Productions
Management
RB/NIE/Mech
Services
Management
Operations
Management
ME0428
Unit1
Course Outcomes
At the end of the course, the student will be able to:
1. Understand the factors affecting productivity and develop
decision support system.
2. Understand the cost Minimization in job shop layout and balance
assembly line layouts.
3. Analyze different qualitative and quantitative forecasting models.
4. Evaluate different material and capacity requirement planning
methods.
Unit 3
201617
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201415
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Unit 3
Demand Forecasting :
Forecasting as a planning tool,
forecasting time horizon,
Short and long range forecasting,
source of data,
type of forecasting, qualitative forecasting
techniques, quantitative forecasting models linear regression,
moving average ,
exponential smoothing, monitoring and
controlling forecasting models,
Numerical Problems.
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201314
Introduction:
A forecasting is an estimate of an event which will happen in future. The event may
be demand of a product. Rainfall at a particular place , population of a country, or
growth of a technology. The forecast value is not a deterministic quantity. Since , it is
only an estimate based on the past data related to a particular event.
Demand forecast: The demand forecast gives the expected level of demand for goods
or service. This is the basic input for business planning and control. Hence, the
decision for all the function of any corporative house are influenced by the demand
forecast.
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Introduction:
In any business, planning done based on the estimation of future events,
In fact, any business action taken today must be based on yesterdays plan and tomorrows
Expectations.
Forecasting is the estimation of future events, with respect to its timing and magnitude.
Demand forecasting is the estimation of likely sales demand for a particular future period.
** activities w r t to investment and inputs
**Quality, timing and location or place of availability of the products.
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Forecasting
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Forecasting Process
1. Identify the purpose
of forecast
6. Check forecast
accuracy with one or
more measures
5. Develop/compute
forecast for period of
historical data
4. Select a forecast
model that seems
appropriate for data
7.
Is accuracy of
forecast
acceptable?
No
Yes
8a. Forecast over
planning horizon
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Forecasting
Predicting the future
Qualitative forecast methods
Subjective
Quantitative forecast methods
based on mathematical formulas
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Forecasting
Quality Management
Accurately forecasting customer demand is a key to
providing good quality service
Strategic Planning
Successful strategic planning requires accurate forecasts of
future products and markets
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Time Frame
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Individual Decisions
Short term
( 15 weeks)
Assignments of orders to
specific
facilities
and
employees.
Dispatching
to
meet
delivery schedules
Arrangement
of
professional and social
appointments. Selection of
a place for a Weekend trip.
Choice of entertainment for
the weekend
Intermediate term
( 1 24 weeks)
Attending an education
course. Painting the house.
Selection of a place summer
vacation.
Long term
(2 10 years)
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Demand Behavior
Trend
a gradual, longterm up or down movement of demand
Random variations
movements in demand that do not follow a pattern
Cycle
an upanddown repetitive movement in demand
Seasonal pattern
an upanddown repetitive movement in demand occurring periodically
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Random
movement
Demand
Demand
Demand Behavior
Demand
Time
(c) Seasonal pattern
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Time
(b) Cycle
Demand
Time
(a) Trend
Time
(d) Trend with seasonal pattern
Uses of Forecasting :
1. Helps in Planning future Activity Levels : ( Sales, Production, inventory, supply of capital)
2. Helps Maintaining Good Labour Relation: ( hiring , firing. OT, and Relation)
3. Helps in Better Coordination of Resources : ( wastes and inefficiencies)
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Limitations of forecasting
1. You can never plan the future by the past
2. Forecasting are always estimates. They are rarely accurate in practice
3. Usage of assumptions and guess work leads to the possibility of errors
4. Arrival of new products, technological break through, economic slumps, warlike
situations etc. All make forecasts go haywire.
5. Even if the forecasts are good, there may be an inexperienced or inefficient sales
force to push the products.
6. Forecasts of new products are always difficult, in the absence of past data.
7. Forecasting can be tricky business. Bad forecasting can make or break new companies.
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Type of Forecasting
Time horizon being forecast.
