Forecasting: Buenaventura A. San Juan, Mba

Forecasting
BUENAVENTURA A. SAN JUAN, MBA

Associate Professor 1
To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Forecasting
 Predicting future events

 Usually demand behavior
over a time frame
Forecast:
• A statement about the future value of a
variable of interest such as demand.
• Forecasts affect decisions and activities
throughout an organization
– Accounting, finance
– Human resources
– Marketing
– MIS
– Operations
– Product / service design
Uses of Forecasts
Accounting Cost/profit estimates
Finance Cash flow and funding
Human Resources Hiring/recruiting/training
Marketing Pricing, promotion, strategy
MIS IT/IS systems, services
Operations Schedules, MRP, workloads
Product/service design New products and services

Uses of Forecasts
To help managers plan the system

To help managers plan the use of the
system.
Features Common to All Forecasts
• Assumes causal system
past ==> future
• Forecasts rarely perfect because of
randomness
• Forecasts more accurate for I see that you will
groups vs. individuals get an A this semester.
• Forecast accuracy decreases

as time horizon increases
Types of Forecasts
1. Economic forecasts
► Address business cycle – inflation rate,
money supply, housing starts, etc.
2. Technological forecasts
► Predict rate of technological progress
► Impacts development of new products
3. Demand forecasts
► Predict sales of existing products and
services
Strategic Importance
of Forecasting
► Supply-Chain Management – Good
supplier relations, advantages in product
innovation, cost and speed to market
► Human Resources – Hiring, training, laying
off workers
► Capacity – Capacity shortages can result
in undependable delivery, loss of
customers, loss of market share
Elements of a Good Forecast
Timely
Reliable Accurate
Written
Time Frame in Forecasting
 Short-range to medium-range
 Daily, weekly monthly forecasts of
sales data
 Up to 2 years into the future
 Long-range
 Strategic planning of goals,
products, markets
 Planning beyond 2 years into the
future
Steps in the Forecasting Process
“The forecast”
Step 6 Monitor the forecast

Step 5 Prepare the forecast
Step 4 Gather and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast
Forecasting Process
1. Identify the 2. Collect historical 3. Plot data and
purpose of forecast data identify patterns
4. Select a forecast model

6. Check forecast accuracy 5. Develop/compute forecast that seems appropriate for
with one or more measures for period of historical data data
7.
Is accuracy of 8b. Select new forecast model
forecast or adjust parameters of
acceptable? existing model
9. Adjust forecast based on

8a. Forecast over additional qualitative 10. Monitor results and
planning horizon information and insight measure forecast accuracy
Approaches to Forecasting
• Qualitative methods
– Based on subjective methods
• Quantitative methods
– Based on mathematical formulas
Forecasting Approaches
Qualitative Methods
► Used when situation is vague

and little data exist
► New products
► New technology
► Involves intuition, experience
► e.g., forecasting sales on
Internet
Forecasting Approaches
Quantitative Methods
► Used when situation is ‘stable’ and

historical data exist
► Existing products
► Current technology
► Involves mathematical techniques
► e.g., forecasting sales of color
televisions
Overview of Qualitative
Methods
1. Jury of executive opinion
► Pool opinions of high-level experts,
sometimes augment by statistical
models
2. Delphi method
► Panel of experts, queried iteratively
Overview of Qualitative
Methods
3. Sales force composite
► Estimates from individual
salespersons are reviewed for
reasonableness, then aggregated
4. Market Survey
► Ask the customer
Jury of Executive Opinion
► Involves small group of high-level
experts and managers
► Group estimates demand by working
together
► Combines managerial experience with
statistical models
► Relatively quick
► ‘Group-think’
disadvantage
Delphi Method
► Iterative group
Decision Makers
process, continues (Evaluate responses
and make decisions)
until consensus is
reached
Staff
► 3 types of (Administering
survey)
participants
► Decision makers
► Staff
► Respondents Respondents
(People who can
make valuable
judgments)
Sales Force Composite
► Each salesperson projects his or
her sales
► Combined at district and national
levels
► Sales reps know customers’ wants
► May be overly optimistic
Market Survey
► Ask customers about purchasing
plans
► Useful for demand and product
design and planning
► What consumers say, and what
they actually do may be different
► May be overly optimistic
Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential Time-
smoothing series
models
4. Trend projection
5. Linear regression Associative
model
Approaches to Forecasting
• Judgmental (Qualitative)- uses
subjective inputs
• Time series - uses historical data
assuming the future will be like
the past
• Associative models - uses
explanatory variables to predict
the future
Judgmental Forecasts
• Executive opinions
• Sales force opinions
• Consumer surveys
• Outside opinion
• Delphi method
– Opinions of managers and staff
– Achieves a consensus forecast
Time Series
A time series is a time-ordered
sequence of observations taken at
regular intervals (eg. Hourly, daily,
weekly, monthly, quarterly, annually)
Time-Series Forecasting
► Set of evenly spaced numerical data

► Obtained by observing response
variable at regular time periods
► Forecast based only on past values,
no other variables important
► Assumes that factors influencing
past and present will continue
influence in future
Time-Series Components
Trend Cyclical
Seasonal Random
Components of Demand
Trend
component
Demand for product or service
Seasonal peaks
Actual demand
line
Average demand
over 4 years
Random variation
| | | |
1 2 3 4
Time (years)
Trend Component
► Persistent, overall upward or
downward pattern
► Changes due to population,
technology, age, culture, etc.
► Typically several years duration
Seasonal Component
► Regular pattern of up and
down fluctuations
► Due to weather, customs, etc.
► Occurs within a single year
PERIOD LENGTH “SEASON” LENGTH NUMBER OF “SEASONS” IN PATTERN
Week Day 7
Month Week 4 – 4.5
Month Day 28 – 31
Year Quarter 4
Year Month 12
Year Week 52
Cyclical Component
► Repeating up and down movements
► Affected by business cycle, political,
and economic factors
► Multiple years duration
► Often causal or
associative
relationships
0 5 10 15 20
Random Component
► Erratic, unsystematic, ‘residual’
fluctuations
► Due to random variation or unforeseen
events
► Short duration
and nonrepeating
M T W T F
Demand Behavior
 Trend
 gradual, long-term up or down movement
 Cycle
 up & down movement repeating over long
time frame; wavelike variations of more than
one year’s duration
 Seasonal pattern
 periodic oscillation in demand which repeats;
short-term regular variations in data
 Irregular variations caused by unusual
circumstances
 Random movements follow no pattern; caused by
chance
Forms of Forecast Movement
Demand
Demand
Random
movement
Time Time
(a) Trend (b) Cycle
Demand
Demand
Time Time
(c) Seasonal pattern (d) Trend with seasonal pattern
Forms of Forecast Movement
Irregular
variatio
n
Trend
Cycles
90
89
88
Seasonal variations
Time Series Methods
 Naive forecasts
Forecast = data from past period
 Statistical methods using historical
data
 Moving average Demand?
 Exponential smoothing
 Linear trend line
 Assume patterns will
repeat
Naive Forecasts
Uh, give me a minute....
We sold 250 wheels last
week.... Now, next week
we should sell....
The forecast for any period equals

