Forecasting

What is Forecasting?
 Process of
predicting a future
event
 Underlying basis of
??
all business
decisions
 Production
 Inventory
 Personnel
 Facilities
Forecasting Time Horizons
 Short-range forecast
 Up to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforce levels, job
assignments, production levels
 Medium-range forecast
 3 months to 3 years
 Sales and production planning, budgeting
 Long-range forecast
 3+ years
 New product planning, facility location, research and
development
 Distinguishing Differences
Medium/long range forecasts deal with more
comprehensive issues and support management
decisions regarding planning and products, plants
and processes
Short-term forecasting usually employs different
methodologies than longer-term forecasting
Short-term forecasts tend to be more accurate
than longer-term forecasts
Influence of Product Life Cycle

Introduction – Growth – Maturity – Decline

 Introduction and growth require longer forecasts
than maturity and decline
 As product passes through life cycle, forecasts
are useful in projecting
 Staffing levels
 Inventory levels
 Factory capacity
Product Life Cycle
Introduction Growth Maturity Decline
Best period to increase Practical to change Poor time to change Cost control critical
Company Strategy/Issues market share price or quality image image, price, or quality

R&D engineering is Strengthen niche Competitive costs

critical become critical
Defend market
position

CD-ROMs
Internet search engines
Analog TVs
Drive-through
LCD & plasma TVs restaurants

Sales iPods

3 1/2”
Xbox 360 Floppy
disks

Figure 2.5
Product Life Cycle
Introduction Growth Maturity Decline
Product design and Forecasting critical Standardization Little product
development Product and process Less rapid product differentiation
critical reliability changes – more Cost
Frequent product minor changes minimization
OM Strategy/Issues

Competitive product
and process design improvements and Optimum capacity Overcapacity in
changes options the industry
Increasing stability
Short production Increase capacity of process Prune line to
runs eliminate items
Shift toward product Long production
High production focus runs not returning
costs good margin
Enhance distribution Product
Limited models improvement and Reduce capacity
Attention to quality cost cutting

Figure 2.5
 Types of Forecasts
 Economic forecasts
 Address business cycle – inflation rate, money
supply, housing starts, etc.
 Technological forecasts
 Predict rate of technological progress
 Impacts development of new products
 Demand forecasts
 Predict sales of existing products and services
Strategic Importance of
Forecasting
 Human Resources – Hiring, training,
laying off workers
 Capacity – Capacity shortages can result
in undependable delivery, loss of
customers, loss of market share
 Supply Chain Management – Good
supplier relations and price advantages
 Seven Steps in Forecasting
 Determine the use of the forecast
 Select the items to be forecasted
 Determine the time horizon of the forecast
 Select the forecasting model(s)
 Gather the data
 Make the forecast
 Validate and implement results
 The Realities!

 Forecasts are seldom perfect

 Most techniques assume an
underlying stability in the system
 Product family and aggregated
forecasts are more accurate than
individual product forecasts
 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

 Jury of executive opinion

 Pool opinions of high-level experts, sometimes
augment by statistical models
 Delphi method
 Panel of experts, queried iteratively
Overview of Qualitative Methods

 Sales force composite

 Estimates from individual salespersons are
reviewed for reasonableness, then aggregated
 Consumer 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
 Sales Force Composite
 Each salesperson projects his or
her sales
 Combined at district and national
levels
 Sales reps know customers’ wants
 Tends to be overly optimistic
 Delphi Method
 Iterative group process, Decision Makers
continues until (Evaluate
consensus is reached responses and
make decisions)
 3 types of participants
 Decision makers
Staff
 Staff (Administering
 Respondents survey)

Respondents
(People who can
make valuable
judgments)
 Consumer Market Survey
 Ask customers about purchasing
plans
 What consumers say, and what
they actually do are often different
 Sometimes difficult to answer
 Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential smoothing Time-Series
Models
4. Trend projection
5. Linear regression

Associative
Model
 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

Average
demand over
Random four years
variation
| | | |
1 2 3 4
Year Figure 4.1
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

Number of
Period Length Seasons
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
 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
 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

∑ demand in previous n periods

Moving average = n
SAMPLE PROBLEM
• Donna’s Garden Supply wants a 3-month moving-average forecast,
including a forecast for next January, for shed sales.
Moving Average Example
Actual 3-Month
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3 = 11.6667
May 19 (12 + 13 + 16)/3 = 13.6667
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19.3333
January forecast = (18 + 16 + 14)/3 = 16
Graph of Moving Average
Moving Average
Forecast
30 –
28 –
Actual Sales
26 –
24 –
Shed Sales

