Forecasting Techniques: Dr. C. Lightner Fayetteville State University 1

FORECASTING TECHNIQUES
Chapter 16
Qualitative Approaches to Forecasting
Quantitative Approaches to Forecasting
The Components of a Time Series
Using Smoothing Methods in Forecasting
Measures of Forecast Accuracy
Using Trend Projection in Forecasting
Using Regression Analysis in Forecasting
Dr. C. Lightner 1
Fayetteville State University
Forecasting Introduction
An essential aspect of managing any organization is

planning for the future.
Organizations employ forecasting techniques to
determine future inventory, costs, capacities, and
interest rate changes.
There are two basic approaches to forecasting:
-Qualitative
-Quantitative
Dr. C. Lightner 2
Qualitative Approaches to Forecasting
Delphi Approach
– A panel of experts, each of whom is physically separated from
the others and is anonymous, is asked to respond to a
sequential series of questionnaires.
– After each questionnaire, the responses are tabulated and the
information and opinions of the entire group are made known to
each of the other panel members so that they may revise their
previous forecast response.
– The process continues until some degree of consensus is
achieved.
Dr. C. Lightner 3
Qualitative Approaches (continued)
Scenario Writing
– Scenario writing consists of developing a conceptual scenario
of the future based on a well defined set of assumptions.
– After several different scenarios have been developed, the
decision maker determines which is most likely to occur in the
future and makes decisions accordingly.
Dr. C. Lightner 4
Qualitative Approaches (continued)
Subjective or Interactive Approaches

– These techniques are often used by committees or panels
seeking to develop new ideas or solve complex problems.
– They often involve "brainstorming sessions".
– It is important in such sessions that any ideas or opinions be
permitted to be presented without regard to its relevancy and
without fear of criticism.
Dr. C. Lightner 5
Quantitative Approaches to
Forecasting
Quantitative methods are based on an analysis of historical data
concerning one or more time series.
A time series is a set of observations measured at successive
points in time or over successive periods of time.
If the historical data used are restricted to past values of the
series that we are trying to forecast, the procedure is called a
time series method.
If the historical data used involve other time series that are
believed to be related to the time series that we are trying to
forecast, the procedure is called a causal method.
Quantitative approaches are generally preferred. In this chapter
we will focus on quantitative approaches to forecasting.
Dr. C. Lightner 6
Time Series Data
Time Series Data is usually plotted on a graph to

determine the various characteristics or components of
the time series data.
There are 4 Major Components: Trend, Cyclical,
Seasonal, and Irregular Components.
Dr. C. Lightner 7
Components of a Time Series
The trend component accounts for the gradual shifting

of the time series over a long period of time.
Any regular pattern of sequences of values above and
below the trend line is attributable to the cyclical
component of the series.
The seasonal component of the series accounts for
regular patterns of variability within certain time periods,
such as over a year.
The irregular component of the series is caused by
short-term, unanticipated and non-recurring factors that
affect the values of the time series. One cannot attempt
to predict its impact on the time series in advance.
Dr. C. Lightner 8
Time Series Data
We will learn the following Forecasting Approaches:

Smoothing
Trend Projections
Dr. C. Lightner 9
Excel Instructions for Drawing a
Scatter Plot
1. Enter data in the Excel spreadsheet.
2. Click on Insert on the toolbar and then click on
the Chart tab. The Chart Wizard will appear. In
step 1 on select the XY (scatter) chart type and
then click next.
3. In step 2 specify the cells where your data is
located in the data range box.
4. In step 3 you can give your chart a title and
label your axes. In step 4 specify where you
want the chart to be placed.
Dr. C. Lightner 10
Example: Robert’s Drugs
During the past ten weeks, sales of cases of Comfort
brand headache medicine at Robert's Drugs have
been as follows:
Week Sales Week Sales

1 110 6 120
2 115 7 130
3 125 8 115
4 120 9 110
5 125 10 130
Plot this data.
Dr. C. Lightner 11
Plot Robert’s Drugs Example
Excel Spreadsheet Showing Input Data. Specify cells