the previous period’s actual value.
Naïve Forecasts
• Simple to use
• Virtually no cost
• Quick and easy to prepare
• Data analysis is nonexistent
• Easily understandable
• Cannot provide high accuracy
• Can be a standard for accuracy
Naive Approach
► Assumes demand in next
period is the same as
demand in most recent period
► e.g., If January sales were 68, then
February sales will be 68
► Sometimes cost effective and
efficient
► Can be good starting point
Uses for Naïve Forecasts
• Stable time series data
– F(t) = A(t-1)
• Seasonal variations
– F(t) = A(t-n)
• Data with trends
– F(t) = A(t-1) + (A(t-1) – A(t-2))
Techniques for Averaging
• Moving Average
• Weighted Moving Average
• Exponential Smoothing
Averaging techniques smooth

fluctuations in a time series.
Moving Average
 Average several n
periods of data 
i=1
At-i
MAn =
 Dampen, smooth out n
changes where
 Use when demand is n = number of periods in

the moving average
stable with no trend At-i= actual demand in
period t-i
or seasonal pattern
Moving Average Method
► MA is a series of arithmetic means
► Used if little or no trend
► Used often for smoothing
► Provides overall impression of data
over time
Moving average =
å demand in previous n periods
n
Moving Averages
• Moving average – A technique that
averages a number of recent actual values,
updated as new values become available.
At-n + … At-2 + At-1
Ft = MAn=
n
Ft = Forecast for time period t

MAn= n period moving average
Simple Moving Average
ORDERS
MONTH PER MONTH
Jan 120
Feb 90
Mar 100
Apr 75 F11 =MA3 90 + 110 + 130
May 110 =
3
June 50
July 75
= 110 orders for Nov
Aug 130
Sept 110
Oct 90
Nov ?
ORDERS THREE-MONTH
MONTH PER MONTH MOVING AVERAGE
Jan 120 –
Feb 90 –
Mar 100 –
Apr 75
May 110 S
June 50 O
July 75 L
Aug 130
Sept 110 V
Oct 90 E
Nov –
ORDERS THREE-MONTH
MONTH PER MONTH MOVING AVERAGE
Jan 120 –
Feb 90 –
Mar 100 –
Apr 75 103.3
May 110 88.3
June 50 95.0
July 75 78.3
Aug 130 78.3
Sept 110 85.0
Oct 90 105.0
Nov – 110.0
ORDERS THREE-MONTH FIVE-MONTH
MONTH PER MONTH MOVING AVERAGE MOVING AVERAGE
Jan 120 – –
Feb 90 – –
Mar 100 – –
Apr 75 103.3 –
May 110 88.3 –
June 50 95.0 S
July 75 78.3 O
Aug 130 78.3
Sept 110 85.0
L
Oct 90 105.0 V
F11 MA5 = E
Nov – 110.0
90 + 110 + 130 + 75 + 50
5
= 91 orders for Nov
ORDERS THREE-MONTH FIVE-MONTH
MONTH PER MONTH MOVING AVERAGE MOVING AVERAGE
Jan 120 – –
Feb 90 – –
Mar 100 – –
Apr 75 103.3 –
May 110 88.3 –
June 50 95.0 99.0
July 75 78.3 85.0
Aug 130 78.3 82.0
Sept 110 85.0 88.0
Oct 90 105.0 95.0
Nov – 110.0 91.0
Potential Problems With
Moving Average
► Increasing n smooths the forecast
but makes it less sensitive to
changes
► Does not forecast trends well
► Requires extensive historical data
Smoothing Effects
150 –
125 –
100 –
Orders
75 –
50 –
Actual
25 –
0– | | | | | | | | | | |
Jan Feb Mar Apr May June July Aug Sept Oct Nov
Month
Smoothing Effects
150 –
125 –
100 –
Orders
75 –
50 – 3-month
Actual
25 –
0– | | | | | | | | | | |
Month
Smoothing Effects
150 –
125 – 5-month
100 –
Orders
75 –
50 – 3-month
Actual
25 –
0– | | | | | | | | | | |
Month
Weighted Moving Average
n
 Adjusts WMAn =  Wi At-i

i=1
moving
average where
method to Wi = the weight for period i,
more closely between 0 and 100
percent
reflect data
fluctuations  W = 1.00
i
Weighted Moving Averages
• Weighted moving average – More recent

values in a series are given more weight in
computing the forecast.
wnAt-n + … wn-1At-2 + w1At-1

Ft = WMAn=
n
• Assigns more weight to recent

observed values
• More responsive to changes
• Selection of weights is arbitrary, but
weights must add to one. The values
for the weights are always given.
56
Example
MONTH WEIGHT DATA
August 17% 130
September 33% 110
October 50% 90
3
November forecast WMA3 = 

i=1
Wi Ai
= (0.50)(90) + (0.33)(110) + (0.17)(130)
= 103.4 orders
Example 3: Weighted Moving Average
• Find weighted moving average using
Fi =0.4Ai-1 + 0.3Ai-2 + 0.2Ai-3 + 0.1Ai-4.
Period i Actual Demand Forecast
1 42
2 40
3 43
4 40
5 41
6 39
7 46
8 44
9 45
10 38
11 40
12 - 58
Solution to Example 3
• Start from F5 (forecast for period 5).
Period Actual Forecast
i Demand
1 42 -
2 40 -
3 43 -
4 40 -
5 41 41.1 = 0.1(42)+.2(40)+.3(43)+.4(40)
6 39 41.0
7 46 40.2
8 44 42.3
9 45 43.3
10 38 44.3
= 0.1(39)+.2(46)+.3(44)+.4(45)
11 40 42.1
12 - 40.8 59
Exponential Smoothing
Ft = Ft-1 + (At-1 - Ft-1)
• Premise--The most recent observations
might have the highest predictive
value.
– Therefore,we should give more weight to
the more recent time periods when
forecasting.
• Current forecast = Previous forecast + α(Actual -
Previous forecast)
Ft = Ft-1 + (At-1 - Ft-1)

where
Ft = Forecast for period t
Ft-1 = Forecast for period t-1
α = Smoothing constant
At-1 =Actual demand or sales for period t-1
Exponential Smoothing (Cont.)
Premise: The most recent observations
might have the highest predictive value.
• Therefore, we should give more weight to the
more recent time periods when forecasting.
• Weighted averaging method based on

previous forecast plus a percentage of the
forecast error
• A-F is the error term,  is the % feedback