Data base available.
Methodology of forecast.
1. Type of Forecast:
Variable : i) Controllable ( Advertisement, budget, inventory levels )
ii) Uncontrollable ( Product demand competition, raw material cost. etc.
Other area where forecasting are made: Technological forecasts, economic forecasts
Environmental forecasts, forecast on natural resources
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Examples
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Quantitative Techniques:
II. Time Series Methods
1) Simple Average
2) Simple Moving Average
3) Weighted Moving Average
4) Simple Exponential Smoothing
5) Exponential Smoothing with Trend Adjustment
Computer
Forecasting Methods
Time series
statistical techniques that use historical demand data to
predict future demand
Regression methods
attempt to develop a mathematical relationship between
demand and factors that cause its behavior
Qualitative
use management judgment, expertise, and opinion to predict
future demand
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2. Market Trials method: When a product concept is entirely new to the customer
or market, it is very difficult to anticipate the acceptability of the product. In such cases,
a trialrun of the new product in the market is suggested. Such a trial is like a controlled
experiment in which the market area and the method of presentation are carefully selected
and controlled. Usually the cost of a trialrun is high. This method is recommended to
Consumable goods like toothpaste , shaving accessories, cosmetics, software packages etc.
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3. Delphi Technique :
Few experts, Designed for the minimize bias and error of judgment when compared
to other expert opinion methods. Expert panel, experts can be both from inside
and outside the organization, Coordinator .
Examples:
1) When could be the petroleum reserves of the country be exhausted?
2) When will the Indian population overtake that of the Chinese?
3) What would be the effect of Internet on ECommerce in India ten years from now
Smart Phone
1) The Coordinator prepares a questionnaire in writing and sends it to each experts in the
panel. Each expert makes independent predictions not knowing what others are predicting
2) The coordinator brings the written predictions from all the experts together, edits them
and summarizes them.
3) On the basis of summary, the coordinator writes a new set of questions and gives them to
the experts. These are answered in writing.
4) Again, the coordinator edits and summaries the answers, repeating the process until the
coordinator is satisfied at the overall consensus arrived at by the experts.
Thus the Delphi method is an iterative procedure in which revisions are carried out by the
Experts till the coordinator gets a stable response.
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2) The experts do not meet each other. Therefore there will not be any conflicts between them
3) There is no domination of one man over others
Disadvantages:
Many groups
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Work together
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Y = f { TCSR }
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Y = Forecasted value
T = Trend
C = Cyclic Variations
S = Seasonal Variations
R = Irregular fluctuations
Trend
a gradual, longterm up or down movement of demand
Ex
Random variations
movements in demand that do not follow a pattern
Ex. Aviation industry and tourism industry, stock market
index
Cycle
an upanddown repetitive movement in demand
Ex. Demand of gold
Seasonal pattern
an upanddown repetitive movement in demand occurring
periodically
Ex. Sales of Umbrella during monsoon and summer, air
cooler during summer.
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Random
movement
Demand
Demand
Demand
Time
(c) Seasonal pattern
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Time
(b) Cycle
Demand
Time
(a) Trend
Time
(d) Trend with seasonal pattern
1) Simple Average:
SA =
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Di
i 1
Where
n = number of periods
Di = demand in the i th period
2) Simple Moving Average : This is nothing but the average of demands occurring is a
fixed number of recent periods. This is known as moving average and is
forecast as the future demand.
MA = Sum of demands for periods / Chosen number of periods
n
Di
MA =
t 1
n
MA =
Where
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1
N
D1 + 1 D2 + 1 D3+  1 Dn
N
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
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ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90

MOVING
AVERAGE
103.3
88.3
95.0
78.3
78.3
85.0
105.0
110.0
i=1
MA3 =
Di
3
=
90 + 110 + 130
3
MONTH
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
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ORDERS
PER MONTH
120
90
100
75
110
50
75
130
110
90

MOVING
AVERAGE
99.0
85.0
82.0
88.0
95.0
91.0
MA5 =
i=1
Di
90 + 110 + 130+75+50
5
= 91 orders for Nov
125
Orders
100
75
3month
50
Actual
25
0

Jan

Feb

Mar

Apr

May

June
Month
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July

Aug

Sept

Oct

Nov
3) Weighted Moving Average : In Simple Average and simple moving average methods, equal
is given to all the previous periods but sometimes the forecaster would like to attach
more importance to more recent periods and lesser importance to older periods.