A4:B13 as the Data A
Range. B
1 Robert'sDrugs
2
3 Week ( t) Sales t
4 1 110
5 2 115
6 3 125
7 4 120
8 5 125
9 6 120
10 7 130
11 8 115
12 9 110
13 10 130
14 11
Dr. C. Lightner 12
Plot Robert’s Drugs Example
I labeled
Robert’s Drug
Robert's Drug Example
Example as
The Chart title
135
130
125
Sales
120
115
I labeled 110
Sales as 105 I labeled
My Value (y) Week, t as
0 5 10 15
axis My Value (x)
Week, t axis
Dr. C. Lightner 13
Smoothing Methods
In cases in which the time series is fairly stable and

has no significant trend, seasonal, or cyclical effects,
one can use smoothing methods to average out the
irregular components of the time series.
Three common smoothing methods are:
– Moving average
– Weighted moving average
– Exponential smoothing
Dr. C. Lightner 14
Smoothing Methods: Moving Average
Moving Average Method

The moving average method consists of computing
an average of the most recent n data values for the
series and using this average for forecasting the value
of the time series for the next period.
Dr. C. Lightner 15
Robert Drug’s Example: Moving
Average
Our scatter plot for Robert’s Drug Sales has no
significant trend, seasonal, or cyclical effects. Thus we
should employ a smoothing technique for forecasting
sales.
Forecast the sales for period 11 using a three period

moving average (MA3).
Dr. C. Lightner 16
Example: Robert’s Drugs: Moving Average
Steps to Moving Average Using Excel

Step 1: Select the Tools pull-down menu.
Step 2: Select the Data Analysis option.
Step 3: When the Data Analysis Tools dialog
appears, choose Moving Average.
Step 4: When the Moving Average dialog box
appears:
This specifies
Enter B4:B13 in the Input Range box.
the value of n Enter 3 in the Interval box.
This is the column Enter C5 in the Output Range box.
following our data,
and one row below where Select OK.
our data begins.
Dr. C. Lightner 17
Robert’s Drugs: Moving Average
MA3 (Three period Moving average) for Robert’s Drug Example
Ft is the forecast for week t.
Robert's Drug
F4 (forecast for week 4)=116.7
Week (t )
1 F11 (forecast for week 11)=118.3
2
Dr. C. Lightner
Thus we would forecast the sales
for Week 11 to be 118.3
18
Smoothing Methods: Weighted Moving
Average
Weighted Moving Average Method
The weighted moving average method consists of computing a
weighted average of the most recent n data values for the series
and using this weighted average for forecasting the value of the
time series for the next period. The more recent observations are
typically given more weight than older observations. For
convenience, the weights usually sum to 1.
The regular moving average gives equal weight to past data
values when computing a forecast for the next period. The
weighted moving average allows different weights to be allocated
to past data values.
There is no Excel command for computing this so you must do this
manually. You can either manually enter the formulas into excel
and apply to all periods or compute value by hand.
Dr. C. Lightner 19
Smoothing Methods: Weighted Moving
Average
Use a 3 period weighted moving average to forecast the
sales for week 11 giving a weight of 0.6 to the most recent
period, 0.3 to the second most recent period, and 0.1 to
the third most recent period.
F11 = (0.6)*130 + (0.3)*110 + (0.1)* 115= 122.5
Sales for the Sales for 2nd Sales for 3rd

most recent most recent most recent
period period period
Thus we would forecast the sales for week 11 to be 122.5.
Dr. C. Lightner 20
Smoothing Methods: Exponential
Smoothing
Exponential Smoothing
– Using exponential smoothing, the forecast for the next period is equal
to the forecast for the current period plus a proportion (α ) of the
forecast error in the current period.
– Using exponential smoothing, the forecast is calculated by:
Ft+1 =α Yt + (1- α )Ft
This is the same as
where: Ft+1 = Ft + α (Yt – Ft)
α is the smoothing constant (a number between 0
and 1)
Ft is the forecast for period t
Ft+1 is the forecast for period t+1
Yt is the actual data value for period t
Dr. C. Lightner 21
Robert’s Drugs: Exponential Smoothing
Forecast the sales for period 11 using Exponential