62
New forecast = Last period’s forecast
+  (Last period’s actual demand
– Last period’s forecast)
Ft = Ft – 1 + (At – 1 - Ft – 1)
where Ft = new forecast
Ft – 1 = previous period’s forecast
 = smoothing (or weighting)
constant (0 ≤  ≤ 1)
At – 1 = previous period’s actual demand
Exponential Smoothing Example
Predicted demand = 142 Ford Mustangs

Actual demand = 153
Smoothing constant  = .20
© 2014 Pearson Education, Inc. 4 - 64


Actual demand = 153
New forecast = 142 + .2(153 – 142)


Actual demand = 153
New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars

Effect of Smoothing Constants
• Smoothing constant generally .05 ≤  ≤ .50

• As  increases, older values become less
significant
WEIGHT ASSIGNED TO
MOST 2ND MOST 3RD MOST 4th MOST 5th MOST
RECENT RECENT RECENT RECENT RECENT
SMOOTHING PERIOD PERIOD PERIOD PERIOD PERIOD
CONSTANT ( ) (1 – ) (1 – )2 (1 – )3 (1 – )4
 = .1 .1 .09 .081 .073 .066
 = .5 .5 .25 .125 .063 .031
Impact of Different 
225 –
Actual  = .5
200 – demand
Demand
175 –
 = .1
150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
Chose high values of 
Impact of Different 
►
when underlying average
is likely to change
► Choose low values of 
225 –
when underlying average
is stable Actual  = .5
200 – demand
Demand
175 –
 = .1
150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
Choosing 
The objective is to obtain the most
accurate forecast no matter the
technique
We generally do this by selecting the
model that gives us the lowest forecast
error
Forecast error = Actual demand – Forecast value
= At – Ft
 Averaging method
 Weights most recent data more strongly
 Reacts more to recent changes
 Widely used, accurate method
Effect of Smoothing Constant
0.0  1.0

If = 0.20, then Ft +1 = 0.20 At + 0.80 Ft
If = 0, then Ft +1 = 0 At + 1 Ft 0 = Ft
Forecast does not reflect recent data
If = 1, then Ft +1 = 1 At + 0 Ft = At
Forecast based only on most recent data
Exponential Smoothing-
Example
PERIOD MONTH DEMAND
1 Jan 37
2 Feb 40
3 Mar 41
4 Apr 37
5 May 45
6 Jun 50
7 Jul 43
8 Aug 47
9 Sep 56
10 Oct 52
11 Nov 55
12 Dec 54
PERIOD MONTH DEMAND
F2 = A1 + (1 - )F1
1 Jan 37
2 Feb 40 = (0.30)(37) + (0.70)(37)
3 Mar 41 = 37
4 Apr 37
5 May 45 F3 = A2 + (1 - )F2
6 Jun 50 = (0.30)(40) + (0.70)(37)
7 Jul 43 = 37.9
8 Aug 47
9 Sep 56 F13 = A12 + (1 - )F12
10 Oct 52
= (0.30)(54) + (0.70)(50.84)
11 Nov 55
= 51.79
12 Dec 54
FORECAST, Ft + 1
PERIOD MONTH DEMAND ( = 0.3)
1 Jan 37 –
2 Feb 40
3 Mar 41
4 Apr 37
5 May 45
6 Jun 50 S
7 Jul 43 O
8 Aug 47 L
9 Sep 56 V
10 Oct 52
11 Nov 55
E
12 Dec 54
13 Jan –
FORECAST, Ft + 1
PERIOD MONTH DEMAND ( = 0.3)
1 Jan 37 –
2 Feb 40 37.00
3 Mar 41 37.90
4 Apr 37 38.83
5 May 45 38.28
6 Jun 50 40.29
7 Jul 43 43.20
8 Aug 47 43.14
9 Sep 56 44.30
10 Oct 52 47.81
11 Nov 55 49.06
12 Dec 54 50.84
13 Jan – 51.79
FORECAST, Ft + 1
PERIOD MONTH DEMAND ( = 0.3) ( = 0.5)
1 Jan 37 – –
2 Feb 40 37.00
3 Mar 41 37.90
4 Apr 37 38.83
5 May 45 38.28 S
6 Jun 50 40.29
O
7 Jul 43 43.20
8 Aug 47 43.14 L
9 Sep 56 44.30 V
10 Oct 52 47.81 E
11 Nov 55 49.06
12 Dec 54 50.84
13 Jan – 51.79
FORECAST, Ft + 1
PERIOD MONTH DEMAND ( = 0.3) ( = 0.5)
1 Jan 37 – –
2 Feb 40 37.00 37.00
3 Mar 41 37.90 38.50
4 Apr 37 38.83 39.75
5 May 45 38.28 38.37
6 Jun 50 40.29 41.68
7 Jul 43 43.20 45.84
8 Aug 47 43.14 44.42
9 Sep 56 44.30 45.71
10 Oct 52 47.81 50.85
11 Nov 55 49.06 51.42
12 Dec 54 50.84 53.21
13 Jan – 51.79 53.61
Forecasts
70 –
60 – Actual
50 –
40 –
Orders
30 –
20 –
10 –
0– | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Month
Forecasts
70 –
60 – Actual
50 –
40 –
Orders
 = 0.30
30 –
20 –
10 –
0– | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Month
Forecasts
70 –
60 – Actual  = 0.50
50 –
40 –
Orders
 = 0.30
30 –
20 –
10 –
0– | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Month
Picking a Smoothing Constant α
• Using judgment or trial and error
• Balancing smoothness and

responsiveness
• Usually range from 0.05 to 0.5

– low α when stable
– high α when susceptible to change
82
Forecast Accuracy
83
Accuracy and Control of
Forecasts
• Error: Difference between the actual value
and the value that was predicted for a given
period
et = At – Ft
• Forecast errors influence decisions in two

somewhat different ways
1. A choice between various forecasting alternatives
2. Evaluate the success or failure of a technique in
use
84
Measures of Forecast
Accuracy
• Mean Absolute Deviation (MAD)
 Actualt  Forecastt
MAD =
n
• Mean Squared Error (MSE)

