Module - II - Forecasting - 11 10 2021

RV Institute of Technology & Management®
FORECASTING
MODULE - II
Forecasting: Steps in forecasting process, approaches to forecasting, forecasts based on judgment and
opinion, analysis of time series data, accuracy and control of forecasts, choosing a forecasting technique,
elements of a good forecast.
INDEX
S. No TOPIC PAGE No.
FORECASTING 03
1. Introduction to Forecasting 03
2. 05
Forecasts Affect Decisions and Activities throughout an Organization
3. Features Common to All Forecasts 06
4. 06
Elements of a Good Forecast
5. Steps in the Forecasting Process 07
6. Approaches [Types] to Forecasting 08
7. 08
Forecasting Variables (or) Factors Affecting Forecasting
8. Classification of Forecasting Methods 09
9. 09
Opinion and Judgmental Methods
10. 10
Time - Series Methods
11. Methods (or) Techniques of Forecasting 11
12. Correction and its Numerical 11
13. Correction and Regression and its Numerical 12
14. Time- Series Forecasting 22
15. Pattern (Components) in Time-Series 24
16. 25
Forecasting by Averages
17. Numerical on Forecasting by Averages 26
18. Simple Exponential Smoothing 31
V Semester 18ME56: Operations Management

19. Numerical on Simple Exponential Smoothing 32
20. Exponential Smoothing with Trend Adjustment 37
21. Numerical on Exponential Smoothing with Trend Adjustment 37
22. Least Squares (or) Regression Methods 40

23. Numerical on Least Squares (or) Regression Methods 41
24. 47
Regression Analysis
25. Numerical on Regression Analysis 47
26. Correlation Co-Efficient 48
27. Numerical on Correlation Co-Efficient 49
28. Control of Forecast (or Forecast Errors) 51
29. Numerical on Control of Forecast (or Forecast Errors) 53
30. Forecasting Important Formula 55
31. VTU QP Solved 57
32. Question Bank 60
33. Two-Marks Q&A 64

FORECASTING
INTRODUCTION TO FORECASTING
Forecasts are the basis for budgeting, planning capacity, sales, production and inventory,
personnel, purchasing, and more.
Forecasts play an important role in the planning process because they enable managers to
anticipate the future so they can plan accordingly.
Forecasts help managers by reducing some of the uncertainty, thereby enabling them to develop
more meaningful plans.
A forecast is a statement about the future value of a variable such as demand. That is, forecasts
are predictions about the future. The better those predictions, the more informed decisions can
be.

[05 Marks, Dec 2016/Jan 2017]; [04 Marks, Dec 2017/Jan 2018]; [05 Marks, July 2014];
[10 Marks, Jan/Feb 2021]

