REVIEW 3

Outline
• Time series forecast (video)
Can be easily performed
using MS Excel (PBL)
• Evaluating forecast (video)

• Causal relationship (PBL)

Using past demand data to estimate future demand

Time series forecast
• Using past demand data to estimate future demand

• 3 methods: Which method is the best?

• Simple moving average (SMA) Use average to forecast

• Weighted moving average (WMA) Allow for different weights

• Exponential smoothing (ES)

1. Based on “previous forecast” and “error in previous forecast”

2. WMA with exponentially decreasing weights
3. First 2 forecast equals actual first demand
 Evaluating forecasts
• Mean absolute deviation (MAD) Week D F Dev

4 10 14 -4
Actual deviation can cancel out 5 12 8 4

• Mean absolute percentage error (MAPE)

Error relative to average demand, clearer if error is high or low

• Mean square error (MSE)

1. Penalizes large errors significantly more than small error

2. Root mean square error (RMSE) will have the same units
3. Divide RMSE by average demand to get coefficient of variation (COV)
Causal relationship
• Time series forecasts estimate future demand by
considering how demand changes over time.

• In some cases, we suspect that demand may depend on

certain factors that we have information regarding.

• For example, demand for ice-cream is likely to increase

when temperature is higher.

• In such cases, regression can be used to estimate

demand.
Causal relationship
• We illustrated two approaches for performing regression
in MS Excel:

• Scatterplot and trend line Visual representation

• Regression (under data analysis) Provides more details

• In PBL worksheet, we highlight that the two approaches

above are equivalent.

• How does MS Excel determine the regression line?

Causal relationship
• The common regression approach is to minimize the
MSE.

• However, MS Excel can also be used to determine

regression lines that minimize MAD.

• In addition, it is also possible to predict demand based on

multiple factors e.g., temperature and humidity.

• Non-linear relationships can also considered.

Causal relationship
Avg. Avg. Multivariate regression can be
Demand Humidity Temp. easily performed using MS
(%) (0C) Excel.
72 80.2 31.2
48 38.5 28.3
68 88.8 31.9 It allows us to predict demand
48 36.2 29.1 based on multiple factors e.g.,
46 45.3 30.4 temperature and humidity.
45 19.4 28.7
41 30.5 26.8
54 65.2 31.4 Non-linear relationships can also
42 33.5 27.3 considered.

𝐷 = −1143.319 + 0.616 × 𝐻 + 81.401 × 𝑇 − 1.416 × 𝑇 2

= −1143.319 + 0.616 × 40 + 81.401 × 28 − 1.416 × 282
≈ 50
MS Excel Solver can also be used for multivariate regression.