Smoothing α= 0.1.
Dr. C. Lightner 22
Steps to Exponential Smoothing Using Excel

Step 1: Select the Tools pull-down menu.
Step 2: Select the Data Analysis option.
Step 3: When the Data Analysis Tools dialog
appears, choose Exponential Smoothing.
Step 4: When the Exponential Smoothing dialog box
appears:
Enter B4:B13 in the Input Range box.
Damping factor Enter 0.9 (for α = 0.1) in Damping Factor box.
is always 1-α Enter C4 in the Output Range box.
Select OK.
Dr. C. Lightner 23
Robert's Drugs
α=0.1
Week (t ) Salest Ft
1 110 #N/A
2 115 110
3 125 110.5
4 120 111.95
5 125 112.755
6 120 113.9795
7 130 114.5816
8 115 116.1234
9 110 116.0111
10 130 115.4099
11
F11 = 0.1 * Y10 + .9 F10

Thus we would
= .1 *130 + .9 * 115.4099
forecast sales for
week 11 to be 116.87 = 116.87
Dr. C. Lightner 24
Questions That You Should Be
Asking
For the Moving Average technique, how do I determine the best
value of n to use for forecasting?
For Exponential Smoothing, how do I determine the best value of α
to use?
If I realize that a smoothing technique should be employed, how do
you know which smoothing technique is best?
In order to answer the above questions, we need criteria for

judging the accuracy of a forecasting technique. Once we select a
criterion, the method (or parameter) which provides the best value
for our criterion is the best method (or parameter) to use for
forecasting our scenario.
Dr. C. Lightner 25
Measures of Forecast Accuracy
Mean Squared Error (MSE)
The average of the squared forecast errors for the historical data is
calculated. The forecasting method or parameter(s) which minimize
this mean squared error is then selected.
Mean Absolute Deviation (MAD)

The mean of the absolute values of all forecast errors is calculated,
and the forecasting method or parameter(s) which minimize this
measure is selected. The mean absolute deviation measure is less
sensitive to individual large forecast errors than the mean squared
error measure.
You may choose either of the above criteria for evaluating the
accuracy of a method (or parameter).
Dr. C. Lightner 26
Selecting the best Smoothing Technique for
Robert’s Drugs
Determine the smoothing technique that is best for forecasting
Robert’s Drug sales: A two period moving average, a three period
moving average, exponential smoothing (α=0.1), or exponential
smoothing (α=0.2)
Realistically we should have experimented with more values of n

for the moving average, and α for exponential smoothing to
determine the absolute best parameters to use for our technique.
On the next slide we randomly chose to use the MSE criterion to

judge the best technique.
Dr. C. Lightner 27
Robert’s Drugs :Comparing Smoothing
Techniques
Double click on the Excel sheet below to enter actual Excel spreadsheet
that I created. Clicking on individual cells will provide the formulas that were
entered to compute the observed values.
Robert's Drug
Sales n=2 Error
2
Week (t ) Yt Ft (Yt - Ft) (Yt - Ft) MSE for MA2
1 110
2 115 #N/A
3 125 112.5 12.5 156.25
4 120 120 0 0
5 125 122.5 2.5 6.25
6 120 122.5 -2.5 6.25
7 130 122.5 7.5 56.25
8 115 125 -10 100
9 110 122.5 -12.5 156.25
10 130 112.5 17.5 306.25
11 120
MSE 98.4375
Dr. C. Lightner 28
Techniques
Robert's Drug
Sales n=3 Error
2
Week (t ) Yt Ft (Yt - Ft) (Yt - Ft)
1 110
2 115 #N/A
3 125 #N/A MSE for MA3
4 120 116.6667 3.333333 11.11111
5 125 120 5 25
6 120 123.3333 -3.33333 11.11111
7 130 121.6667 8.333333 69.44444
8 115 125 -10 100
9 110 121.6667 -11.6667 136.1111
10 130 118.3333 11.66667 136.1111
11 118.3333
MSE 69.84127
Dr. C. Lightner 29
Techniques
Sales α=0.1 Error

