# Chapter 13 Forecasting

It is difficult to forecast, especially in regards to the future.

MGS3100
Julie Liggett De Jong

It isn’t difficult to forecast, just to forecast correctly.

Numbers, if tortured enough, will confess to just about anything.

Economic Forecasts Influence:

Government policies & business decisions

1

Insurance companies’ investment decisions in mortgages and bonds

Service industries’ forecasts of demand as input for revenue management

Excel Features & Functions
FEATURES • Regression • Solver • Sorting FUNCTIONS • SUMPRODUCT( ) • SUMXMY2( ) • YEAR( ) • MONTH( ) • RIGHT( )

Quantitative vs Qualitative Forecasting Models

Quantitative Forecasting Models

Expressed in mathematical notation

2

Quantitative Forecasting Models
1. Causal (Curve Fitting)
a. Linear b. Quadratic

2. Moving Averages (Naive)
a. Simple n-Period Moving Average b. Weighted n-Period Moving Average

3. Exponential Smoothing
a. Basic model b. Holt’s Model (exponential smoothing with trend)

Based on an amazing quantity of data
4. Seasonality

Important Variables

X
Y

Independent variable(s)

True value of dependent variable Predicted or forecasted dependent variable (Y hat)

ˆ Y
Y

Causal vs Time Series Models
Average value of dependent variable (Y bar)

Causal Forecasting Models

Requirements

3

Independent and dependent variables must share a relationship

We must know the values of the independent variables when we make the forecast

Curve Fitting

Self Service Gas Stations

Oil company wants to expand its network of self-service gas stations

We’ll use historical data for five stations to calculate average traffic flow and sales

4

Sales & Traffic Data

Traffic flow: average # of cars / hour Sales: average dollar sales / hour

Plot the averages in a scatter plot.

Figure 1, p274

Scatter Plot of Sales & Traffic Data
300 250 200 150 100 50 0 50 100 Cars/hour
Figure 2, p274

Method of Least Squares
300 250 200 150 100 50 -

S ales /hour (\$)

150

200

250

S ales /hour (\$)

y = a + bx

0

50

100 Cars/hour

150

200

250
Figure 3, p275

Use Regression to fit a Linear Function

Regression computes three types of errors
RSS = ESS = TSS =

Σ (Yi – Y )2 i=1 Σ (Yi – Yi )2 i=1 Σ (Yi – Y–)2 i=1
n n

n

^

Regression Residual Total

^

TSS = ESS + RSS RSS TSS

R2 =
Figure 5, p277

5

Should we build a gas station at Buffalo Grove where traffic is 183 cars/hour?

^ y

=

a

+

b

*

x

Sales/hour = 57.104 + 0.92997 * 183 cars/hr

= \$227.29

How confident are we in this forecast?

Confidence intervals use the following statistics: 1.00 =68% 1.96 = 95.0% 3.00 = 99.7%

ˆ Y

+ -

2 * Standard Error (Se)

Se =

Σ (Yi – Yi )2 i=1
n – k -1

n

^

=

ESS n – k -1

6

Excel calculates the Standard Error for us.

The 95% confidence interval is:
[227.29 – 2(44.18); 227.29 + 2(44.18)] [\$138.93; \$315.65]

Fitting a Quadratic Function
Other important information:
T-statistic and its p-value Upper & Lower 95% F significance R2 and Adjusted R2

Figure 5, p277

Fitting a Quadratic Function

Use Solver to fit a Quadratic Function

300 250 200
Sales/hour (\$)

y = a0 + a1x + a2x2
150 100 50 0 50 100
Cars/hour

150

200

250

Figure 10, p283

y = a0 + a1x + a2x2

Figure 7, p281

7

We could create a formula that exactly passes through every data point…..

But, why wouldn’t we want to do that?

Which curve to fit?