Forecasts Affect Decisions and Activities throughout an Organization
• Accounting
• Finance
• Human resources
• Marketing
• Management Information Systems (MIS)
• Other parts of an organization
Here are some examples of uses of forecasts in business organizations:
• Accounting: New product/process cost estimates, profit projections, cash
management
• Finance: Equipment/equipment replacement needs, amount of
funding/borrowing needs
• Human resources: Hiring activities, including recruitment, interviewing, and
training;
• Marketing: Pricing and promotion, business strategies
• MIS: New/revised information systems, Internet services
• Operations: Schedules, capacity planning, inventory planning, outsourcing
• Product/service design: Revision of current features, design of new products or
services
In most of these uses of forecasts, decisions in one area have consequences in other areas.
Therefore, it is very important for all affected areas to agree on a common forecast.
Accurate forecasts can help managers plan tactics (e.g., offer discounts, don’t offer discounts) to
match capacity with demand, thereby achieving high productivity.
There are two uses for forecasts. One is to help managers plan the system, and the other is to
help them plan the use of the system.
Planning the system generally involves long-range plans about the types of products and
services to offer, what facilities, where to locate, and so on.
Planning the use of the system refers to short-range and intermediate- range planning, which
involve tasks such as planning inventory and workforce levels, planning purchasing and
production, budgeting, and scheduling.
FEATURES COMMON TO ALL FORECASTS
1. Assumes a causal system approach
2. Forecasts are not perfect
3. Forecasts for groups tend to be more accurate than forecasts for individual items.
4. Forecast accuracy decreases as the time period covered by the forecast increases
➢ Forecasting techniques generally assume that the same underlying causal system that
existed in the past will continue to exist in the future.
➢ Forecasts are not perfect; actual results usually differ from predicted values; Allowances
should be made for forecast errors.
➢ Forecasts for groups of items tend to be more accurate than forecasts for individual items
because forecasting errors among items in a group usually have a canceling effect.
➢ Forecast accuracy decreases as the time period covered by the forecast increases. Generally
speaking, short-range forecasts must contend with fewer uncertainties than longer-range
forecasts, so they tend to be more accurate.
ELEMENTS OF A GOOD FORECAST [05 Marks, Dec 2016/Jan 2017]
1. Should be timely
2. Should be accurate
3. Should be reliable
4. Expressed in meaningful units
5. Should be in writing
6. Techniques used should be simple to understand and use
7. Should be cost-effective
➢ The forecast should be timely. Usually, a certain amount of time is needed to respond to
the information contained in a forecast.
➢ The forecast should be accurate, and the degree of accuracy should be stated.
➢ The forecast should be reliable; A technique that sometimes provides a good forecast and
sometimes a poor one will leave users with the uneasy feeling.
➢ The forecast should be expressed in meaningful units.
➢ The forecast should be in writing.
➢ The forecasting technique should be simple to understand and use.
➢ The forecast should be cost-effective: The benefits should outweigh the costs.
STEPS IN THE FORECASTING PROCESS

[05 Marks, Dec 2016/Jan 2017]; [04 Marks, Dec 2017/Jan 2018]; [05 Marks, July 2014];
[10 Marks, Jan/Feb 2021]
1. Determine the purpose of the forecast
2. Establish a time horizon
3. Obtain, clean, and analyze appropriate data
4. Select a forecasting technique
5. Make the forecast
6. Pass on the forecast results to the respective departments for further action
7. Monitor the forecast
❖ Determine the purpose of the forecast. How will it be used and when will it be needed?
❖ Establish a time horizon. The forecast must indicate a time interval, keeping in mindthat accuracy
decreases as the time horizon increases.
❖ Obtain, clean, and analyze appropriate data. Once data is obtained, the data may need to be “cleaned”
to get rid of outliers and obviously incorrect data before analysis.
❖ Select a forecasting technique.
❖ Make the forecast. Do analysis using mathematical models.
❖ Pass on the forecast results to the respective departments for further action.
❖ Monitor the forecast. A forecast has to be monitored to determine whether it is performing in a
satisfactory manner. If it is not, reexamine and prepare a revised forecast.
APPROACHES [TYPES] TO FORECASTING
1. Qualitative Approach or Opinion and Judgmental Methods
2. Quantitative Approach or Time – Series Methods
Each type has different uses so it's important to pick the one that that will help you meet your
goals. And understanding all the techniques available will help you select the one that will yield
the most useful data for your company.
There are three general approaches to forecasting:
1. Judgmental Forecasts
2. Time-series Forecasts
3. Associative Forecasts
Judgmental forecasts - are inputs obtained from various sources, such as consumer surveys, the
sales staff, managers and executives, and panels of experts.
Time-series forecasts - Forecasts that project patterns identified in recent time-series

observations.
Associative model - Forecasting technique that uses explanatory variables to predict future
demand.
FORECASTING VARIABLES OR FACTORS AFFECTING FORECASTING
[05 Marks, July 2014]
In any organization, generally speaking, forecasting activities are a function of the
1. Type of forecast
2. Time horizon being forecast
3. Data base available
4. Methodology of forecast