22 –
20 –
18 –
16 –
14 –
12 –
10 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Weighted Moving Average
 Used when trend is present
 Older data usually less important
 Weights based on experience and intuition

∑ (weight for period n)

x (demand in period n)
Weighted
moving average = ∑ weights
SAMPLE PROBLEM
• Donna’s Garden Supply wants a 3-month moving-average forecast,
including a forecast for next January, for shed sales.
 Weights Applied Period
Weighted Moving Average
3 Last month
2 Two months ago
1 Three months ago
6 Sum of weights

Actual 3-Month Weighted

Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13) + (2 x 12) + (10)]/6 = 12.1667
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 14.3333
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 20.5
 Potential Problems With
Moving Average
 Increasing n smooths the forecast but makes it
less sensitive to changes
 Do not forecast trends well
 Require extensive historical data
 Moving Average And
Weighted Moving Average
Weighted
moving
30 – average
25 –
Sales demand

20 – Actual
sales
15 –
Moving
10 – average

5 –
| | | | | | | | | | | |
Figure 4.2
J F M A M J J A S O N D
Exponential Smoothing
 Form of weighted moving average
 Weights decline exponentially
 Most recent data weighted most
 Requires smoothing constant ()
 Ranges from 0 to 1
 Subjectively chosen
 Involves little record keeping of past data
 Exponential Smoothing

w forecast = Last period’s forecast

+ a (Last period’s actual demand
– Last period’s forecast)

Ft = Ft – 1 + a(At – 1 - Ft – 1)

where Ft = new forecast

Ft – 1 = previous forecast
a = smoothing (or weighting)
constant (0 ≤ a ≤ 1)
Exponential Smoothing Example

Predicted demand = 142 Ford Mustangs

Actual demand = 153
Smoothing constant a = .20
Exponential Smoothing Example

Predicted demand = 142 Ford Mustangs

Actual demand = 153
Smoothing constant a = .20

New forecast = 142 + .2(153 – 142)

Exponential Smoothing Example

Predicted demand = 142 Ford Mustangs

Actual demand = 153
Smoothing constant a = .20

New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars
 Effect of
Smoothing Constants

Weight Assigned to
Most 2nd Most 3rd Most 4th Most 5th Most
Recent Recent Recent Recent Recent
Smoothing Period Period Period Period Period
Constant (a) a(1 - a) a(1 - a)2 a(1 - a)3 a(1 - a)4

a = .1 .1 .09 .081 .073 .066

a = .5 .5 .25 .125 .063 .031

 Impact of Different 

225 –
Actual a = .5
demand
200 –
Demand

175 –
a = .1
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter
 Impact of Different 

225 –
Actual a = .5
 Chose high values of
demand

when
200 – underlying average
Demand

is likely to change
175
Choose
– low values of 
when underlying average a = .1
is stable
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter
SAMPLE PROBLEM
During the past 8 quarters, the Port of
Baltimore has unloaded large
quantities of grain from ships. The
port’s operations manager wants to
test the use of exponential smoothing
to see how well the technique
works in predicting tonnage
unloaded. He guesses that the
forecast of grain unloaded in the first
quarter was 175 tons. Two values of a
are to be examined: a = .10 and a = .
50.
SOLUTION

178.6
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
Common Measures of Error

Mean Absolute Deviation (MAD)

∑ |Actual - Forecast|
MAD =
n

Mean Squared Error (MSE)

∑ (Forecast Errors)2
MSE =
n
Common Measures of Error

Mean Absolute Percent Error (MAPE)

n
∑100|Actuali - Forecasti|/Actuali
MAPE = i=1
n
 Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .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

Compute for MAD

Comparison of Forecast Error
∑ |deviations|
Rounded Absolute Rounded Absolute
MADActual
= Forecast Deviation Forecast Deviation
Tonnage n
with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1
For a =
180
.10 175 5.00 175 5.00
2 168 = 82.45/8
175.5 = 10.31
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|
Rounded Absolute Rounded Absolute
MADActual
= Forecast Deviation Forecast Deviation
Tonnage n
with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1
For a =
180
.10 175 5.00 175 5.00
2 168 = 82.45/8
175.5 = 10.31
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For a175
= .50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 = 98.62/8
175.02 = 12.33
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
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .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