In other words, the more recent demands are considered to be more indicative of
the future demands than older demands. Weighted moving average is done by
assigning different weights to different periods but whose sum is equal to one.
WMA = Sum of demands for the chosen number of periods each multiple by
its respective weightage.
n
Ct Dt
WMA =
Where 0
Ct
t 1
Ct
t 1
1 and
Problem.1
1) The past data for the sales of wet grinder of a particular company in an area is shown below
Forecast the demands for the month of july 2001 using
a) Simple average for all previous months
b) Athreemonth moving average
c) A three month moving average where the weights are 0.5 for the latest month, 0.3 and
0.2 for the months previous to that respectively.
Month
Jan 2001
Feb
March
April
May
June
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Sales
585
610
675
750
860
970
Solution:
A)
MA = 860 units
Forecast for july 2001 using 3 months Moving Average = 860 units
C) 3month weighted moving average where weight are
June = 0.5 , May = 0.3, April = 0.2
n
Ct Dt
WMA =
t 1
Problem . 2
Compute four months moving average and weighted moving average for the data given below.
Assume the weight for the most recent period is 3 times as that of the previous two periods.
Month Jan Feb
Sales
250 210
in 100s
Mar
223
Apr
270
May
245
June
261
July
212
Aug
212
Sept
246
Oct
252
Nov
261
Dec
224
Solution :
i) Fourmonth moving average (MA) = ( 246 + 252 + 261 + 224)/ 4 = 245.75
MA = 245.75 x 100 = 24575 units
ii) Four month Weighted moving average:
( If the weight for December has to three times the weight of October or November, then
by trial and error, weight for)
Dec
= 0.54
4month weighted moving average :
Nov
= 0.18
WMA = 100(0.54 x 224 + 0.18 x 261 + 0.18 x 252 + 0.10 x 246)
Oct
= 0.18
WMA = 100 x 237.9
September = 0.10
WMA = 23,790 units.
Total = 1.00
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Problem 3.
1) A food processor uses a moving average to forecast next months demand. Past actual
demand ( in units) is as shown in the accompanying table.
i) Compute a simple 5month moving average to forecast demand for month 52
ii) Compute a weighted a weighted 3month moving average where the weight are highest
for the latest months and descend in order 3,2,1
Month
43
44
45
46
47
48
49
50
51
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Actual Demand
105
106
110
110
114
121
130
128
137
Averaging method
Weights most recent data more strongly
Reacts more to recent changes
Widely used, accurate method
Ft = Ft1 +
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( Dt1Ft1)
Ft = Forecast for the time period t
Ft1 = Forecast for the time period t1 ( Previous forecast)
= Smoothing constant (0
1)
Dt1 = Actual demand for the time period t1
2) assumes values between 0 and 1. When is 1, the forecast is equal to the previous
actual demand. When is equal to zero, the forecast is the same as the forecast for the
previous period.
3) Higher values places heavy weight on the most recent demand. In other words, higher
values gives more imp to the recent demands and tends to place the new forecast nearer to the
recent demands. For example, higher values are taken in case of products which register
rapid and dramatic growth, in which case the forecast for the next period is more likely to be in
terms of the recent actual demands, Higher values are also assumed in case of new products.
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4) Lower values weights recent demand less heavily. In other words, lesser values
gives almost as much imp to older demands as it does to recent demands, Lower values
tends to place the forecast nearer to previous forecast than nearer to recent to recent demand.