➢ TYPES OF FORECAST:
Any forecast must first establish the variables which are to be forecast. Variables could be
either controllable or non-controllable variables are those which can be reasonably controlled
by the management such as advertisement, budget, inventory levels etc,. Whereas
uncontrollable variables are those which are not in the hands of management such as product
demand, competition, raw material cost etc.
➢ Time horizon: Forecast can be made for different time periods and can be classified as
short term, long term and intermediate forecasts. Forecast technique can change with
changes in time horizons.
➢ Data base – Quantitative and Qualitative: Forecast technique become moredependable
if they use quantitative data rather than qualitative data. For example information such as
price of the product, previous demands, stock market index, etc are more reliable than
information such as brand image climate condition, etc.
➢ Forecasting Methodology: There are many forecasting methods available to business
organizations as listed in the succeeding paragraphs. There are both subjective and
objective methods. There is also both simple as well as complicated analysis. Forecast
methods tend to become complex as the amount of uncertainty about future events
increases.
CLASSIFICATION OF FORECASTING METHODS
I. Opinion and Judgmental Methods or Qualitative Approach
1) Opinion survey method
2) Market Trails method
3) Delphi Technique
4) Nominal Group Technique

II. Time – Series Methods or Quantitative Approach
1) Simple Average
2) Simple Moving Average
3) Weighted Moving Average
4) Simple Exponential Smoothing
5) Exponential Smoothing with Trend Adjustment.
III. Least squares or Regression Methods

I. OPINION AND JUDGMENTAL METHODS
1. Opinion survey or Market Research method: It is a relatively simple and practical method
for forecasting demands especially for new products. In this method, opinions are collected from
the prospective buyers regarding why they buy a particular product, what they expect from the
product and so on. The sampling technique is used to survey the customers. From the
information gathered it is possible to forecast how the targeted population responds to the
product.
2. Market Trails 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 trial – run of the
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.
3. Delphi Technique: It is a subjective method relying on the opinion of a few experts. This
method is designed in such a way as the minimize bias and error of judgment when compared to
other expert-opinion methods.
Advantages: a) The experts do not meet each other. Therefore there will not be any conflicts
between them.
b) There is no domination of one man over others
Disadvantages: a) It is a tedious and time-consuming method
b) Deadlocks are difficult to resolve.
4. Nominal Group Technique: It comprises of a panel of experts but here they work together in
a meeting to arrive at a consensus through discussion. The success of Nominal Group Process lies
in clearly identifying questions, allowing creativity & innovation, encouraging discussion and
ultimately arriving at a consensus.
II. TIME-SERIES METHODS
A time series is a time-ordered sequence of observations taken at regular intervals (e.g., hourly,
daily, weekly, monthly, quarterly, annually).
The data may be measurements of demand, earnings, profits, shipments, productivity, or the
consumer price index.
Time-series data are made on the assumption that future values of the series can be estimated
from past values.
No attempt is made to identify variables that influence the data these methods are widely used,
often with quite satisfactory results.












[10 Marks, June/July 2016]


PATTERNS [COMPONENTS] IN TIME-SERIES
The most general type of time series is influenced by all four components, a stable
pattern consisting of trend, cyclical, and seasonal components observed in the presence of the
random error component as shown in figure 2.1.
1. Trend refers to a long-term upward or downward movement in the data.

2. Seasonality refers to short-term, fairly regular variations generally related to factors such as the
calendar or time of day. Restaurants, supermarkets, and theaters experience weekly and even daily
“seasonal” variations.
3. Cycles are wavelike variations of more than one year’s duration. These are often related to a
variety of economic, political, and even agricultural conditions.
4. Irregular variations are due to unusual circumstances such as severe weather conditions,
strikes, or a major change in a product or service.
5. Random variations are residual variations that remain after all other behaviors have been
accounted for.
Fig. 2.1: Pattern [Components] in Time-Series


2. The past data for the sales of wet grinders of a particular company in an area is shown below.
Month Sales
Jan 2001 585
Feb 2001 610
March 2001 675
April 2001 750
May 2001 860
June 2001 970
Forecast the demand for the month of July 2001 using
a) Simple Average for all previous months
b) A- three-month 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.

