Regression and Forecasting

Prof Narayan Janakiraman

Forecasting1

Forecasting Techniques
Markets

Existing

New

Existing

Time Series Analysis Regression Analysis

Delphi Technique

Products
New
Sales Force Composite Diffusion Models Customer Survey

Forecasting2

For existing companies the need is to determine how much of the current product they are likely to sell..

Existing

Markets

New

Existing

Time Series Analysis Regression Analysis

Products
New

Forecasting3

Time Series
Simplest Method is EXTRAPOLATION
Volume of Sales

Time Past Present Future

Forecasting4

Typical Time Series Data

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Sales 37 40 41 37 45 50 43 47 56 52 55 54

Set of evenly spaced numerical data

Obtained by observing response variable at regular time periods

Forecast based only on past values

Assumes that factors influencing past and present will continue influence in future

Forecasting5

What would a plot of the data tell you?

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sales 37 40 41 37 45 50 43 47 56 52 55 54

Chart Title

Forecasting6

Plot data and connect the dots

Chart Title
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Forecasting7 Sales 37 40 41 37 45 50 43 47 56 52 55 54

Connect the dots and add a trend line

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sales 37 40 41 37 45 50 43 47 56 52 55 54

Chart Title

y = -0.1758x + 394.85 R = 0.00223

Forecasting8

Lets try moving averages, lag functions

Chart Title

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sales 37 40 41 37 45 50 43 47 56 52 55 54

3 year

39.33 39.33 41.00 44.00 46.00 46.67 48.67 51.67

54.3 53.7
Forecasting9

Weighted Average
Moving Average weights all previous data equally
What would happen if you differentially weighted the data?

Period 1 2 3 4 5 6 7 8 9 10 11 12 13

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Sales 37 40 41 37 45 50 43 47 56 52 55 54

Weighte d Avg'

39.9 38.8 41.8 45.9 45.5 46.4 50.7 52.2 54.3 53.9

t-1 t-2 t-3

0.5 0.3 0.2

Forecasting10

Exponential Smoothing
Sophisticated weighted average

Exp Year Sales Smooth 1996 37 37 1997 40 37.0 1998 41 39.7 1999 37 40.9 2000 45 37.4 2001 50 44.2 2002 43 49.4 2003 47 43.6 2004 56 46.7 2005 52 55.1 2006 55 52.3 2007 54 54.7 2008 54.1

Forecast = last period forecast + alpha * (last period demand - last period's forecast)

Forecasting11

Exponential Smoothing Tool

Single-parameter exponential smoothing is easy with Excels ToolPak. Click on Tools on the menu bar, select the Data Analysis option, and then in the Data Analysis dialog box, click on Exponential Smoothing.

The image part with relationship ID rId3 was not found in the le.

12 Forecasting12

Single-Parameter Exponential Smoothing (Figure 7-4 )

1. Enter the smoothing constant in D2.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 A B C D E F Forecast of Blitz Beer Sales by Single-Parameter Smoothing = 0.2 Period t 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 MSE = Actual Sales, Yt 4,890 4,910 4,970 5,010 5,060 5,100 5,050 5,170 5,180 5,240 5,220 5,280 5,330 5,380 5,440 5,460 5,520 5,490 5,550 5,600 Forecast Sales, Ft 4890.0 4894.0 4909.2 4929.4 4955.5 4984.4 4997.5 5032.0 5061.6 5097.3 5121.8 5153.5 5188.8 5227.0 5269.6 5307.7 5350.2 5378.1 5412.5 5450.0 Month January 2000 February March April May June July August September October November December January 2001 February March April May June July August September

2. Enter problem information in range. Notice D26 does not have a value because it is to be forecast.

24,254

D 28 =SUMXMY2(D7:D25,E7:E25)/COUNT(E7:E25)

3. Click on Tool, Data Analysis, and the Exponential Smoothing to get the Exponential Smoothing dialog box shown next.
13 Forecasting13

The image part with relationship ID rId3 was not found in the le.

Exponential Smoothing Dialog Box

1. In the Input Range line enter the range of the data. The result shown is $D$6:$D $25 2. Enter the Damping factor. It is 1 - . 3. In the Output Range enter the location of the results.

