy X^2 y^2
1 600 600 1 360000
2 1550 3100 4 2402500
3 1500 4500 9 2250000
4 1500 6000 16 2250000
5 1500 7500 25 2250000
6 3100 18600 36 9610000
7 2600 18200 49 6760000
8 2900 23200 64 8410000
9 3800 34200 81 14440000
10 4500 45000 100 20250000
11 4000 44000 121 16000000
12 4900 58800 144 24010000
Total 78 32450 263700 650 108992500

b = 359.61 a = 441.66
Y = 441.6 + 359.6 *X

The final equation for Y shows an intercept of 441.6 and a slope of 359.6. The slope
shows that for every unit change in X, Y changes by 359.6
Strictly based on the equation, forecasts for period 13 would be Y13= 441.6 + 359.6
(13) = 5116.4
EXAMPLE: A manufacturer of critical components for two-wheelers in the automotive
sector is interested in forecasting the trend of demand during the next year as a key input
to its annual planning exercise. Information on the past sales is available for the last three
years. Extract the trend component of the time series data and use it for predicting the
future demand of the components.
Actual demand in the last three years (in thousands of units):

Actual
Periods Demand
Year 1 : Q1 360
 Year 1 : Q2 438
Year 1 : Q3 359
Year 1 : Q4 406
Year 2 : Q1 393
Year 2 : Q2 465
Year 2 : Q3 387
Year 2 : Q4 464
Year 3 : Q1 505
Year 3 : Q2 618
Year 3 : Q3 443
Year 3 : Q4 540

SOLUTION:
The model for forecasting using linear Trend is denoted by Y = a +bX.
Computation for trend extraction using the method of least squares is shown
below:

Periods X y Xy X^2
Year 1 : Q1 1 360 360 1
Year 1 : Q2 2 438 876 4
Year 1 : Q3 3 359 1077 9
Year 1 : Q4 4 406 1624 16
Year 2 : Q1 5 393 1965 25
Year 2 : Q2 6 465 2790 36
Year 2 : Q3 7 387 2709 49
Year 2 : Q4 8 464 3712 64
Year 3 : Q1 9 505 4545 81
Year 3 : Q2 10 618 6180 100
Year 3 : Q3 11 443 4873 121
Year 3 : Q4 12 540 6480 144
Sum 78 5378 37191 650

Therefore, using the values from Table, we can compute b, where

b = 15.59 and a = 346.91
The linear trend for the time series is given by Y = 346.91 + 15.59X
The trend components of forecasts for the four quarters in Year 4 are obtained by
substituting the values of 13 to 16 for X, respectively.
 Forecast for Q1 of Year 4 = 346.91 + 15.59 * 13 = 550
Forecast for Q2 of Year 4 = 346.91 + 15.59 * 14 = 565
Forecast for Q3 of Year 4 = 346.91 + 15.59 * 15 = 581
Forecast for Q4 of Year 4 = 346.91 + 15.59 * 16 = 596

SEASONAL COMPONENT:
EXAMPLE: Extract the seasonal component and adjust the forecast obtained for
seasonality for the following data
Actual Actual
Periods Periods
Demand Demand
Year 1 : Q1 360 Year 2 : Q3 387
Year 1 : Q2 438 Year 2 : Q4 464
Year 1 : Q3 359 Year 3 : Q1 504
Year 1 : Q4 406 Year 3 : Q2 618
Year 2 : Q1 393 Year 3 : Q3 443
Year 2 : Q2 465 Year 3 : Q4 540

SOLUTION:
Computation of seasonality index
Four Quarter Average
Actual Moving Seasonality
Period demand for
Demand Average of Index
period
demand
Year 1 : Q1 360
Year 1 : Q2 438 390.75
Year 1 : Q3 359 399 394.875 0.91
Year 1 : Q4 406 405.75 402.375 1.01
Year 2: Q1 393 412.75 409.25 0.96
Year 2 : Q2 465 427.25 420 1.11
Year 2 : Q3 387 455 441.125 0.88
Year 2 : Q4 464 493.25 474.125 0.98
Year 3 : Q1 504 507.25 500.25 1.01
Year 3 : Q2 618 526.25 516.75 1.20
Year 3 : Q3 443
Year 3 : Q4 540

Computation for obtaining the seasonality index in all four quarters

 YEAR 1 YEAR 2 YEAR 3 AVERAGE
QUARTER 1 0.96 1.01 0.99
QUARTER 2 1.11 1.2 1.16
QUARTER 3 0.91 0.88 0.90
QUARTER 4 1.01 0.98 1.00

The forecast after the seasonality index for the next four quarters is given by:

Trend Seasonality
Seasonality
YEAR 4 adjusted adjusted
Index
forecast forecast
QUARTER 1 550 0.99 541.75
QUARTER 2 565 1.16 652.575
QUARTER 3 581 0.90 519.995
QUARTER 4 596 1.00 593.02