2
MSE =  ( Actualt  Forecastt)
n -1
• Mean Absolute Percent Error (MAPE)

Actualt  Forecastt
 × 100
Actualt
MAPE =
n
Common Measures of Error
Mean Absolute Deviation (MAD)
MAD 
 Actual - Forecast
n
Determining the MAD
ACTUAL
TONNAGE FORECAST WITH
QUARTER UNLOADED FORECAST WITH  = .10  = .50
1 180 175 175
2 168 175.50 = 175.00 + .10(180 – 175) 177.50
3 159 174.75 = 175.50 + .10(168 – 175.50) 172.75
4 175 173.18 = 174.75 + .10(159 – 174.75) 165.88
5 190 173.36 = 173.18 + .10(175 – 173.18) 170.44
6 205 175.02 = 173.36 + .10(190 – 173.36) 180.22
7 180 178.02 = 175.02 + .10(205 – 175.02) 192.61
8 182 178.22 = 178.02 + .10(180 – 178.02) 186.30
9 ? 178.59 = 178.22 + .10(182 – 178.22) 184.15
Determining the MAD
ACTUAL FORECAST ABSOLUTE FORECAST ABSOLUTE
TONNAGE WITH DEVIATION WITH DEVIATION
QUARTER UNLOADED  = .10 FOR a = .10  = .50 FOR a = .50
1 180 175 5.00 175 5.00
2 168 175.50 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
Sum of absolute deviations: 82.45 98.62
Σ|Deviations
MAD = | 10.31 12.33
n
Mean Squared Error (MSE)
å (Forecast errors)
2
MSE =
n
Determining the MSE
ACTUAL
TONNAGE FORECAST FOR
QUARTER UNLOADED  = .10 (ERROR)2
1 180 175 52 = 25
2 168 175.50 (–7.5)2 = 56.25
3 159 174.75 (–15.75)2 = 248.06
4 175 173.18 (1.82)2 = 3.31
5 190 173.36 (16.64)2 = 276.89
6 205 175.02 (29.98)2 = 898.80
7 180 178.02 (1.98)2 = 3.92
8 182 178.22 (3.78)2 = 14.29
Sum of errors squared = 1,526.52
å (Forecast errors)
2
MSE = =1,526.52 / 8 =190.8

n
Mean Absolute Percent Error (MAPE)

n
å100 Actual -Forecasti i

/ Actuali
MAPE = i=1
n
Determining the MAPE
ACTUAL
TONNAGE FORECAST FOR ABSOLUTE PERCENT ERROR
QUARTER UNLOADED  = .10 100(ERROR/ACTUAL)
1 180 175.00 100(5/180) = 2.78%
2 168 175.50 100(7.5/168) = 4.46%
3 159 174.75 100(15.75/159) = 9.90%
4 175 173.18 100(1.82/175) = 1.05%
5 190 173.36 100(16.64/190) = 8.76%
6 205 175.02 100(29.98/205) = 14.62%
7 180 178.02 100(1.98/180) = 1.10%
8 182 178.22 100(3.78/182) = 2.08%
Sum of % errors = 44.75%
MAPE =
å absolute percent error 44.75%
= = 5.59%
n 8
Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00