Compute for MSE

 Comparison of Forecast Error
∑ (forecast
Rounded
errors) 2
Absolute Rounded Absolute
MSE = Actual Forecast Deviation Forecast Deviation
Tonnage n
with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1
For a =
180
.10 175 5.00 175 5.00
2 = 1,526.54/8
168 175.5 = 190.82
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
 Comparison of Forecast Error
∑ (forecast
Rounded
errors) 2
Absolute Rounded Absolute
MSE = Actual Forecast Deviation Forecast Deviation
Tonnage n
with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .50
1
For a =
180
.10 175 5.00 175 5.00
2 = 1,526.54/8
168 175.5 = 190.82
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For a175
= .50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 = 1,561.91/8
205 175.02 = 195.24
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
 Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .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

Compute for MAPE

 Comparison of Forecast Error
n
∑100|deviation
Rounded i|/actual
Absolute Rounded
i Absolute
MAPE =Actual
i=1 Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 n a = .10 a = .50 a = .50
1
a = .10 175
For 180 5.00 175 5.00
2 168 = 44.75/8
175.5 = 7.50
5.59% 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
 Comparison of Forecast Error
n
∑100|deviation
Rounded i|/actual
Absolute Rounded
i Absolute
MAPE =Actual
i=1 Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 n a = .10 a = .50 a = .50
1
a = .10 175
For 180 5.00 175 5.00
2 168 = 44.75/8
175.5 = 7.50
5.59% 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 a=
For 175 .50 173.18 1.82 165.88 9.12
5 190 173.36 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
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded a = .10 a = .10 a = .50 a = .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%
Exponential Smoothing with Trend
Adjustment
When a trend is present, exponential smoothing
must be modified

Forecast Exponentially Exponentially

including (FITt) =
trend smoothed (Ft) + (Tt) smoothed
forecast trend
Exponential Smoothing with Trend
Adjustment

Ft = a(At - 1) + (1 - a)(Ft - 1 + Tt - 1)

Tt = b(Ft - Ft - 1) + (1 - b)Tt - 1

Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
Exponential Smoothing with Trend
Adjustment
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24
6 21
7 31
8 28
9 36
10
Table 4.1
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24 Step 1: Forecast for Month 2
6 21
7 31 F2 = aA1 + (1 - a)(F1 + T1)
8 28
9 36 F2 = (.2)(12) + (1 - .2)(11 + 2)
10 = 2.4 + 10.4 = 12.8 units
Table 4.1
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80
3 20
4 19
5 24 Step 2: Trend for Month 2
6 21
7 31 T2 = b(F2 - F1) + (1 - b)T1
8 28
9 36 T2 = (.4)(12.8 - 11) + (1 - .4)(2)
10 = .72 + 1.2 = 1.92 units
Table 4.1
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80 1.92
3 20
4 19
5 24 Step 3: Calculate FIT for Month 2
6 21
7 31 FIT2 = F2 + T1
8 28
9 36
FIT2 = 12.8 + 1.92
10 = 14.72 units
Table 4.1
 Exponential Smoothing with Trend
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
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
Table 4.1
Exponential Smoothing with Trend
Adjustment Example
35 –
Actual demand (At)
Product demand 30 –

25 –

20 –

15 –

10 –
Forecast including trend (FITt)
with  = .2 and  = .4
5 –

0 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Figure 4.3
Time (month)
Trend Projections
Fitting a trend line to historical data points to
project into the medium to long-range
Linear trends can be found using the least squares
technique
^
y = a + bx
^ where y = computed value of the
variable to be predicted (dependent
variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable
Least Squares Method

Values of Dependent Variable

Actual observation Deviation7
(y value)

Deviation5 Deviation6

Deviation3

Deviation4

Deviation1
(error) Deviation2
Trend line, y =^ a + bx

Time period Figure 4.4

Least Squares Method

Values of Dependent Variable

Actual observation Deviation7
(y value)

Deviation5 Deviation6

Deviation3 Least squares method

minimizes the sum of the
squared errors (deviations)
Deviation 4

Deviation1
Deviation2
Trend line, y =^ a + bx

Time period Figure 4.4

Least Squares Method
Equations to calculate the regression variables

^
y = a + bx

Sxy - nxy
b=
Sx2 - nx2

a = y - bx
Least Squares Method
Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2001 1 74 1 74
2002 2 79 4 158
2003 3 80 9 240
2004 4 90 16 360
2005 5 105 25 525
2005 6 142 36 852
2007 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.8571

∑xy - nxy 3,063 - (7)(4)(98.8571)

b= = = = 10.5358
∑x - nx
2 2 140 - (7)(42)

a = y - bx = 98.8571 - 10.5358(4) = 56.7139

Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2001 1 74 1 74
2002 2 79 4 158
2003The trend
3 line is 80 9 240
2004 4 90 16 360
2005 ^ 5= 56.71 + 10.54x
y 105 25 525
2005 6 142 36 852
2007 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.8571

