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Single Regression

Advanced techniques can be used when there is trend or seasonality, or when other factors (such as price discounts) must be considered. What is Single Regression? EXAMPLE: 16 Months of Demand History EXAMPLE: Building a Regression Model to Handle Trend and Seasonality EXAMPLE: Causal Modeling

What is Single Regression?

Develops a line equation y = a + b(x) that best fits a set of historical data points (x,y) Ideal for picking up trends in time series data Once the line is developed, x values can be plugged in to predict y (usually demand)

For time series models, x is the time period for which we are forecasting For causal models (described later), x is some other variable that can be used to predict demand: o Promotions Price changes Economic conditions Etc. Software packages like Excel can quickly and easily estimate the a and b values required for the single regression model

EXAMPLE: 16 Months of Demand History

There is a clear upward trend, but also some randomness.

Forecasted demand = 188.55 + 69.43*(Time Period)

Notice how well the regression line fits the historical data, BUT we arent interested in forecasting the past

Forecasts for May 05 and June 05:

May: 188.55 + 69.43*(17) = 1368.86 June: 188.55 + 69.43*(18) = 1438.29 The regression forecasts suggest an upward trend of about 69 units a month. These forecasts can be used as-is, or as a starting point for more qualitative analysis.

EXAMPLE: Building a Regression Model to Handle Trend and Seasonality

Quarter PeriodDemand Winter 04 1 80 Spring 2 240 Summer 3 300

Fall Winter 05 Spring Summer Fall

4 5 6 7 8

440 400 720 700 880

Regression picks up the trend, but not seasonality effects

Calculating seasonal index: Winter Quarter

(Actual / Forecast) for Winter quarters: Winter 04: (80 / 90) = 0.89 Winter 05: (400 / 524.3) = 0.76 Average of these two = .83 Interpretation: For Winter quarters, actual demand has been, on average, 83% of the unadjusted forecast

Seasonally adjusted forecast model

For Winter quarter [ -18.57 + 108.57*Period ] * .83 Or more generally: [ -18.57 + 108.57*Period ] * Seasonal Index

Seasonally adjusted forecasts

Comparison of adjusted regression model to historical demand

Single regression and causal forecast models

Time series assume that demand is a function of time. This is not always true. Examples: Demand as a function of advertising dollars spent Demand as a function of population Demand as a function of other factors (ex. flu outbreak) Regression analysis can be used in these situations as well; We simply need to identify the x and y values

EXAMPLE: Causal Modeling

MonthPrice per unitDemand 1 $1.50 7,135 2 $1.50 6,945 3 $1.25 7,535 4 $1.40 7,260 5 $1.65 6,895 6 $1.65 7,105 7 $1.75 6,730

8 9 10

$1.80 $1.60 $1.60

6,650 6,975 6,800

Two possible x variables: Month or Price Which would be a better predictor of demand?

Demand seems to be trending down over time, but the relationship is weak. There may be a better model ...

Demand shows a strong negative relationship to price. Using Excel to develop a regression model results in the following: Demand = 9328 1481 * (Price) Interpretation: For every dollar the price increases, we would expect demand to fall 1481 units.