2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
Comparison of Forecast
Error
∑ |deviations|
MAD =
Actual Forecast Deviation ForecastDeviation
Tonnage n
with for with for
For
1  =180
QuarterUnloaded
.10 a =175.10 a =5.00
.10  =175
.50  =5.00
.50
2 168 175.5 7.50 177.50 9.50
3 159= 82.45/8
174.75= 10.31
15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
For
5  =190
.50 173.36 16.64 170.44 19.56
6 205= 98.62/8
175.02= 29.98
12.33 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
Error
∑ (forecast errors)
2
MSE =Actual Forecast Deviation ForecastDeviation
Tonnage
n
with for with for
For
1  =180
QuarterUnloaded
.10 a =175.10 a =5.00
.10  =175
.50  =5.00
.50
2 168 175.5 7.50 177.50 9.50
3 =159
1,526.54/8
174.75= 190.82
15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
For
5  =190
.50 173.36 16.64 170.44 19.56
6 =205 175.02=
1,561.91/8 29.98
195.24 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
n Error
∑100|deviation |/actual
Rounded Absolute Rounded Absolute i i
MAPEActual
= Forecast Deviation ForecastDeviation
i=1
Tonnage withn for with for
1 For  180
QuarterUnloaded
= .10 a =175.10 a =5.00
.10 a =175
.50  =5.00
.50
2 168 175.5 7.50 177.50 9.50
3 159 = 44.75/8
174.75 = 5.59%
15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 For  190
= .50 173.36 16.64 170.44 19.56
6 205 = 54.05/8
175.02 29.98
= 6.76% 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.24
Comparison of Forecast Error
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.24
MAPE 5.59% 6.76%
Drill: Exponential Smoothing
Period (t) Actual (At) Ft (α = 0.1) Error (A-F) Ft ( α = 0.4) Error (A-F)
1 42
2 40
3 43
4 40
5 41
6 39
7 46
8 44
9 45
10 38
11 40
12
98
Solution (Cont.)
Ft = Ft-1 + (At-1 - Ft-1)
Period (t) Actual (At) Ft (α = 0.1) Error (A-F) Ft ( α = 0.4) Error (A-F)
1 42
2 40 42 -2.00 42 -2
3 43 41.8 1.20 41.2 1.8
4 40 41.92 -1.92 41.92 -1.92
5 41 41.73 -0.73 41.15 -0.15
6 39 41.66 -2.66 41.09 -2.09
7 46 41.39 4.61 40.25 5.75
8 44 41.85 2.15 42.55 1.45
9 45 42.07 2.93 43.13 1.87
10 38 42.36 -4.36 43.88 -5.88
11 40 41.92 -1.92 41.53 -1.53
12 41.73 40.92
99
Picking a Smoothing Constant
Actual
50
.4
 .1
Demand
45
40
35
1 2 3 4 5 6 7 8 9 10 11 12
Period
Exponential Smoothing with
Trend Adjustment
When a trend is present, exponential
smoothing must be modified
MONTH ACTUAL DEMAND FORECAST (Ft) FOR MONTHS 1 – 5
1 100 Ft = 100 (given)
2 200 Ft = F1 + (A1 – F1) = 100 + .4(100 – 100) = 100
3 300 Ft = F2 + (A2 – F2) = 100 + .4(200 – 100) = 140
4 400 Ft = F3 + (A3 – F3) = 140 + .4(300 – 140) = 204
5 500 Ft = F4 + (A4 – F4) = 204 + .4(400 – 204) = 282
with Trend Adjustment
Forecast Exponentially Exponentially
including (FITt) = smoothed (Ft) + smoothed(Tt)
trend forecast trend
Ft = (At - 1) + (1 - )(Ft - 1 + Tt - 1)
Tt = b(Ft - Ft - 1) + (1 - b)Tt - 1
where Ft = exponentially smoothed forecast average
Tt = exponentially smoothed trend
At = actual demand
 = smoothing constant for average (0 ≤  ≤ 1)
b = smoothing constant for trend (0 ≤ b≤ 1)
with Trend Adjustment
Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
Trend Adjustment Example
MONTH (t) ACTUAL DEMAND (At) MONTH (t) ACTUAL DEMAND (At)
1 12 6 21
2 17 7 31
3 20 8 28
4 19 9 36
5 24 10 ?
 = .2 b = .4
TABLE 4.1 Forecast with  - .2 and b = .4
SMOOTHED FORECAST
FORECAST SMOOTHED INCLUDING TREND,
MONTH ACTUAL DEMAND AVERAGE, Ft TREND, Tt FITt
1 12 11 2 13.00
2 17 12.80
3 20
19
Step 1: Average for Month 2
4
5 24 F2 = A1 + (1 – )(F1 + T1)
6 21
F2 = (.2)(12) + (1 – .2)(11 + 2)
7 31
8 28 = 2.4 + (.8)(13) = 2.4 + 10.4
9 36 = 12.8 units
10 —
SMOOTHED FORECAST
1 12 11 2 13.00
2 17 12.80 1.92
3 20
4 19
Step 2: Trend for Month 2
5 24
6 21 T2 = b(F2 - F1) + (1 - b)T1
7 31
8 28
T2 = (.4)(12.8 - 11) + (1 - .4)(2)
9 36 = .72 + 1.2 = 1.92 units
10 —
SMOOTHED FORECAST
1 12 11 2 13.00
2 17 12.80 1.92 14.72
3 20
4 19
5 24 Step 3: Calculate FIT for Month 2
6 21
7 31 FIT2 = F2 + T2
8 28
FIT2 = 12.8 + 1.92
9 36
10 — = 14.72 units
Trend Adjustment Solution
SMOOTHED FORECAST
1 12 11 2 13.00
2 17 12.80 1.92 14.72
3 20 15.18 2.10 17.28
4 19 17.82 2.32 20.14
5 24 19.91 2.23 22.14
6 21 22.51 2.38 24.89
7 31 24.11 2.07 26.18
8 28 27.14 2.45 29.59
9 36 29.28 2.32 31.60
10 — 32.48 2.68 35.16
40 –
Actual demand (At)
35 –
Product demand
30 –
25 –
20 –
Forecast including trend (FITt)
15 – with  = .2 and b = .4
10 –
| | | | | | | | |
5 –
1 2 3 Time
4 (months)
5 6 7 8 9
0 – To Accompany Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Linear Trend Line
y = a + bx
where
a = intercept (at period 0)
b = slope of the line
x = the time period
y = forecast for demand for period x
Linear Trend Line
y = axy
+ bx- nxy
b = x2 - nx2
where
a = intercept
a = (at
y - period
bx 0)
x = where
the time period
y n =for
= forecast number
demandof periods
for period x
x
x = = mean of the x values
n
y
y = n = mean of the y values
Calculating a and b
n  (ty) -  t y
b =
2
n t - (  t) 2
 y - b t
a =
n
Linear Trend Calculation Example
x(PERIOD) y(DEMAND)
1 73
2 40
3 41
4 37
5 45
6 50
7 43
8 47
9 56
10 52
11 55
12 54
78 557
x(PERIOD) y(DEMAND) xy x2
1 73
2 40
3 41
4 37
5 45
6 50
7 43
8 47
9 56
10 52
11 55
12 54
78 557
x(PERIOD) y(DEMAND) xy x2
1 37 37 1
2 40 80 4
3 41 123 9
4 37 148 16
5 45 225 25
6 50 300 36
7 43 301 49
8 47 376 64
9 56 504 81
10 52 520 100
11 55 605 121
12 54 648 144
78 557 3867 650
Linear Trend Calculation
x =
78
= 6.5 Example
12
xyy =
557 x2
x(PERIOD) y(DEMAND) = 46.42
12
1 73 37
xy 1- nxy
2 40 80
b = 4
3 41 123 x2 9- nx2
4 37 148 386716- (12)(6.5)(46.42)
5 45 225 = 25
6 50 300 650 - 12(6.5)2
36
7 43 301 49
8 47 376 = 1.7264
9 56 a
504 = y - bx81
10 52 520 = 100- (1.72)(6.5)
46.42
11 55 605 = 35.2121
12 54 648 144
78 557 3867 650
Linear Trend Calculation
x =
78
= 6.5 Example
Linear trend line12
557 x2
x(PERIOD) y(DEMAND) xyy =
y = 35.2 + = 46.42
1.72x
12
1 73 37
xy 1- nxy
2 40 80
b = 4
3 41 123 x2 9- nx2
4 37 148 386716- (12)(6.5)(46.42)
5 45 225 = 25
6 50 300 650 - 12(6.5)2
36
7 43 301 49
8 47 376 = 1.7264
9 56 a
504 = y - bx81
10 52 520 = 100- (1.72)(6.5)
46.42
11 55 605 = 35.2121
12 54 648 144
78 557 3867 650
Least Squares
x =Example
78
12
= 6.5
Linear trend line
557 x2
x(PERIOD) y(DEMAND) xyy =
y = 35.2 + = 46.42
1.72x
12
1 73 37 1
Forecast for xy
period - nxy
13
2 40 80
b = 4
3 41 123 x2 9- nx2
4 37
= 35.2 + 1.72(13)
y148
386716- (12)(6.5)(46.42)
5 45 y = =57.56 25
225 units
650 - 12(6.5)2
6 50 300 36
7 43 301 49
8 47 376 = 1.7264
9 56 a
504 = y - bx81
10 52 520 = 100- (1.72)(6.5)
46.42
11 55 605 = 35.2121
12 54 648 144
78 557 3867 650
Linear Trend Line
70 –
60 –
50 –
Demand
40 –
30 –
20 –
10 –
0– | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Period
Linear Trend Line
70 –
60 –
Actual
50 –
Demand
40 –
30 –
20 –
10 –
0– | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Period
Linear Trend Line
70 –
60 –
Actual
50 –
Demand
40 –
30 – Linear trend line
20 –
10 –
0– | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Period
Seasonal Variations In Data
The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand
Seasonal Variations In Data
Steps in the process for monthly seasons:
1. Find average historical demand for each

month
2. Compute the average demand over all months
3. Compute a seasonal index for each month
4. Estimate next year’s total demand
5. Divide this estimate of total demand by the
number of months, then multiply it by the
seasonal index for that month
Seasonal Index Example
DEMAND
AVERAGE AVERAGE
YEARLY MONTHLY SEASONAL
MONTH YEAR 1 YEAR 2 YEAR 3 DEMAND DEMAND INDEX
Jan 80 85 105 90
Feb 70 85 85 80
Mar 80 93 82 85
Apr 90 95 115 100
May 113 125 131 123
June 110 115 120 115
July 100 102 113 105
Aug 88 102 110 100
Sept 85 90 95 90
Oct 77 78 85 80
Nov 75 82 83 80
Dec 82 78 80 80
Total average annual demandTo Accompany