Goodness of fit statistics: Sum of Squared Errors (SSE)

SSE =

i=1

^ Σ (Yi – Yi )2

n

Goodness of fit statistics: Mean Squared Error (MSE)

8

MSE =

Sum of Squared Errors (# of points – # of parameters)

Regression: SSE = 5854 Quadratic: SSE = 4954

Causal Forecasting Models
Positive Slope indicates upward trend Negative Slope indicates downward trend

140 120 100

140

y = 5x + 5
Customers

120

y = -5x + 135
100 80 60 40 20 0
13 21 17

Regression: MSE = 5854 / (5 - 2) = 1951.3 Quadratic: MSE = 4954 / (5 - 3) = 2477.0

Profit

80 60 40 20 0

11

19

13

15

17

21

23

25

Time

Time

Time-Series Forecasting Models

1. Curve Fitting: a) Linear b) Quadratic

Time is the independent variable

23

25

15

11

19

1

3

5

1

3

5

7

9

7

9

9

2. Moving Averages (Naive)
a) Simple n-Period Moving Avg b) Weighted n-Period Moving Avg

3. Exponential Smoothing a) Basic model
b) Holt’s Model (trend)

Curve Fitting Seasonality Plot historical values as function of time and draw a linear “trend line”. Use trend line to predict future value.

Moving Averages (Naïve): Use previous period’s actual value to forecast the current period (i.e., use 12th value to predict 13th value). The Bank of Laramie

10

Moving Averages: Use average of past 12 values as best forecast for 13th value.

Simple n-Period Moving Averages: Use average of the most recent 6 values to predict 13th value.

Steco: a simple nperiod moving averages forecasting model

MONTH Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec.

ACTUAL SALES (\$000s) 20 24 27 31 37 47 53 62 54 36 32 29

THREE-MONTH SIMPLE MOVING AVERAGE FORECAST

FOUR-MONTH SIMPLE MOVING AVERAGE FORECAST

(20 (24 (27 (31 (37 (47 (53 (62 (54

+ + + + + + + + +

24 27 31 37 47 53 62 54 36

+ + + + + + + + +

27)/3 31)/3 37)/3 47)/3 53)/3 62)/3 54)/3 36)/3 32)/3

= = = = = = = = =

23.67 27.33 31.67 38.33 45.67 54.00 56.33 50.67 40.67

(20 + (24 + (27 + (31 + (37 + (47 + (53 + (62 +

24 27 31 37 47 53 62 54

+ + + + + + + +

27 + 31 + 37 + 47 + 53 + 62 + 54 + 36 +

31)/4 37)/4 47)/4 53)/4 62)/4 54)/4 36)/4 32)/4

= = = = = = = =

25.50 29.75 35.50 42.00 49.75 54.00 51.25 46.00

Three- and Four- Month Simple Moving Averages

ˆ y

16

=

y

15

+

y

14

+ 4

y

13

+

y

12

Table 1, p290

Goodness of fit statistics

STECO: Simple n-Period Moving Average

MAD =

all forecasts

actual sales − forecast sales number of forecasts

MAPE =

all forecasts

actual sales − forecast sales actual sales number of forecasts

∗ 100 %

MONTH Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec.

ACTUAL SALES (\$000s) 20 24 27 31 37 47 53 62 54 36 32 29

THREE-MONTH FOUR-MONTH SIMPLE MOVING SIMPLE MOVING AVERAGE ABSOLUTE AVERAGE FORECAST ERROR FORECAST

ABSOLUTE ERROR

\$ \$ \$ \$ \$ \$ \$ \$ \$

23.67 27.33 31.67 38.33 45.67 54.00 56.33 50.67 40.67 SUM = MAD =

7.33 9.67 15.33 14.67 16.33 0.00 20.33 18.67 11.67 114.00 12.67

\$ \$ \$ \$ \$ \$ \$ \$

25.50 29.75 35.50 42.00 49.75 54.00 51.25 46.00 SUM = MAD =

11.50 17.25 17.50 20.00 4.25 18.00 19.25 17.00 124.75 15.59

Figure 14, p291

11

Simple n-Period Moving Average forecasting models have two shortcomings

Philosophical Shortcoming Most recent observations receive no more weight or importance than older observations.

Operational Shortcoming All historical data used to make forecast must be stored in some way to calculate the forecast.