Lower values are considered for those products which have been in the market for a long
time and whose demand is quite stable. The value of is often kept in the range of 0.005 to
0.30 in order to smooth any sudden changes. Products like colegate toothpaste, Life buoy
soap or other consumer items which have a long standing stability have typical lower
values.
5) In some cases, values are assumed based on the Length of the moving average in
other words, can be calculated using the relation = 2/(n+1)
For example, a 12month moving average has a value or 0.153 obviously, longer the length
of the moving average lower are the value.
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Problem
1) The demand for a disposable plastic tubing in a hospital for September was 300 units
and for October was 350 units. Using 200 units as the September forecast and a
Smoothing coefficient of 0.7 to weight recent demand more heavily, forecast the
demand in November.
Solution:
Month
Sept
Oct
Nov
Demand
300
350
?
FNov = Foct +
Problem.
A firm uses simple exponential smoothing with
= 0.2 to forecast demand. The forecast
For the first week of January was 400 units, where as actual demand turned out to be 450
Units.
a) Forecast the demand for the second week of January.
b) Assume that the actual demand during the second week of January turned out to be 460
units. Forecast the demand up to February third week, assuming the subsequent demands
as 465, 434, 420, 498, and 462 units.
Solution :
( Dt1 Ft1
= 410 units.
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b) The working for the remaining weeks are shown in tabular form.
Week
Demand Dt1
Old Forecast
( Ft1)
Jan. week 1
Jan. week 2
Jan. week 3
Jan. week 4
Feb. week 1
Feb. week 2
Feb. week 3
450
460
465
434
420
498
462
400
410
420
429
430
428
442
410
420
429
430
448
442
446
In table initial forecast was available. If no previous forecast value is known. The old forecast
Starting point many be estimated or taken to be an average of the values of some preceding
Periods.
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Problem
A firm uses simple exponential smoothing with = 0.1 to forecast sales. The forecast for
week ending Feb 1 was 500 units where as actual demand turned out to be 450 units.
i) forecast the demand for week ending Feb 8
ii) Assume the actual demand during the week ending Feb 8 turned out to be 505 units.
Forecast the demand for week ending Feb 15. Continue the forecast through March 15,
assuming that the assuming that the subsequent demands were actually 516, 488, 467, 554
and 510 units.
Solution:
( Dt1  Ft1 )
Week
ending
Feb 1
Feb 8
Feb 15
Feb 22
March 1
March 8
March 15
Old
forecast
500
495
496
498
497
494
500
Actual
demand
450
505
516
488
467
554
510
New
forecast
495
496
498
497
494
500
501
It is observed from the above solution table that every forecast becomes the old
Forecast for the succeeding new forecast.
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Problem
Using SES technique, determine the forecast for period 2 through 12 for which the actual figures
are given below
Period
1
Actual
200
Demand
2
3
4
211 190 198
5
210
6
230
7
195
8
200
9
215
10
198
11
200
12
212
Assume that the first period forecast is equal to actual demand in that period given =0.2
. Also graphically compare your forecast demand with actual demand.
Solution: In the following solution table, the new forecasts are started to be calculated
From period 2 onwards. Therefore period 1 becomes t1 in the first row and so on it
continues
Period
Old forecast
Actual Demand
New Forecast
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Ft1
Dt1
Ft = Ft1 +
( Dt1 Ft1 )
1
2
200
200
200
211
3
4
5
6
7
8
9
10
11
12
202.20
199.76
199.40
201.51
207.20
204.76
203.80
206.03
204.42
203.52
190
198
210
230
195
200
215
198
200
199.76
199.40
201.51
207.20
204.76
203.80
206.03
204.42
203.52
Problem.
Wockhard hospital has used a 9month moving average forecasting method to predict their
Drug requirements. The actual demand for one of the drugs is shown in the accompanying
Table. Using the 9month moving average data as the fresh forecast , convert the problem
Into exponential smoothing and find the forecast for month 33
Month
Demand
Solution
Month
24
25
26
27
28
29
30
31
32
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24
78
25
65
Actual Demand
Dt1
78
65
90
71
80
101
84
60
73
26
90
27
71
Old forecast
Ft1
28
80
29
101
30
84
New Forecast
Ft = Ft1 + ( Dt1 Ft1 )
31
60
32
73
Hint = 2/(n+1)
Problem.