= 1,128 Russell and Taylor, Operations Management, 4th Edition,  2003 Prentice-Hall, Inc. All rights reserved.
Seasonal
Average
Index Example
1,128
monthly = = 94
demand 12DEMAND
months
AVERAGE AVERAGE
Jan 80 85 105 90 94
Feb 70 85 85 80 94
Mar 80 93 82 85 94
Apr 90 95 115 100 94
May 113 125 131 123 94
June 110 115 120 115 94
July 100 102 113 105 94
Aug 88 102 110 100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 75 82 83 80 94
Dec 82 78 80 80 94
Total average annual demand = 1,128
DEMAND
AVERAGE AVERAGE
Jan 80 85 105 90 94 .957( = 90/94)
Feb 70 85 85 80 94
Mar 80 93 82 85 94
Apr 90 95 115 100 94
May 113 125 131 123 94
June 110 115 120 115 94
Seasonal
July Average
102monthly
113 demand for
105 past 3 years
=100 94
index
Aug 88 Average
102 110monthly demand
100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 75 82 83 80 94
Dec 82 78 80 80 94
DEMAND
AVERAGE AVERAGE
Jan 80 85 105 90 94 .957( = 90/94)
Feb 70 85 85 80 94 .851( = 80/94)
Mar 80 93 82 85 94 .904( = 85/94)
Apr 90 95 115 100 94 1.064( = 100/94)
May 113 125 131 123 94 1.309( = 123/94)
June 110 115 120 115 94 1.223( = 115/94)
July 100 102 113 105 94 1.117( = 105/94)
Aug 88 102 110 100 94 1.064( = 100/94)
Sept 85 90 95 90 94 .957( = 90/94)
Oct 77 78 85 80 94 .851( = 80/94)
Nov 75 82 83 80 94 .851( = 80/94)
Dec 82 78 80 80 94 .851( = 80/94)
Seasonal forecast for Year 4
MONTH DEMAND MONTH DEMAND
Jan 1,200 July 1,200

x .957 = 96 x 1.117 = 112
12 12
Feb 1,200 Aug 1,200
x .851 = 85 x 1.064 = 106
12 12
Mar 1,200 Sept 1,200
x .904 = 90 x .957 = 96
12 12
Apr 1,200 Oct 1,200
x 1.064 = 106 x .851 = 85
12 12
May 1,200 Nov 1,200
x 1.309 = 131 x .851 = 85
12 12
June 1,200 Dec 1,200
x 1.223 = 122 x .851 = 85
12 12
Year 4 Forecast
Year 3 Demand
140 –
Year 2 Demand
130 – Year 1 Demand
Demand
120 –
110 –
100 –
90 –
| | | | | | | | | | | |
80 –
J F M A M J J A S O N D
70 – Time
Techniques for Seasonality
• Example :
• Winter and summer sports equipment
• Rush hour traffic occurs twice a day
• Theaters and Restaurants often
experience weekly demand pattern
• Banks may experience daily and monthly
seasonal variation.
• Seasonality is expressed as variation
from average or trend line.
130
Different Models of Seasonality
• Additive model: Seasonality factor is
expressed as a quantity. Simply add or
subtract from the series average
• Multiplicative model: Seasonality is
expressed as a percentage of the average (or
trend) amount
– Seasonal relative: amount by which
overall average is multiplied to generate
forecast for this season.
• Example: A seasonal relative of 1.20 for the
quantity of toys sold in May indicates that May
sales are 20% above the monthly average.
Additive Model and
Multiplicative Model
Seasonal
Relative
Using Seasonal Relatives
• Deseasonalize historical observations to
get nonseasonal component
– Divide each data by its corresponding
seasonal relative
• Seasonalize forecasts when demand has
both trend and seasonal components
– Obtain trend estimates
– Add seasonality to the trend estimates by
multiplying the trend estimates by the
corresponding seasonal relative
Example
• A manager wants to predict the quarterly demand for
period 15 and 16, which are the 2nd and 3rd quarters of
a particular year. Demand series consists of both
trend and seasonality. The trend portion is Ft = 124 +
7.5t. Quarter relatives are Q1 = 1.20, Q2 = 1.10, Q3 =
0.75, and Q4 = 0.95.
1. The trend values at t = 15 and t = 16:
F15 = 124 + 7.5(15) = 236.5
F16 = 124 + 7.5(16) = 244.0
2. Incorporating seasonality
Period 15: 236.5(1.10) = 260.15
Period 16: 244.0(0.75) = 183.00
Seasonal Adjustments
Repetitive increase/ decrease in demand
Models of seasonality:
Additive (seasonality is expressed as a
quantity that is added to or subtracted from
the series average)
Multiplicative (seasonality is expressed as a
percentage of the average (or trend)amount)
 The seasonal percentages

in the multiplicative
model are referred to as
seasonal relatives or
seasonal indexes
 Use seasonal factor

to adjust forecast
Di
Seasonal factor = Si =
D
Seasonal Adjustment
DEMAND (1000’S PER QUARTER)

YEAR 1 2 3 4 Total
1999 12.6 8.6 6.3 17.5 45.0
2000 14.1 10.3 7.5 18.2 50.1
2001 15.3 10.6 8.1 19.6 53.6
Total 42.0 29.5 21.9 55.3 148.7
Seasonal Adjustment
YEAR 1 2 3 4 Total
1999 12.6 8.6 6.3 17.5 45.0
2000 14.1 10.3 7.5 18.2 50.1
2001 15.3 10.6 8.1 19.6 53.6
Total 42.0 29.5 21.9 55.3 148.7
D1 42.0 D3 21.9
S1 = = = 0.28 S3 = = = 0.15
D 148.7 D 148.7
D2 29.5 D4 55.3
S2 = = = 0.20 S4 = = = 0.37
D 148.7 D 148.7
Seasonal Adjustment
YEAR 1 2 3 4 Total
1999 12.6 8.6 6.3 17.5 45.0
2000 14.1 10.3 7.5 18.2 50.1
2001 15.3 10.6 8.1 19.6 53.6
Total 42.0 29.5 21.9 55.3 148.7
Si 0.28 0.20 0.15 0.37
Seasonal Adjustment
YEAR 1 2 3 4 Total
For 2002
1999 12.6 8.6 6.3 17.5 45.0
2000 14.1 10.3 7.5 18.2 50.1 y = 40.97 + 4.30x
2001 15.3 10.6 8.1 19.6 53.6 = 40.97 + 4.30(4)
Total 42.0 29.5 21.9 55.3 148.7 = 58.17
Si 0.28 0.20 0.15 0.37
Seasonal Adjustment
YEAR 1 2 3 4 Total
For 2002
1999 12.6 8.6 6.3 17.5 45.0
2000 14.1 10.3 7.5 18.2 50.1 y = 40.97 + 4.30x
2001 15.3 10.6 8.1 19.6 53.6 = 40.97 + 4.30(4)
Total 42.0 29.5 21.9 55.3 148.7 = 58.17
Si 0.28 0.20 0.15 0.37
SF1 = (S1) (F5) SF3 = (S3) (F5)