Weighted n-Period Moving Averages: Resolves philosophical shortcoming of simple period moving average forecasting

Weighted n-Period Moving Averages: Use weighted average of previous values & assign higher weights to more recent observations

Recent data is more important than old data

ˆ y = α 0 y 6 + α 1 y5 + α 2 y 4

12

Constraints: The α' s (weights) are positive numbers

Constraints: Smaller weights are assigned to older data

alpha2 = alpha1 = alpha0 = SUM OF WTS=

0.167 0.333 0.500 1.00

Constraints: All the weights sum to 1

Month Actual Sales (000) 3month WMA Fcst Absolute Error January 20 February 24 March 27 April 31 24.83 6.17 May 37 28.50 8.50 June 47 33.33 13.67 July 53 41.00 12.00 August 62 48.33 13.67 September 54 56.50 2.50 October 36 56.50 20.50 November 32 46.34 14.34 December 29 37.01 8.01 Sum = MAD = 99.35 11.04

Use Solver to find the optimal weights
Figure 16, p293

Weighted n-Period Moving Averages resolves philosophical shortcoming of simple period moving average forecasting

Exponential Smoothing resolves operational shortcoming of simple period moving average forecasting

13

Exponential Smoothing

Exponential Smoothing
Forecast for t + 1 Observed in t Forecast for t

ˆ ˆ y t +1 = αy t + (1 − α )y t
Where

α

is a user-specified constant

Resolves operational shortcoming of the Moving Averages Model:
Number of 8-period Moving Inventory Items Average Model to Forecast Exponential Smoothing Model

alpha =

0.500

5,000

40,000: 5,000 * 8

10,001:
ˆ 5,000 y t 5,000 y t 1α

Actual Sales (000) Fcst Sales Absolute Error Month January 20 20.00 February 24 20.00 4.00 March 27 22.00 5.00 April 31 24.50 6.50 May 37 27.75 9.25 June 47 32.38 14.63 July 53 39.69 13.31 August 62 46.34 15.66 September 54 54.17 0.17 October 36 54.09 18.09 November 32 45.04 13.04 December 29 38.52 9.52 Sum = MAD = 109.17 9.92

Saving alpha and the last forecasts stores all the previous forecasts. When t = 1, the expression becomes:

Does exponential smoothing produce a better forecast?

ˆ ˆ y t +1 = αy t + (1 − α )y t

ˆ ˆ y 2 = αy t + (1 − α )y t

VARIABLE yt y t-1 y t-2 y t-3 y t-4 y t-5 y t-6 y t-7 y t-8 y t-9 y t-10 Sum of the Weights

COEFFICIENT α α(1-α) α(1-α) α(1-α) α(1-α) α(1-α) α(1-α) α(1-α) α(1-α) α(1-α) α(1-α)
2 3 4 5 6 7 8 9

α = 0.1 0.1 0.09 0.081 0.07290 0.06561 0.05905 0.05314 0.04783 0.04305 0.03874 0.03487 0.68619

α = 0.3 0.3 0.21 0.147 0.10290 0.07203 0.05042 0.03529 0.02471 0.01729 0.01211 0.00847 0.98023

α = 0.5 0.5 0.25 0.125 0.06250 0.03125 0.01563 0.00781 0.00391 0.00195 0.00098 0.00049 0.99951

Case 1: Response to Sudden Change
System Change when t = 100
2 1

Response to a Unit Change in y t
1.2 1.1 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 100

yt

1 0 -1 94 95 96 97 98 99 100 101 102 103

t

105

110

115

120

125

t

10

The value of alpha affects the performance of the model

A forecasting system with alpha = 0.5 responds quickly to changes in the data.

14

Case 2: Response to Steady Change
Steadily Increasing Values of yt (Linear Ramp) yt
6 5 4 3 2 1 0 0 2 4 6 8 10

Case 2: Response to Steady Change
Steadily Increasing Values of yt (Linear Ramp) yt
6 5 4 3 2 1 0 0 2 4 6 8 10

t

t

Exponential smoothing is not a good forecasting tool in a rapidly growing or a declining market.

But the model can be adjusted (Holt’s model / exponential smoothing w/trend)

Case 3: Response to Seasonal Change
Seasonal Pattern in y t
1.5 1.3 1.1 0.9 0.7 0.5 0.3 0.1 -0.1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

yt

t

Seasonality
Exponential smoothing is not a good model to use here because it ignores the seasonal pattern.