Sales of Television sets of a particular brand have been tabulated below
Year
Sales (Rs in
lakhs)
1990 1991
15
16
1992
22
1990
1991
1992
1993
1994
1995
1996
1997
1998
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Actual
Demand
Dt1
1993
24
1994
21
1995
30
1996
31
1997
38
Old forecast
Ft1
New Forecast
Ft = Ft1 + ( Dt1 Ft1 )
Ans :24.03
Problem.
The following information gives the sales of a water pump manufacturing company for
10 months. If a smoothing coefficient or 0.5 is used, forecast the demand for February 2001
Month
April 2000
May
June
July
August
September
October
November
December
January 2001
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Sales
700
1280
840
920
1020
900
1276
1440
1610
1500
Ans : 1471
Fta = Ft + Tt
Where
Ft = Ft1 +
(Dt1Ft1)
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1. A Manufacture of printed circuit boards uses exponential smoothing with trend to forecast
monthly demand of its products. At the end of December the company wishes to forecast sales
for January . The estimate of trend through November has been 200 addition boards sold per
month . Average sales have been around 1000 units per month. The demand for December
was 1100 units. The company uses =0.2 and = 0.1. Make a forecast for the month of
January.
Solution;
Given
Trend for November , Tnov = 200 units
Forecast for every month, F = 1000 units
Demand for December Ddec = 1100 units
=0.2 and = 0.1 Fjan = ?
Trend adjusted forecast FTA = Ft + Tt
Or Fjan (TA) = Fjan + Tjan
Fjan = Fdec + ( Ddec Fdec)
= 1000 + 0.2(11001000) =1020 units
Tjan = ( Fjan Fdec ) + (1 ) TDec
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Slope Y/X = b
X
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Y=a+bX
For any value of X ( independent variable ) the value of Y ( demand) can be found out.
Case (i) : When time is the dependent variable i.e. When sum of deviations can be made
Zero ( X 0 )
Case (ii) When any other quantity is the independent variable i.e. When the sum of
deviation cannot be made zero (
X 0 )
Case (i)
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When time is the independent variable, the sum of deviations can be made
Equal to zero statistically.
XY
Y
b
Y = a + bX a =
X2
n
1) With the help of LeastSquare Methods, develop a linear trend equation for the data shown
in the table and
( i ) Compute the constants a and b in the regression equation
( ii ) forecast a trend value for the year 2002 and 2008
Year
Shipments
( tons)
1991
2
Solution:
In an Odd years
Median may
Become Zero
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1992
3
1993
6
1994
10
1995
8
1996
7
1997
12
1998
14
1999
14
2000
18
2001
19
i)
Y = a + bX, a =
n
a = 113/11 = 10.3
XY
X2
b = 181/110 = 1.6
Y = 10.3 + 1.6 X
ii) To Forecast for the years 2002 and 2008
It is observed from the table that if year 2001 is coded as +5 , year 2002 be +6 and
Year 2008 would be +12
For year 2002 . Put X =6
1) The table below gives the sales record of a firm. Using Regression Analysis forecast the sales
in the month of January and February next year.
Month Jan
Feb
Sales
111
90
Solution.
Month
January
February
March
April
May
June
July
August
September
October
November
December
n = 12
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Marc April
h
99
89
X month coded
5.5
4.5
3.5
2.5
1.5
0.5
0.5
1.5
2.5
3.5
4.5
5.5
X=0
May
June
July
Aug
Sept
Oct
Nov
Dec
87
84
104
102
95
114
103
113
Y sales (units)
90
111
99
89
87
84
104
102
95
114
103
113
Y = 1191
XY
495
499.5
346.5
222.5
130.5
42
52
153
237.5
399
463.5
621.5
XY = 190.5
X2
30.25
20.25
12.25
6.25
2.25
0.25
0.25
2.25
6.25
12.25
20.25
30.25
X2 = 143
Y = a + bX, a =
a = 1191/12 = 99.5
XY
X2
b = 190.5/143 = 1.332
Y = 99.25 + 1.332 X
Forecast for the month of January and February Next year
From the table, it the value of X for December is + 5.5, the value of X for January
Would be +6.5 and that of February would be +7.5
Therefore,
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If X = 6.5
If X = 7.5
1) The data given below refers to the past sales of a production unit for the last eleven years.