= (0.28)(58.17) = 16.28 = (0.15)(58.17) = 8.73
SF2 = (S2) (F5) SF4 = (S4) (F5)

= (0.20)(58.17) = 11.63 = (0.37)(58.17) = 21.53
Centered Moving Average
 A commonly used method for representing the
trend portion of a time series involves a
centered moving average.
 By virtue of its centered position it looks

forward and looks backward, so it is able to
closely follow data movements whether they
involve trends, cycles, or random variability
alone.
Computing Seasonal Relatives
by Using Centered Moving
Averages
The ratio of demand at period i to the
centered average at period i is an
estimate of the seasonal relative at
that point.
Associative Forecasting
145
• Associative techniques rely on identification of
related variables that can be used to predict the
variable of interest (dependent variable)
– Example 1: Crop yields are related to soil conditions and the
amounts and timing of water and fertilizer applications.
– Example 2: Sales of beef may be related to the price per
pound (of beef) and the price of substitutes such as chicken,
pork and lamb.
• Predictor (independent) variables - used to predict
values of variable of interest
• Regression - technique for fitting a line to a set of
points
146
Predictor variables - used to predict

values of variable interest
Regression - technique for fitting a line to
a set of points
Least squares line - minimizes sum of
squared deviations around the line
Causal Modeling with Linear
Regression
 Study relationship between two

or more variables
 Dependent variable y depends
on independent variable x
y = a + bx
Linear Model Seems Reasonable
X Y Computed
7 15
relationship
2 10
6 13 50
4 15 40
14 25 30
15 27 20
10
16 24
0
12 20 0 5 10 15 20 25
14 27
20 44 A straight line is fitted to a set of sample points.
15 34
7 17
Linear Regression Formulas
a = y-bx
xy - nxy
b =
x2 - nx2
where
a = intercept (at period 0)
x
x = = mean of the x data
n
y
y = n = mean of the y data
Linear Regression Example
x y
(WINS) (ATTENDANCE) xy x2
4 36.3 145.2 16
6 40.1 240.6 36
6 41.2 247.2 36
8 53.0 424.0 64
6 44.0 264.0 36
7 45.6 319.2 49
5 39.0 195.0 25
7 47.5 332.5 49
49 346.7 2167.7 311
49
x x= = 6.125
8y
(WINS) (ATTENDANCE)
346.9 xy x2
y= = 43.36
8
4 36.3 145.2 16
6 xy
40.1 - nxy2 240.6 36
6 b = 41.2 247.2 36
x2 - nx2
8 53.0 424.0 64
6 (2,167.7)
44.0 - (8)(6.125)(43.36)
264.0 36
= 2
7 45.6(311) - (8)(6.125)
319.2 49
5 39.0
= 4.06 195.0 25
7 47.5 332.5 49
49 a = y346.7
- bx 2167.7 311
= 43.36 - (4.06)(6.125)
= 18.46
49
x x= = 6.125
8y
(WINS) (ATTENDANCE)
Regression
346.9 xy
equation x2
y= = 43.36
8
4 36.3 y = 18.46
145.2+ 4.06x 16
6 xy
40.1 - nxy2 240.6 36
6 Attendance forecast
b = 41.2 247.2 for367 wins
x2 - nx2
8 53.0 y = 18.46
424.0+ 4.06(7)
64
6 (2,167.7)
44.0 = 46.88,
264.0 or 46,880
- (8)(6.125)(43.36) 36
= 2
7 45.6(311) - (8)(6.125)
319.2 49
5 39.0
= 4.06 195.0 25
7 47.5 332.5 49
49 a = y346.7
- bx 2167.7 311
= 43.36 - (4.06)(6.125)
= 18.46
Linear Regression Line
60,000 –
50,000 –
40,000 –
Attendance, y
30,000 –
20,000 –
10,000 –
| | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10
Wins, x
Linear Regression Line
60,000 –
50,000 –
40,000 –
Attendance, y
30,000 –
Linear regression line,

20,000 – y = 18.46 + 4.06x
10,000 –
| | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10
Wins, x
Correlation and Coefficient of
Determination
 Correlation, r
 Measure of strength and direction of
relationship between two variables
 Varies between -1.00 and +1.00
 Coefficient of determination, r2
 Percentage of variation in dependent variable
resulting from changes in the independent
variable. Percentage of variability in the values
of the dependent variable that is explained by
the independent variable.
Computing Correlation
n xy -  x y
r=
[n x2 - ( x)2] [n y2 - ( y)2]
(8)(2,167.7) - (49)(346.9)
r=
[(8)(311) - (49)2] [(8)(15,224.7) - (346.9)2]
r = 0.947
Coefficient of determination
r2 = (0.947)2 = 0.897
Multiple Regression
Study the relationship
of demand to two or more
independent variables
y = b 0 + b 1x 1 + b 2x 2 … + b kx k
where
b0 = the intercept
b1, … , bk = parameters for the
independent variables
x1, … , xk = independent variables
Important Points in Using
Regression
 Always plot the data to verify that a
linear relationship is appropriate
Check whether the data is time-
dependent. If so use time series
instead of regression
A small correlation may imply that
other variables are important
Forecast Accuracy
 Error = Actual - Forecast
 Find a method which minimizes error
 Mean Absolute
Deviation (MAD)
 Mean Squared Error (MSE)
 Mean Absolute
Percent Deviation (MAPE)
Forecast Control
 Reasons for out-of-control forecasts

(sources of forecast errors)
 Change in trend
 Appearance of cycle
 Inadequate forecasts
 Irregular variations
 Incorrect use of forecasting technique
Controlling the Forecast
A forecast is deemed to perform adequately
when the errors exhibit only random
variations
• Control chart
– A visual tool for monitoring forecast errors
– Used to detect non-randomness in errors
• Forecasting errors are in control if
– All errors are within the control limits
– No patterns, such as trends or cycles, are
present
Tracking Signal
 Compute each period
 Compare to control limits
 Forecast is in control if within limits
(At - Ft) E
Tracking signal = =
MAD MAD
Use control limits of +/- 2 to +/- 5 MAD