Takes into consideration and adjusts for the seasonal patterns in data

1. Look at original data to see seasonal pattern. Examine the data & hypothesize an m-period seasonal pattern.

15

2. Deseasonalize the Data

3. Forecast using deseasonalized data

4. Seasonalize the forecast to account for the seasonal pattern

Gillett Coal Mine

Coal Receipts Over a Nine-Year Period
3,000

Deseasonalized Data
3,000.0

2,500

2,500.0 Coal (000 Tons) 2,000.0 1,500.0 1,000.0 500.0 1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3- 4- 4- 4- 4- 5- 5- 5- 5- 6- 6- 6- 6- 7- 7- 7- 7- 8- 8- 8- 8- 9- 9- 9- 91 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Coal (000 Tons)

2,000

1,500

1,000

500

0 1-1 1-3 2-1 2-3 3-1 3-3 4-1 4-3 5-1 5-3 6-1 6-3 7-1 7-3 8-1 8-3 9-1 Tim e (Ye ar and Quarte r) 9-3

Tim e (Year & Qtr)

1. Look at original data to see seasonal pattern. Examine the data & hypothesize an m-period seasonal pattern. Figure 27, p303

2. Deseasonalize the Data

Figure 32, p306

16

2.Deseasonalize the Data
a) Calculate a series of m-period moving averages, where m is the length of the seasonal pattern. b) Center the moving average in the middle of the data from which it was calculated. c) Divide the actual data at a given point in the series by the centered moving average corresponding to the same point. d) Develop seasonal index e) Divide actual data by the seasonal index

Time Coal 4 Period Year-Qtr Receipts Moving Average 11 2, 159 ---12 1, 203 ---13 1, 094 1, 613 14 1, 996 1, 594 21 2, 081 1, 626 22 1, 332 1, 721 23 1, 476 1, 856 (2,159+1,203+1,094+1,996)/4 24 2, 533 1, 898 31 2, 249 1, 948 32 1, 533 2, 063 33 1, 935 2, 060 34 2, 523 2, 050 41 2, 208 2, 066

= 1,613

a) Calculate a series of m-period moving averages, where m is the length of the seasonal pattern.
Figure 28, p304

Time Coal Year-Qtr Receipts 11 2, 159 12 1, 203 13 1, 094 14 1, 996 21 2, 081 22 1, 332 23 1, 476 24 2, 533 31 2, 249 32 1, 533 33 1, 935 34 2, 523 41 2, 208 42 1, 597 43 1, 917 44 2, 726

4 Period Moving Average

Centered Moving Average
3,000

Data & Centered Moving Average

1, 613 1, 594 1, 626 1, 721 1, 856 1, 898 1, 948 2, 063 2, 060 2, 050 2, 066 2, 061 2, 112 2, 213

1, 603 1, 610 1, 674 1, 788 1, 877 1, 923 2, 005 2, 061 2, 055 2, 058 2, 064 2, 087 2, 163 2, 255

2,500

Receipts

Coal (000 Tons)

(1613 + 1594)/2 = 1603

2,000

Centered Moving Average

1,500

1,000

500

0 1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3- 4- 4- 4- 4- 5- 5- 5- 5- 6- 6- 6- 6- 7- 7- 7- 7- 8- 8- 8- 8- 9- 9- 9- 91 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Time (Ye ar & Qtr)

b) Center the moving average in the middle of the data from which it was calculated.
Figure 28, p304

b) Center the moving average in the middle of the data from which it was calculated.
Figure 29, p305

Time Coal Year-Qtr Receipts 11 2, 159 12 1, 203 13 1, 094 14 1, 996 21 2, 081 22 1, 332 23 1, 476 24 2, 533 31 2, 249 32 1, 533 33 1, 935 34 2, 523

4 Period Moving Average

Centered Moving Average

Ratio of Coal Receipts to Centered Moving Average

1, 613 1, 594 1, 626 1, 721 1, 856 1, 898 1, 948 2, 063 2, 060 2, 050

1, 603 1, 610 1, 674 1, 788 1, 877 1, 923 2, 005 2, 061 2, 055 2, 058

1,094 / 1,603 = 0.682

0. 682 1. 240 1. 244 0. 745 0. 787 1. 317 1. 122 0. 744 0. 942 1. 226

Ti m e C o al Y e ar - Q tr R ec e i pt s 1-1 2,159 1-2 1,203 1-3 1,094 1-4 1,996 2-1 2,081 2-2 1,332 2-3 1,476 2-4 2,533 3-1 2,249 3-2 1,533 3-3 1,935 3-4 2,523