Solution: a) Simple Average= Sum of demands for all periods / Number of periods
SA = 585 + 610 + 675 + 750 + 860 + 970 / 6
SA = 741.667
b) 3-month Moving Average (MA) = Sum of demands for periods / Chosen number of periods
MA = 750 + 860 + 970 / 3
MA = 860
Therefore for July 2001 using 3 month Moving Average = 860 Units
c) 3 month weighted moving average where weights are June=0.5 May=0.3 April=0.2
WMA = 0.5 x 970 + 0.3 x 860 + 0.2 x 750 = 893 Units
Since different methods give different forecasts, it is obvious that a certain method is selected
based on its performance as a forecast.
3. Compute Four-month 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 Mar Apr May June July Aug Sept Oct Nov Dec
Sales in 250 210 223 270 245 261 212 212 246 252 261 224
100’s
Solution: i) Four Month Moving Average (MA) = Sum of demands for periods / Chosen
number of periods
MA = (246 + 252 + 261 + 224) x 100 / 4 = 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 Nov= 0.18 Oct=0.18 Sept=0.10 Total= 1.00
Therefore 4-month weighted moving average
WMA= 100(0.54 x 224 + 0.18 x 261 + 0.18 x 252 + 0.10 x 246)

WMA= 100 x 237.9
WMA= 23,790 Units
(Note: The above problem can have other answers as well. The weightage for different months
can be found from the relation [(5/3) Dec + Sept=1] in such a way that weight of Dec. is less than
0.6, but on condition that September’s weight is the least. One more e.g., of giving weightage is,
Dec=0.51, Oct and Nov=0.17, Sept=0.15 and so on)



1) SIMPLE EXPONENTIAL SMOOTHING [08 Marks, Dec 2017/Jan 2018]
In this type each new forecast is based on the previous forecast plus a percentage of the
difference between that forecast and the actual value of the series at that point.
Next forecast = Previous forecast + α (Actual - Previous forecast)
Ft = Ft-1 + α (Dt-1 – Ft-1)
Ft = Forecast for the time period ‘t’
Ft-1 = Forecast for the time period ‘t-1’ (Previous forecast)
α = Smoothing constant (0 <_ α <_1)
Dt-1 = Actual demand for the time period ‘t-1’
For example,
Suppose the previous forecast was 42 units,
Actual demand was 40 units,
and α= 0.10.
The new forecast would be computed as follows:

[10 Marks, Jan/Feb 2021]; [08 Marks, July 2019]

WORKED PROBLEMS:
1. The demand for disposable plastic tubing in a hospital for September was 300 units and for
October were 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.
Month Sept Oct Nov
Demand 300 350 ?
Solution:
α = 0.7 Fsept = 200
Ft = Ft-1 + α (Dt-1 – Ft-1)
t= November then t-1 = October
Dt-1 =Demand for October = 350

Ft-1 = Forecast for September = 200
Ft = Forecast for October
Ft = Ft-1 + α (Dt-1 – Ft-1)
∴ Foct= 200 + 0.7 (300-200)
Foct=270
Fnov = Foct + α (Doct – Foct) = 270 + 0.7 (350-270)
Fnov = 326 Units (This is the forecast for November month).
2. A firm uses simple exponential smoothing with α = 0.1 to forecast sales. The forecast for
weekending Feb 1 was 500 units whereas actual demand 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 forecasting through March15,
assuming that the subsequent demands were actually 516, 488, 467, 554 and 510 units.
Solution:
Let t= week ending Feb8
Then t-1= Previous week (i.e., week ending Feb 1)
Given
α =0.1 Ft-1 = 500 Dt-1 =450
Ft = Ft-1 + α (Dt-1 – Ft-1)
Ft = 500 + 0.1(450-500)
Ft = 495 Units
Week-ending Old Forecast Actual Demand New Forecast

t-1 Ft-1 Dt-1 Ft = Ft-1+ α (Dt-1 – Ft-1)
Ft = 500 + 0.1 (450-500)

