ANALYTICS REPORT

TO: JOHN MCCLINTOCK

FROM: MEGAN HAY

SUBJECT: CHAPTER 8: FORECASTING

DATE: 3 MAY 2020

Introduction

Hi John,
I reviewed your sales data and I decided to compare the sales with the exponential
smoothing method when the weight is equaled to 0.2 and when it is equaled to 0.9. I
found when comparing the sales for both methods, the weight equaling 0.9 would be
more of an accurate model for predicting sales because it had the smallest mean absolute
deviation and the smallest mean squared error compared to the weight equaling 0.2. I
then ran a regression using seasonal dummy variables to compare each quarter to quarter
3.

Data Analysis

Exponential Smoothing

 Lambda=0.2
  Lambda=0.9

Advantages for both Models:

 MAD: if we care about an average error, we would want the model with the
lowest MAD. This is also beneficial for big corporations because although it has
room for error, those corporations can afford it.

 MSE: If we wanted to avoid outliers or major mistakes in our predictions, we

would want to use the lowest MSE.

Which Model is Better?

Out of these two models, the model with the lambda = 0.9 is better to use for predictions
because their MAD average is lower than the MAD average with the lambda = 0.2. The
MSE average for lambda = 0.9 is lower than the MSE with the lambda = 0.2.

Use the better model to predict the sales for the upcoming day (December 22nd)

𝐴t = λ𝑦𝑡 + (1 − λ) (𝐴𝑡−1)

𝐴t = 0.9 x 113 + 0.1 x 133.5325207

𝐴December 22 = 115.05325

2
 Seasonal Dummy Variables

Regression Equation:

𝐴t = 75.0467+0.0301(t)-18.3954(Q1)-2.9162(Q2)-5.5869(Q4)

Interpretation of R2: We are about 2.1% of the way to perfectly predicting forecasting
demands, on average and all else constant.

Interpretation of Standard Error: Our predictions of forecasting demands are off by

71.97 units, on average and all else constant.

Would you trust this model’s predictions? I would not trust this model because our R2
is too low and standard error is too high.

Which coefficients are significant?

Interpret the significant coefficients:

 Sales on a day in quarter 1 are 18.40 units less than sales on a day in Quarter 3, on
average and all else constant.

 As far as we can tell, sales on a day in Quarter 2 or Quarter 4 are the same as a
day in Quarter 3.

3
  “t” --- Each day, sales increase by about 0.03 units sold, on average and all else
constant

 It takes about a month for sales to increase by an average of one sale per day.

“Time” Residual Plot:

 It made sense to use a linear trend model because we can see that there is no
heteroscedasticity, which means we can trust our model.

Predicting Sales for the upcoming day (December 22nd):

𝐴December 22 = 75.0467+0.0301(843)-18.3954(0)-2.9162(0)-5.5869(1)

𝐴December 22 =94.8341

Sales for December 22nd will increase by 94.83 units, on average and all else constant.

Conclusion
After reviewing the sales data, I would recommend using the model with the weight (or
lambda) that equals 0.9 because it has the lowest mean absolute value and mean squared
error compared to the lambda that equaled 0.2. I also found that sales increase by an
average of 0.3 units each day. I also went and predicted that sales for the next day,
December 22nd, would be increase by an average of 94.83 units. Please let me know if
you have any questions. You can reach me: meganhay@email.arizona.edu