Using Least Square Method. Estimate sales forecast for the next two years.
Plot the graph of the sales data and draw the regression line on it.
Year
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991
Sales
35
50
48
47
53
58
68
79
92
85
96
( x 1000)
Month
X month coded
Y sales (units)
XY
X2
ANS:
a = 64.63
b = 5.96
n = 11
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X =0
1992
Y = Rs 100.39 x 1000
Y = 711
XY = 656
X2 = 110
1993
Y = Rs106.39x 1000
Problem : The data given below refers to the past sales of a helmet manufacturing unit for
the last 11 years. Using least squares method estimate sales forecast for the next two year.
Year
Sales Rs
(10000)
1990
35
Solution:
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
n = 11
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1991
50
1992
48
X year coded
5
4
3
2
1
0
1
2
3
4
5
X=0
1993
47
1994
53
1995
58
Y shipments (tons)
35
50
48
47
53
58
68
79
92
85
96
Y=
Y = a + bX, a =
Y
n
1996
68
1997
79
1998
92
X2
XY
1999
85
2000
96
a=
b=
Forecast for
The year 2002
?
X2 =
XY =
b
XY
X2
Case ( ii ) : When any quantity (other than time) is the independent variable
Normally the demand of any product would vary with time but in reality it depends on a
Variety of factors like quality of the product, effectiveness of sales force, advertisement
Strategies and budget , distribution efficiencies , and so on. In such a case we consider
Demand to be dependent on a quantity other than time. The procedure followed is the
Same as the previous case, but only the formulae used to calculate the constants a and b
Are different .
Y = a + bX,
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X 2.
Y) (
(n
X 2) (
(n
(n
XY ) (
X 2) (
X.
XY )
X )2
Y)
X )2
1) A manufacture of childrens cycle believes that the demand for the cycles is correlated to
the birth of babies in the area during the previous year.
The data given below shows this relationship.
Year No. of
birth in the
previous
year
1
40,000
2
48,000
3
66,000
4
78,000
5
92,000
6
1,05,000
7
1,25,000
8
1,40,000
Cycles sold
during
the year
3,000
3,200
4,000
5,200
7,900
7,900
9,000
10,000
Compute the probable sales of cycles in the 9th year given the no. of birth in the
previous year as 1,66,000.
RB/NIE/Mech
Solution:
Year
1
2
3
4
5
6
7
8
n=8
No. of birth in
the previous
year
40,000
48,000
66,000
78,000
92,000
1,05,000
1,25,000
1,40,000
X = 694 x 103
X2 x 106
Cycles sold
during
the year
3,000
3,200
4,000
5,200
7,900
7,900
9,000
10,000
Y = 502x 102
XY x 105
1600
2304
4356
6084
8464
11025
15625
19600
X2 = 69058 x 106
1200
1536
2640
4056
7268
8295
11250
14000
XY =
5
50245x10
X 2.
(n
Y) (
2
X ) (
X.
X)
XY )
2
(n
(n
XY ) (
X 2) (
Y)
X )2
X 2.
Y) (
(n
X 2) (
X.
XY )
X )2
2
3 2
a =  286
(n
XY ) (
(n
X 2) (
Y)
X )2
Y =  286 + 0.075 X
Y =  2.86 + 0.75 X
Note : cross check the values.
RB/NIE/Mech
Correlation Coefficient
Regression Analysis basically tries to express the relation between two variable in the form
of a straight line. The Extent to which the two variables are related to each other is
explained by correlation analysis.
correlation is a means of expressing the degree of relation between two or more variables.