∑xy - nxy 3,063 - (7)(4)(98.8571)

b= = = = 10.5358
∑x - nx
2 2 140 - (7)(42)

a = y - bx = 98.8571 - 10.54(4) = 56.7139

 Least Squares Example

The trend line is

^ = 56.71 + 10.54x
y

The DEMAND IN YEAR 8 IS

^ = 56.71 + 10.54(8)
y
=141.03
How to Use Sci Cal?
• Choose stat
• Choose 5 A + Bx
• Input the data
• Input the data

• Press shift 1

• Choose
Regression
• Choose the parameter that
we need
 Least Squares Example
Trend line,
160 – y^ = 56.70 + 10.54x
150 –
140 –
Power demand

130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
 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:

1. Find average historical demand for each season
2. Compute the average demand over all seasons
3. Compute a seasonal index for each season
4. Estimate next year’s total demand
5. Divide this estimate of total demand by the
number of seasons, then multiply it by the
seasonal index for that season
Seasonal Variations In Data

If we expect the annual

demand for computers to
be 1,200 units next year,
find the forecasted
monthly demand next
year.
Seasonal Index Example
Demand Average Average Seasonal
Month 2018 2019 2020 2018-2020
Monthly Index
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
Jun 110 115 120 115 94
Jul 100 102 113 105 94
Aug 88 102 110 100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 76 81 83 80 94
Dec 82 78 80 80 94
 Seasonal Index Example
Demand Average Average Seasonal
Month 2018 2019 2020 2018-2020 Monthly Index
Jan 80 85 105 90 94 0.9574
Feb 70 85 85 80 94
Mar 80 93 average
82 85 monthly demand
2018-2020 94
Seasonal90index95= 115
Apr 100 94
average monthly demand
May 113 125 131 123 94
Jun 110 115= 90/94
120 = .9574 115 94
Jul 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 72 83 80 94
Dec 82 78 80 80 94
 Seasonal Index Example
Demand Average Average Seasonal
Month 2018 2019 2020 2018-2020 Monthly Index
Jan 80 85 105 90 94 0.9574
Feb 70 85 85 80 94 0.8511
Mar 80 93 82 85 94 0.9043
Apr 90 95 115 100 94 1.0638
May 113 125 131 123 94 1.3085
Jun 110 115 120 115 94 1.2234
Jul 100 102 113 105 94 1.1170
Aug 88 102 110 100 94 1.0638
Sept 85 90 95 90 94
0.9574
Oct 77 78 85 80 94
0.8511
Nov 75 72 83 80 94
0.8511
Dec 82 78 80 80 94
0.8511
 Seasonal Index Example
Demand Average Average Seasonal
Month 2018 2019 2020 2018-2020 Monthly Index
Jan 80 85 105 90 94 0.9574
Feb 70 85 85 80 94 0.8511
Mar 80 93 82 85 94 0.9043
Apr 90 95 115 100 94 1.0638
May 113 125 131 123 94 1.3085
Jun 110 115 120 115 94 1.2234
Jul 100 102 113 105 94 1.1170
Aug 88 102 110 100 94 1.0638
Sept 85 90 95 90 94 0.9574
Oct 77 78 85 80 94 0.8511
Nov 75 72 83 80 94 0.8511
Dec 82 78 80 80 94 0.8511
 Seasonal Index Example
Demand Average Average Seasonal
Month 2018 2019 2020 2018-2020 Monthly Index
Jan 80 85 105 90 94 0.9574
Feb 70 85 Forecast
85 for802021 94 0.8511
Mar 80 93 82 85 94 0.9043
Apr 90Expected
95 115 annual demand100 = 1,200
94 1.0638
May 113If we125 131annual demand
expect the 123for computers to
94be 1.3085
Jun 1101,200115 120year, find the115
units next 94
forecasted monthly 1.2234
Jul 100demand
102next 113
year. 105 94 1.1170
Aug 88 102 110 100 94 1.0638
Sept 85 Jan 90 1,200
95 90 = 95.74 94
x .9574 0.9574
Oct 77 78 85 12 80 94 0.8511
Nov 75 72 83 80 94 0.8511
Dec 82 78 80 80 94 0.8511
 Seasonal Index Example
Demand Average Average Seasonal forecasted
Month 2018 2019 2020 2018-2020 Monthly Index demand
Jan 80 85 105 90 94 0.9574 95.74
Feb 70 85 85 80 94 0.8511 85.11
Mar 80 93 82 85 94 0.9043 90.43
Apr 90 95 115 100 94 1.0638 106.38
May 113 125 131 123 94 1.3085 130.85
Jun 110 115 120 115 94 1.2234 122.34
Jul 100 102 113 105 94 1.1170 111.70
Aug 88 102 110 100 94 1.0638 106.38
Sept 85 90 95 90 94
0.9574 95.74
Oct 77 78 85 80 94
0.8511 85.11
Nov 75 72 83 80 94
0.8511 85.11
Dec 82 78 80 80 94
0.8511 85.11
Seasonal Index Example
2021 Forecast
140 – 2020 Demand
130 – 2019 Demand
2018 Demand
120 –
Demand