Feb 1 500 450
= 495
Feb 8 495 505 496

Feb 15 496 516 498
Feb 22 498 488 497
Mar 1 497 467 494
Mar 8 494 554 500
Mar 15 500 510 501
It is observed from the above solution table that every forecast becomes the old forecast for the
succeeding new forecast.
3. Using SES technique, determine the forecast for period 2 through 12 for which the
actualfigures are given below.
Period 1 2 3 4 5 6 7 8 9 10 11 12
Actual Demand 200 211 190 198 210 230 195 200 215 198 200 212
Assume that the first period forecast is equal to actual demand in that period given α = 0.2. Also
graphically compare your forecast demand with actual demand.
Solution:
In the following table, the new forecasts are stated to be calculated from period 2onwards. Therefore period
1 becomes t-1 in the first row and so on it continues. The figure 2.2 indicates that the Graph of Actual Demand vs
Period

Period Old Forecast Actual Demand New forecast

t-1 Ft-1 Ft = Ft-1 + α (Dt-1 – Ft-1)
Dt-1
1 200 200 F2= 200 + 0.2(200-200)=200
2 200 211 F3= 200 + 0.2(211-200)=202.20
3 202.20 190 F4= 202.20 + 0.2(190-202.20)=199.76
4 199.76 198 F5= 199.76 + 0.2(198-199.76)=199.40
5 199.40 210 F6= 199.40 + 0.2(210-199.40)=201.51
6 201.51 230 F7= 201.51 + 0.2(230-201.51)=207.20
7 207.20 195 F8= 207.20 + 0.2(195-207.20)=204.76
8 204.76 200 F9= 204.76 + 0.2(200-204.76)=203.80
9 203.80 215 F10= 203.80 + 0.2(215-203.80)=206.03
10 206.03 198 F11= 206.03 + 0.2(198-206.03)=204.42
11 204.42 200 F13= 204.42 + 0.2(230-204.42)=203.52
12 203.53 212

Fig. 2.2: Graph of Actual Demand vs Period
2) EXPONENTIAL SMOOTHING WITH TREND ADJUSTMENT
When the exponential smoothing technique takes into account seasonal effects along with
regular trend forecasts, we get exponential smoothing with trend adjustment or adjusted
exponential smoothing.
Adjusted exponential smoothing models actually project into the future (for example, to time
period t+1) by adding a trend correction increment Tt, to the current – period smoothed average,
Ft.
∴ Trend adjustment Forecast = New Forecast + Trend Correction
Fta= Ft + Tt
Ft = Ft-1 + α (Dt-1 – Ft-1)
Tt = β (Ft- Ft-1) + (1 – β) Tt-1
Where Tt-1 = Smoothed trend for previous period

β = Smoothing constant for trend adjustment
Ft-1 = Forecast of previous period
WORKED PROBLEMS:

3. A manufacturer of printed circuit boards uses exponential smoothing with trend to forecast
monthly demand of its product. At the end of December the company wishes to forecast sales
for January. The estimate of trend through November has been 200 additional boards sold per
month. Average sales have been around 1000 units per month. The demand for December was
1100 units. The company uses α = 0.2 β = 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 unitsα
= 0.2
β = 0.1
Fjan =?
Trend adjustment forecast, Fta = Ft + Tt
Or Fjan (ta) = Fjan + Tjan
Fjan = Fdec + α (Ddec – Fdec)
= 1000 + 0.2 (1100 -1000)
= 1020 units
Tt = β (Ft- Ft-1) + (1 – β) Tt-1
Tjan = β (Fjan- Fdec) + (1 – β) Tdec
We do not know Tdec, So we have to find it first.
Tdec= 0.1 (1000 – 1000) + (1 + 0.1) 200 Tdec= 180
Therefore Tjan= 180 + 0.1(1000 – 1000) Tjan= 180
Fjan (trend) = 1020 -180
Fjan (trend) = 1200 units.
Therefore the trend adjusted forecast for the month of January is 1200 units.
III. LEAST SQUARES (OR) REGRESSION METHODS
Least squares are a widely used mathematical method of obtaining line of best fit between the
dependent variable (usually demand) and an independent variable. This method is called least
squares method since the sum of the square of the deviations of the various points from the line
of best fit is minimum or least. It gives the equation of the line for which the sum of the squares
of vertical distances between the actual values and the line values are at minimum.
The least squares concept is also used for Regression and Correlation. Analysis between any set
of dependent and independent variables.
In Least squares or Regression Analysis, the relationship between the dependent variables Y and
some independent variable X can be represented by a straight line. The figure 2.3 shows that the
linear square method.
y=a+bX
Where b = Slope of straight line a = Y-intercept of the straight line
Fig. 2.3: Linear Square Method
WORKED PROBLEMS
1. With the help of Least squares Method, develop a linear trend equation for the data
shown in the table.
i) Compute the constants a and b in the regression equation
ii) Forecast a trend value for the year 2002 and 2008.
Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Shipments 2 3 6 10 8 7 12 14 14 18 19
(Tons)