A single value (figure) which expresses the degree and direction of correlation is called the
Coefficient of correlation ( r ).
Correlation coefficient ( r )
[n
XY
X2 (
X ) 2 ][n
Y
Y2 (
Coefficient of Determination
2
Coefficient of determination = [ correlation coefficient ]
2
= [ r ]
Standard Deviation of Regression
S XY
RB/NIE/Mech
Y2 a
Y b
n 2
XY
Y )2 ]
Problem.
The following table gives five months of average monthly temperatures and corresponding
monthly resort attendance.
Month
Average temp
Resort attendance (1000)
1
24
43
2
41
31
3
32
39
4
30
38
5
38
35
Compute linear regression equation of the relationship between the two, if next months
average temperature is forecast to be 45 degrees.
Use linear regression equation to develop a forecast
Compute a correlation coefficient for the above data and determine the strength of the linear
relationship between average temperature and attendance. How good a predictor is temperature
for attendance ?
VTU June 2006
RB/NIE/Mech
Solution:
Months
1
2
3
4
5
n =5
Average
Temp
X
24
41
32
30
38
X=165
a = 58650
b = 650
Resort
Attendance Y
X2
Y2
43
31
39
38
35
Y=186x1000 X2 =5625
Y2
6
=7000x10
Y = 58650 650 X
a
If next months temp is 45 ,
the resort attendance would become
Y = 58650 650 x 45 = 29400 will be the attendance
b
r = 0.97
RB/NIE/Mech
XY
XY
3
=6021x10
X 2.
Y) (
(n
X 2) (
(n
(n
XY ) (
X 2) (
X.
XY )
X )2
Y)
X )2
Forecast control helps in finding a measure of the deviation of actual demand from
Forecasted demand and helps us to take to corrective action.
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(actual
SF
hkhk
RB/NIE/Mech
forecast )
n 1
When
__
SF
(X
X )2
n 1
Much variation tends to be normally distributed about the mean. In such a case it might
expect about 95.5 % of the actual demand values to be within two standard deviation
of the average value and 99.7% within three standard deviations. When demand values
occur outside these limits, it might indicate an unusual event or a substantial change,
which needs to be investigated if there are several points outside the limits, then the
validity of the model has to be questioned and may have to be changed.
RB/NIE/Mech
MAD
 forecasterrorj 
j 1
n
MAD
j 1
n
 forecasdemand j
Actualdemand j 
n
MAD is an average of the absolute value of forecast errors where errors are measured
Without regard to sign, MAD expresses the magnitude but not the direction of error.
This measure of absolute values is called absolute deviation.
RB/NIE/Mech
2) Bias
BAIS is a measure of forecast error in which the average forecast error is calculated
giving regarding to the direction of error. It is calculated as the sum of the actual
value of forecast errors for all periods divided by the total number of periods
evaluated.
Sum of forecast errors for all periods
Bias =
Number of periods
n
Bais
j 1
Bais
j 1
Forecasterror
n
( Forecastdemand j
Actualdemand j )
Thus BAIS is an average of the actual value of forecast errors where errors are measured
With due regard to sign. BAIS basically shows any tendency to over forecast or under
Forecast consistently. Unlike MAD, BAIS indicates the direction tendency of forecast
Errors. If the forecast repeatedly over estimates the actual demand, BAIS will have a
Positive value and for a consistent underestimation, BAIS will have a negative (ve) Value.
RB/NIE/Mech
Problem.
A dealer for carrier Aircooler forecasted the demand for his aircooler at the rate of 500
Per month for each of the next three months. The actual demands turned out to be
400, 560 and 700. Calculate the forecast error measures ( I ) MAD and
(ii ) Bias and interpret the same.
Solution :
MAD =
Number of periods
MAD =
MAD
500 400
500 560
3
500 700
( 100+60+200) = 360
= 0.24
b)
Bias =
Number of periods
(500 400) (500 560) (500 700)
3
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