110 –
100 –
90 –
80 –
70 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Time
 San Diego Hospital
Trend Data

10,200 –

10,000 –
Inpatient Days

9745
9,800 – 9659 9702
9573 9616 9766
9,600 – 9530 9680 9724
9594 9637
9551
9,400 –

9,200 –
| | | | | | | | | | | |
9,000 –
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.6
San Diego Hospital
Seasonal Indices

1.06 –
1.04 1.04
Index for Inpatient Days

1.04 – 1.03
1.02
1.02 – 1.01
1.00
1.00 – 0.99
0.98
0.98 – 0.99
0.96 – 0.97 0.97
0.96
0.94 –
| | | | | | | | | | | |
0.92 –
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.7
 San Diego Hospital
Combined Trend and Seasonal Forecast

10,200 – 10068
9949
10,000 – 9911
Inpatient Days

9764 9724
9,800 – 9691
9572
9,600 –
9520 9542
9,400 –
9411
9265 9355
9,200 –
| | | | | | | | | | | |
9,000 –
Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
67 68 69 70 71 72 73 74 75 76 77 78
Month
Figure 4.8
Associative Forecasting
Used when changes in one or more independent
variables can be used to predict the changes in the
dependent variable

Most common technique is linear

regression analysis

We apply this technique just as we did in the

time series example
Associative Forecasting
Forecasting an outcome based on predictor
variables using the least squares technique

^
y = a + bx
^ where y = computed value of the
variable to be predicted (dependent
variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable though
to predict the value of the dependent
variable
Associative Forecasting
Associative Forecasting Example
Sales Local Payroll
($ millions), y ($ billions), x
2.0 1
3.0 3
2.5 4
2.0 2 4.0 –
2.0 1
3.0 –

Sales
3.5 7
2.0 –

1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Associative Forecasting Example
Sales, y Payroll, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
∑y = 15.0 ∑x = 18 ∑x2 = 80 ∑xy = 51.5

∑xy -=nxy 51.5 - (6)(3)(2.5)

x = ∑x/6 = 18/6 = 3 b= = .25
∑x2 - nx2 80 - (6)(32)
y = ∑y/6 = 15/6 = 2.5 a = y - bx = 2.5 - (.25)(3) = 1.75
 Associative Forecasting Example
^
y = 1.75 + .25x Sales = 1.75 + .25(payroll)

If payroll next year is

estimated to be $6 billion, 4.0 –
then:
3.25

Sales
3.0 –

Sales = 1.75 + .25(6) 2.0 –

Sales = $3,250,000
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Correlation
 How strong is the linear relationship between
the variables?
 Correlation does not necessarily imply
causality!
 Coefficient of correlation, r, measures degree
of association
 Values range from -1 to +1
Correlation Coefficient
nSxy - SxSy
r=
[nSx2 - (Sx)2][nSy2 - (Sy)2]
Correlation Coefficient
y y

nSxy - SxSy
r=
(a) Perfect positive [nSx
x
2
- (Sx)2][nSy(b)
2
- Positive
(Sy)2] x
correlation: correlation:
r = +1 0<r<1

y y

(c) No correlation: x (d) Perfect negative x

r=0 correlation:
r = -1
Correlation
 Coefficient of Determination, r2, measures the
percent of change in y predicted by the change
in x
 Values range from 0 to 1
 Easy to interpret

For the Nodel Construction example:

r = .901
r2 = .81
Multiple Regression Analysis

If more than one independent variable is to be used

in the model, linear regression can be extended to
multiple regression to accommodate several
independent variables
^y = a + b x + b x …
1 1 2 2

Computationally, this is quite complex and

generally done on the computer
Multiple Regression Analysis
In the Nodel example, including interest rates in the model gives the new
equation:

^
y = 1.80 + .30x1 - 5.0x2
An improved correlation coefficient of r = .96 means this model does a better
job of predicting the change in construction sales