Bias: persistent tendency for forecasts to be greater or
less than actual values
Tracking Signal Values
DEMAND FORECAST, ERROR E =
PERIOD Dt Ft At - Ft (At - Ft) MAD
1 37 37.00 – – –
2 40 37.00 3.00 3.00 3.00
3 41 37.90 3.10 6.10 3.05
4 37 38.83 -1.83 4.27 2.64
5 45 38.28 6.72 10.99 3.66
6 50 40.29 9.69 20.68 4.87
7 43 43.20 -0.20 20.48 4.09
8 47 43.14 3.86 24.34 4.06
9 56 44.30 11.70 36.04 5.01
10 52 47.81 4.19 40.23 4.92
11 55 49.06 5.94 46.17 5.02
12 54 50.84 3.15 49.32 4.85
DEMAND FORECAST, ERROR E =
PERIOD At Ft At - Ft (At - Ft) MAD
1 37 37.00 – – –
2 40 37.00 3.00 3.00 3.00
3 41 37.90 3.10 6.10 3.05
4 37 38.83 -1.83 4.27 2.64
5 45 38.28
Tracking 6.72 for period
signal 10.99 3 3.66
6 50 40.29 9.69 20.68 4.87
7 43 43.20 -0.20
6.10 20.48 4.09
8 47 43.14
TS3 = 3.86 =24.34 2.00 4.06
9 56 44.30 3.05
11.70 36.04 5.01
10 52 47.81 4.19 40.23 4.92
11 55 49.06 5.94 46.17 5.02
12 54 50.84 3.15 49.32 4.85
DEMAND FORECAST, ERROR E = TRACKING
PERIOD At Ft At - Ft (At - Ft) MAD SIGNAL
1 37 37.00 – – – –
2 40 37.00 3.00 3.00 3.00 1.00
3 41 37.90 3.10 6.10 3.05 2.00
4 37 38.83 -1.83 4.27 2.64 1.62
5 45 38.28 6.72 10.99 3.66 3.00
6 50 40.29 9.69 20.68 4.87 4.25
7 43 43.20 -0.20 20.48 4.09 5.01
8 47 43.14 3.86 24.34 4.06 6.00
9 56 44.30 11.70 36.04 5.01 7.19
10 52 47.81 4.19 40.23 4.92 8.18
11 55 49.06 5.94 46.17 5.02 9.20
12 54 50.84 3.15 49.32 4.85 10.17
Tracking Signal Plot
3 –
Tracking signal (MAD)
2 –
1 –
0 –
-1 –
-2 –
-3 –
| | | | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10 11 12
Period
3 –
2 –
Exponential smoothing ( = 0.30)
1 –
0 –
-1 –
-2 –
-3 –
| | | | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10 11 12
Period
3 –
2 –
Exponential smoothing ( = 0.30)
1 –
0 –
-1 –
-2 – Linear trend line
-3 –
| | | | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10 11 12
Period
Statistical Control Charts
(At - Ft)2
= n-1
 Using  we can calculate statistical

control limits for the forecast error
 Control limits are typically set at  3
18.39 –
12.24 –
6.12 –
Errors
0–
-6.12 –
-12.24 –
-18.39 –
| | | | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10 11 12
Period
18.39 –
UCL = +3
12.24 –
6.12 –
Errors
0–
-6.12 –
-12.24 –
LCL = -3
-18.39 –
| | | | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10 11 12
Period
Choosing a Forecasting Technique
• No single technique works in every
situation
• Two most important factors
– Cost
– Accuracy
• Other factors include the availability of:
– Historical data
– Computers
– Time needed to gather and analyze the data
– Forecast horizon

Forecasting: Buenaventura A. San Juan, Mba

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Forecasting: Buenaventura A. San Juan, Mba

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Forecasting

BUENAVENTURA A. SAN JUAN, MBA

 Predicting future events

Accounting Cost/profit estimates

Finance Cash flow and funding

Human Resources Hiring/recruiting/training

Marketing Pricing, promotion, strategy

MIS IT/IS systems, services

Operations Schedules, MRP, workloads

Product/service design New products and services

To help managers plan the system

• Forecast accuracy decreases

Step 6 Monitor the forecast

4. Select a forecast model

9. Adjust forecast based on

► Used when situation is vague

► Used when situation is ‘stable’ and

► Set of evenly spaced numerical data

The forecast for any period equals

Averaging techniques smooth

 Use when demand is n = number of periods in

Ft = Forecast for time period t

► Requires extensive historical data

 Adjusts WMAn =  Wi At-i

• Weighted moving average – More recent

wnAt-n + … wn-1At-2 + w1At-1

• Assigns more weight to recent

November forecast WMA3 = 

= (0.50)(90) + (0.33)(110) + (0.17)(130)

Ft = Ft-1 + (At-1 - Ft-1)

• Weighted averaging method based on

• A-F is the error term,  is the % feedback

Predicted demand = 142 Ford Mustangs

© 2014 Pearson Education, Inc. 4 - 64

Predicted demand = 142 Ford Mustangs

New forecast = 142 + .2(153 – 142)

© 2014 Pearson Education, Inc. 4 - 65

Predicted demand = 142 Ford Mustangs

New forecast = 142 + .2(153 – 142)

© 2014 Pearson Education, Inc. 4 - 66

• Smoothing constant generally .05 ≤  ≤ .50

0.0  1.0

• Using judgment or trial and error

• Balancing smoothness and

• Usually range from 0.05 to 0.5

• Forecast errors influence decisions in two

• Mean Squared Error (MSE)

• Mean Absolute Percent Error (MAPE)

Mean Absolute Deviation (MAD)

2 168 175.50 = 175.00 + .10(180 – 175) 177.50

3 159 174.75 = 175.50 + .10(168 – 175.50) 172.75

4 175 173.18 = 174.75 + .10(159 – 174.75) 165.88

5 190 173.36 = 173.18 + .10(175 – 173.18) 170.44

6 205 175.02 = 173.36 + .10(190 – 173.36) 180.22

7 180 178.02 = 175.02 + .10(205 – 175.02) 192.61

8 182 178.22 = 178.02 + .10(180 – 178.02) 186.30

9 ? 178.59 = 178.22 + .10(182 – 178.22) 184.15

2 168 175.50 7.50 177.50 9.50

3 159 174.75 15.75 172.75 13.75

4 175 173.18 1.82 165.88 9.12

5 190 173.36 16.64 170.44 19.56

6 205 175.02 29.98 180.22 24.78

7 180 178.02 1.98 192.61 12.61