4 P e ri o d Mo v i ng A ve r a ge

1,613 1,594 1,626 1,721 1,856 1,898 1,948 2,063 2,060 2,050

C e n te r ed Ra t i o o f C o al R ec e ip t s t o S e as o n al M o vi n g A v er a g e C e n te r ed M ov i n g A v er a ge I n di c e s 1.112 0.786 1,603 0.682 0.863 1,610 1.240 1.238 1,674 1.244 1.112 1,788 0.745 0.786 1,877 0.787 0.863 1,923 1.317 1.238 2,005 1.122 1.112 2,061 0.744 0.786 2,055 0.942 0.863 2,058 1.226 1.238

c) Divide the actual data at a given point in the series by the centered moving average corresponding to the same point. Figure 28, p304

d) Develop seasonal index for each quarter • Group ratios by quarter • Average all of the ratios to moving averages quarter by quarter • Add Seasonal Indices data to table • Normalize the seasonal index

17

Deseasonalized Data
3,000.0 2,500.0
Time Coal Year-Qtr Receipts 1-1 2,159 1-2 1,203 1-3 1,094 1-4 1,996 2-1 2,081 2-2 1,332 2-3 1,476 2-4 2,533 3-1 2,249 3-2 1,533 3-3 1,935 3-4 2,523 4 Period Moving Average Centered Moving Average Ratio of Coal Receipts to Seasonal Centered Moving Average Indices 1.112 0.786 0.682 0.863 1.240 1.238 1.244 1.112 0.745 0.786 0.787 0.863 1.317 1.238 1.122 1.112 0.744 0.786 0.942 0.863 1.226 1.238 Deseasonalized Data 1,941.0 1,529.8 1,267.7 1,611.9 1,870.9 1,693.8 1,710.3 2,045.6 2,021.9 1,949.4 2,242.2 2,037.5

Coal (000 Tons)

2,000.0 1,500.0 1,000.0 500.0 Deseasonalized Data

1,613 1,594 1,626 1,721 1,856 1,898 1,948 2,063 2,060 2,050

1,603 1,610 1,674 1,788 1,877 1,923 2,005 2,061 2,055 2,058

21 23

13

31 33

11

41 43

51 53

71 73 81

61 63

83 91

Tim e (Ye ar & Qtr)

e) Divide actual data by the seasonal index
Figure 31, p306

e) Divide actual data by the seasonal index
Figure 32, p306

Time Coal Year-Qtr Receipts 11 2, 159 12 1, 203 13 1, 094 14 1, 996 21 2, 081 22 1, 332 23 1, 476 24 2, 533 31 2, 249 32 1, 533 33 1, 935 34 2, 523

4 Period Moving Average

Centered Moving Average

1, 613 1, 594 1, 626 1, 721 1, 856 1, 898 1, 948 2, 063 2, 060 2, 050

1, 603 1, 610 1, 674 1, 788 1, 877 1, 923 2, 005 2, 061 2, 055 2, 058

Ratio of Coal Receipts to Seasonal Centered Moving Average Indices 1. 108 0. 784 0. 682 0. 860 1. 240 1. 234 1. 244 1. 108 0. 745 0. 784 0. 787 0. 860 1. 317 1. 234 1. 122 1. 108 0. 744 0. 784 0. 942 0. 860 1. 226 1. 234

Deseasonalized Data Forecast 1, 948. 1 1, 948. 1 1, 535. 4 1, 948. 1 1, 272. 3 1, 678. 5 1, 617. 8 1, 413. 1 1, 877. 8 1, 546. 8 1, 700. 0 1, 763. 0 1, 716. 6 1, 721. 9 2, 053. 1 1, 718. 4 2, 029. 3 1, 937. 1 1, 956. 5 1, 997. 4 2, 250. 4 1, 970. 7 2, 045. 0 2, 153. 4