2
1 110 #N/A
2 115 110 5 25
3 125 110.5 14.5 210.25 MSE for Exponential
Smoothing α=0.1
4 120 111.95 8.05 64.8025
5 125 112.755 12.245 149.94
6 120 113.9795 6.0205 36.24642
7 130 114.5816 15.41845 237.7286
8 115 116.1234 -1.1234 1.262016
9 110 116.0111 -6.01106 36.13279
10 130 115.4099 14.59005 212.8696
11
MSE 108.248
Dr. C. Lightner 30
Techniques
Sales α=0.2 Error
2
1 110 #N/A
2 115 110 5 25
3 125 111 14 196
4 120 113.8 6.2 38.44
MSE for Exponential
5 125 115.04 9.96 99.2016 Smoothing α=0.2
6 120 117.032 2.968 8.809024
7 130 117.6256 12.3744 153.1258
8 115 120.1005 -5.10048 26.0149
9 110 119.0804 -9.08038 82.45337
10 130 117.2643 12.73569 162.1979
11
MSE 87.91584
Dr. C. Lightner 31
Techniques
Since the three period moving average technique
(MA3) provides to lowest MSE value, this is the best
smoothing technique to use for forecasting Robert’s
Drug Sales.
Dr. C. Lightner 32
Trend Projection
If a time series exhibits a linear trend, the method of least

squares may be used to determine a trend line (projection) for
future forecasts.
Least squares, also used in regression analysis, determines the
unique trend line forecast which minimizes the mean square
error between the trend line forecasts and the actual observed
values for the time series.
The independent variable is the time period and the dependent
variable is the actual observed value in the time series.
Dr. C. Lightner 33
Trend Projection
Using the method of least squares, the formula for the trend
projection is:
Yt = b0 + b1t.
where: Yt = trend forecast for time period t

b1 = slope of the trend line
b0 = trend line projection for time 0
b1 = nΣ tYt - Σ t Σ Yt b0 = Y − b1t
nΣ t 2 - (Σ t )2
where: Yt = observed value of the time series at time period t
t
Y
= average of the observed values for Yt
t
=t average time period for the n observations
Dr. C. Lightner 34
Example: Auger’s Plumbing Service
The number of plumbing repair jobs performed by Auger's
Plumbing Service in each of the last nine months are listed
below.
Month Jobs Month Jobs Month Jobs
March 353 June 374 September 399
April 387 July 396 October 412
May 342 August 409 November 408
Forecast the number of repair jobs Auger's will perform in

December using the least squares method.
Dr. C. Lightner 35
Auger’s Plumbing Service: Trend
Projection
Trend Projection
(month) t Yt tYt t 2
(Mar.) 1 353 353 1

(Apr.) 2 387 774 4
(May) 3 342 1026 9
(June) 4 374 1496 16
(July) 5 396 1980 25
(Aug.) 6 409 2454 36
(Sep.) 7 399 2793 49
(Oct.) 8 412 3296 64
(Nov.) 9 408 3672 81
Sum 45 3480 17844 285
Dr. C. Lightner 36
Trend Projection (continued)
= 45/9 = 5 = 3480/9 = 386.667

tt Y
nΣ tYt - Σ t Σ Yt (9)(17844) - (45)(3480)
b1 = = = 7.4
n Σ t 2 - (Σ t)2 (9)(285) - (45)2
= 386.667 - 7.4(5) = 349.667

= Y −our
b0 Thus b1ttrend line is Y = 349.667 + 7.4 t.
t
Y10 = 349.667 + (7.4)(10) =
423.667
For December t=10 Dr. C. Lightner 37
Auger’s Plumbing Service: Trend Line
in Excel
Excel Spreadsheet Showing Input Data
A B C
1 Auger's Plumbing Service
2
3 Month Calls
4 1 353
5 2 387
6 3 342
7 4 374
8 5 396
9 6 409
10 7 399
11 8 412
12 9 408
13
Dr. C. Lightner 38
Steps to Trend Projection Using Excel
Step 1: Select an empty cell (B13) in the worksheet.
Step 2: Select the Insert pull-down menu.
Step 3: Choose the Function option.
Step 4: When the Select Category dialog box appears:
Choose Statistical in Function Category box.
Choose Forecast in the Function Name box.
Select OK.
Step 5: When the Forecast dialog box appears:
Enter 10 in the x box (for month 10).
Enter B4:B12 in the Known y’s box.
Enter A4:A12 in the Known x’s box.
Select OK.
Dr. C. Lightner 39
Spreadsheet Showing Trend Projection for Month 10