4. Click the OK button to get the results shown previously in Figure 7-4.

14 Forecasting14

Forecast using Regression Models

1 Explanatory Variable Regression Models 2+ Explanatory Variables

Simple

Multiple

Linear

NonLinear

Linear

NonLinear

Forecasting15

Linear Regression
Identify dependent (y) and
b=

XY ((X )Y ) X 2 ((X ) X )

independent (x) variables

Develop your equation for the

trend line

Y = a + bX

Forecasting16

Interpretation of Coefficients

Y = a + bX
Slope (b)

Estimated Y changes by b for each 1 unit increase in X

If b = 2, then sales (Y) is expected to increase by 2 for each 1 unit increase in

advertising (X)

Y-intercept (a)

Average value of Y when X = 0

If a = 4, then average sales (Y) is expected to be 4 when advertising (X) is 0
17 Forecasting17

Regression is to understand relationships

E (Y ) = a + bX i

b > 0

b< 0

Forecasting18

A maker of golf shirts has been tracking sales and advertising dollars. Predict sales for $53,000 advertising Sales $ (Y) 1 2 3 4 5 130 151 150 158 ? Adv.$ (X) 32 52 50 55 53

Y = 92.9 + 1.15X
Y5 = 92.9 + 1.15(53) = 153.85

Forecasting19

Regression
Regression is easy with Excels Regression Tool. Click on Tools on the menu bar, select the Data Analysis option, and then in the Data Analysis dialog box select Regression. This yields the Regression dialog box shown next.

20 Forecasting20

1. In the Input Y Range line enter the range of the Y data. The result shown here is $C$7:$C$16

Regression Dialog Box

3. Click on the OK button to get the Regression Summary Output shown next.

2. In the Input X Range line enter the range of the X data. The result here shown is $B $7:$B$16

21 Forecasting21

Excels Regression Tool

The slope and intercept are read from E15:E16 and yield the regression equation below. The multiple R, R squared, adjusted R, standard error, and F and t statistics are shown also.

A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 B C D
SUMMARY OUTPUT

Fitting Trend Line to BriDent Toothpaste Sales Using Regression

Year in Unit Transformed Sales Units (thousands) X Y 0 72.9 1 74.4 2 75.9 3 77.9 4 78.6 5 79.1 6 81.7 7 84.4 8 85.9 9 84.8
Regression S tat ist ics Multiple R 0.98 R Square 0.96 Adjusted R Square 0.96 Standard Er ror 0.90 Observat ions 10 ANO VA Regr ession Resi dual Tot al df 1 8 9 C oeff icients 72.96 1.47 SS 177.47 6.46 183.92 MS 177.47 0.81 F 219.86 S ignificance F 0.00

Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Y = 72..96 + 1.47 X

I nter cept X

St andard Er ror t Stat 0.53 138.17 0.10 14.83

22 Forecasting22

What if you had data like this?

X1
Forecasting23

Second-Order Model

E (Y ) = a + bX1i + cX
Linear effect

2 1i
Curvilinear effect

Forecasting24

Second-Order Model Worksheet

Case, i 1 2 3 4 : Yi 1 4 1 3 : X1i 1 8 3 5 :
2 X1i

1 64 9 25 :

Create X12 column.  Run regression with Y, X1, X12.

Forecasting25

Non Linear Regression

26 Forecasting26

Multiple Regression

Example: Toy Manufacturer Sales Hypothesis

How is weekly toy sales affected by

changes in levels of advertising,

the use of sales reps vs. agents for calling on retailers, and
local school enrollments?

Toy Sales = Advertising(X1)+ sales rep/agent(X2)+ school enrollment(X3) + e

To do this, we need to dummy code: sales rep = 1 or agent = 0.
Y = 102.18 + 3.87X1 + 115.2X2 + 6.73X3
So what does this mean?

Forecasting27

Multiple Regression
A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 B C D E F G

Multiple Regression for the Deuce Hardware Store

Monthly Sales Y 20,100 14,900 16,800 9,100 15,500 26,700 34,600 7,200 21,800 23,400 Floorspace (square feet) X1 3,050 1,300 1,890 1,750 1,010 2,690 4,210 1,950 2,830 2,030 Monthly Advertising Expenditure X2 350 980 830 760 930 770 440 570 310 920

Store 1 2 3 4 5 6 7 8 9 10

SUMMARY OUTPUT Regression Statistics Multiple R 0.89332611 R Square 0.798031538 Adjusted R Square 0.740326264 Standard Error 4168.371133 Observations 10 ANOVA df Regression Residual Total 2 7 9 SS 480581774.7 121627225.3 602209000 MS 240290887.3 17375317.9

Excels regression tool can be used to do multiple regression. Just list ALL the X variables when designating the Input X Range; C7:D16 in this example.

Y = 22,979 + 11.42 X 1 + 23.41X 2

F Significance F 13.8294383 0.003702478

Intercept X1 X2

Coefficients Standard Error -22979 10546.50 11.42 2.29 23.41 8.64

t Stat -2.18 4.98 2.71

P-value 0.07 0.00 0.03

Lower 95% Upper 95% -47917.10 1959.87 5.99 16.84 2.99 43.84

28 Forecasting28

Model-based forecasting methods

Regression with other factors

Sales = a intercept + b (advertising) + c (price) Develop model on half of past data Test model on other half of data

Advanced Marketing

BiMBA 2006

Forecasting29

PROS AND CONS?

Existing

Markets

New

Existing

Time Series Analysis Regression Analysis

Products
New

Forecasting30