Time Coal Year-Qtr Receipts 11 2, 159 12 1, 203 13 1, 094 14 1, 996 21 2, 081 22 1, 332 23 1, 476 24 2, 533 31 2, 249 32 1, 533 33 1, 935 34 2, 523

4 Period Moving Average ------1, 613 1, 594 1, 626 1, 721 1, 856 1, 898 1, 948 2, 063 2, 060 2, 050

Centered Moving Average ------1, 603 1, 610 1, 674 1, 788 1, 877 1, 923 2, 005 2, 061 2, 055 2, 058

Ratio of Coal Receipts to Seasonal Centered Moving Average Indices ---1. 108 ---0. 784 0. 682 0. 860 1. 240 1. 234 1. 244 1. 108 0. 745 0. 784 0. 787 0. 860 1. 317 1. 234 1. 122 1. 108 0. 744 0. 784 0. 942 0. 860 1. 226 1. 234

3. Forecast method in deseasonalized terms
• Review the graphed deseasonalized data to reveal pattern • Use forecasting method that accounts for the pattern in the deseasonalized data • Use Excel’s Solver to minimize the error
Figure 33, p307

4. Reseasonalize the forecast to account for the seasonal pattern • Multiply the deseasonalized forecast by the seasonal index for the appropriate period. • Graph the actual Coal Receipts and Seasonalized Forecast

Actual & Forecast
3,500

1. Look at original data to see seasonal pattern. Examine the data & hypothesize an m-period seasonal pattern. 2. Deseasonalize the data. a) Calculate a series of m-period moving averages, where m is the length of the seasonal pattern. b) Center the moving average in the middle of the data from which it was calculated. c) Divide the actual data at a given point in the series by the centered moving average corresponding to the same point. d) Develop seasonal index e) Divide actual data by the seasonal index 3. Forecast method in deseasonalized terms. 4. Reseasonalize the forecast to account for the seasonal pattern.

Coal (000 Tons)

3,000 2,500 2,000 1,500 1,000 500 0 Coal Receipts Seasonalized Forecast 1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3- 4- 4- 4- 4- 5- 5- 5- 5- 6- 6- 6- 6- 7- 7- 7- 7- 8- 8- 8- 8- 9- 9- 9- 9- 1 1 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 0- 01 2

Year-Quarter

4. Reseasonalize the forecast to account for the seasonal pattern

93
Deseasonalized Seasonalize Data Forecast Forecast 1, 948. 1 1, 948. 1 2, 159. 000 1, 535. 4 1, 948. 1 1, 526. 409 1, 272. 3 1, 678. 5 1, 443. 212 1, 617. 8 1, 413. 1 1, 743. 439 1, 877. 8 1, 546. 8 1, 714. 276 1, 700. 0 1, 763. 0 1, 381. 390 1, 716. 6 1, 721. 9 1, 480. 540 2, 053. 1 1, 718. 4 2, 120. 128 2, 029. 3 1, 937. 1 2, 146. 723 1, 956. 5 1, 997. 4 1, 564. 974 2, 250. 4 1, 970. 7 1, 694. 495 2, 045. 0 2, 153. 4 2, 656. 854

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SUMXMY2( )
Returns the sum of squares of differences of corresponding values in two arrays. Syntax: SUMXMY2(array_x,array_y), where Array_x is the first array or range of values. Array_y is the second array or range of values. The equation for the sum of squared differences is:

Measures of Comparison
MAD =
all forecasts

actual sales − forecast sales number of forecasts

MAPE =

all forecasts

n

actual sales − forecast sales actual sales number of forecasts

∗ 100 %

SUMXMY2 =

∑ (x − y )2

MSE =

∑ ( actual
t =1

sales − forecast sales ) 2

number of forecasts

Model Validation

Create experience by simulating the past.

Create the model with a portion of the historical data.

Use remaining data to see how well the model would have performed.

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Qualitative Forecasting Models

Expert Judgment

Consensus Panel

Delphi Method

Coordinator requests forecasts Coordinator receives Individual forecasts Coordinator determines (a) Median response (b) Range of middle 50% of answers Coordinator sends to all experts (a) Median response (b) Range of middle 50% (c) Explanations Coordinator requests explanations from any expert whose estimate is not in the middle 50%

Delphi Method

Grassroots Forecasting

20

Market Research

21

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