Auger's Plumbing Service
Month Calls
1 353
2 387
3 342
4 374
5 396
6 409
7 399
8 412
9 408
10 423.667 Projected
Dr. C. Lightner 40
Roberts Drug Example
Suppose we neglected to plot Robert’s Drug example, and therefore we
do not know that a trend does not exist. Use trend analysis to forecast
the sales for month 11.
Week( t) Yt
1 110
2 115
3 125
4 120
5 125
6 120
7 130
8 115
9 110
10 130
11 124 Forecast
Dr. C. Lightner 41
Question????
How could we use the MSE or MAD to verify that the

MA3 is a better smoothing technique than trend analysis
for Robert’s Drug Sales data?
Dr. C. Lightner 42
Causal Method: Regression Analysis
Regression Analysis is similar to trend analysis, except

the independent variable is not restricted to time. Refer
to Robert’s Drug example. Instead of letting time
represent our independent variable, we could forecast
sales based upon the price of the product. Since
products often go on sale, we could collect data over
several months collecting the weekly price and number
of items sold for the week. For this model, we would
find the regression equation in the same manner in
which we found the trend line except we would call the
independent variable x, instead of t.
Dr. C. Lightner 43
Regression Equation
Using the method of least squares, the formula for the regression
line is:
Y = b0 + b1x.
where: Y= dependent variable which depends on the value of x

b1 = slope of the regression line
b0 = regression line projection for x= 0
b1 = nΣ XiYi - Σ Xi Σ Yi b0 = y − b1 x
nΣ Xi2 - (Σ Xi)2
where: Yt = observed value of the time series at time period t
t
Y
= average of the observed values for Yt
tt
= average time period for the n observations
Dr. C. Lightner 44
Regression Analysis in Excel
The dependent variable Y can predicted using the

same forecast function in Excel as used to forecast a
trend line. Follow the same steps provided on slide 39.
Dr. C. Lightner 45
THE END
See your textbook for more

examples and detailed explanations
of all topics discussed in these notes.
Dr. C. Lightner 46

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FORECASTING TECHNIQUES

An essential aspect of managing any organization is

Subjective or Interactive Approaches

Time Series Data is usually plotted on a graph to

The trend component accounts for the gradual shifting

We will learn the following Forecasting Approaches:

Week Sales Week Sales

Plot this data.

Excel Spreadsheet Showing Input Data. Specify cells

In cases in which the time series is fairly stable and

Moving Average Method

Forecast the sales for period 11 using a three period

Steps to Moving Average Using Excel

MA3 (Three period Moving average) for Robert’s Drug Example

Ft is the forecast for week t.

F11 = (0.6)*130 + (0.3)*110 + (0.1)* 115= 122.5

Sales for the Sales for 2nd Sales for 3rd

Thus we would forecast the sales for week 11 to be 122.5.

Forecast the sales for period 11 using Exponential

Steps to Exponential Smoothing Using Excel

F11 = 0.1 * Y10 + .9 F10

In order to answer the above questions, we need criteria for

Mean Absolute Deviation (MAD)

Realistically we should have experimented with more values of n

On the next slide we randomly chose to use the MSE criterion to

Sales α=0.1 Error

If a time series exhibits a linear trend, the method of least

where: Yt = trend forecast for time period t

Forecast the number of repair jobs Auger's will perform in

(Mar.) 1 353 353 1

= 45/9 = 5 = 3480/9 = 386.667

= 386.667 - 7.4(5) = 349.667

Y10 = 349.667 + (7.4)(10) =

Spreadsheet Showing Trend Projection for Month 10

How could we use the MSE or MAD to verify that the

Regression Analysis is similar to trend analysis, except

where: Y= dependent variable which depends on the value of x

The dependent variable Y can predicted using the

See your textbook for more

You might also like

F11 = (0.6)130 + (0.3)110 + (0.1)* 115= 122.5