Year X Year Coded Y Shipments (tons) XY X2
1991 -5 2 -10 25
1992 -4 3 -12 16
1993 -3 6 -18 9
1994 -2 10 -20 4
1995 -1 8 -8 1
1996 0 7 0 0
1997 1 12 12 1
1998 2 14 28 4
1999 3 14 42 9
2000 4 18 72 16
2001 5 19 95 25
n = 11 ∑X = 0 ∑Y = 113 ∑XY = 181 ∑X2 =110
i) To find constants a and b

The straight line equation is Y = a + b X

Y = demand (shipment)
a= Y-intercept
b=Slope
X= Time period
Where a= ∑Y / n = 113/ 11 = 10.3
b= ∑XY / ∑X2 =
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 would be
+6 and year2008 would be +12.
∴ For year 2002 Put X=6
Y = 10.3 + 1.6 x 6
Y = 19.9
∴ Forecast for the year 2002 = 19.9 tons of shipment
For year 2008 Put X=12
Y = 10.3 + 1.6 x 12
Y = 29.5
∴ Forecast for the year 2008 = 29.5 tons of shipment

2. The table below gives the sales record of a firm. Using Regression Analysis
Forecast the salesin the month of January and February next year.
Month Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
Sales in 90 11 99 89 87 84 104 102 95 114 103 113

(units)
Month X Month Y Sales X2 XY

Coded (units)
January -5.5 90 30.25 -495
February -4.5 111 20.25 -499.5
March -3.5 99 12.25 -346.5
April -2.5 89 6.25 -222.5
May -1.5 87 2.25 -130.5
June -0.5 84 0.25 -42
July 0.5 104 0.25 52
August 1.5 102 0.25 153
September 2.5 95 6.25 237.5
October 3.5 114 12.25 399
November 4.5 103 20.25 463.5
December 5.5 113 30.25 621.5
n = 12 ∑X = 0 ∑Y = 1191 ∑X2 = 143 ∑XY = 190.5
[Note: In the above table, the values of X can also be coded as -11.5,-9.5,-7.5,-5.5,-
3.5,- 1.5,+1.5,3.5,5.5,7.5,9.5,11.5. in which case also ∑X=0, but the difference
between each month coded is 2]
To find constants a and b

a= ∑Y / n = 1191/ 12 = 99.25
b= ∑XY / ∑X2 = 190.5/143 = 1.332
∴Y=a+bX
Y = 99.25 + 1.332 x X
Forecast for the month of January and February Next year
From the table, if the value of X for December is +5.5, the value of X for January
would be +6.5and that of February would be +7.5.
∴ For
Jan, put
X=6.5 Y=
99.25 +
1.332 x
6.5
Y= 107.9 or Y=108 units is the Forecast
∴ For
Feb, put
X=7.5 Y=
99.25 +
1.332 x
7.5
Y= 109.24 or Y=110 units is the Forecast
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 budgets, 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. In case (ii) also a straight line is fit whose
equation is,

Y= a + b X
a=y – intercept
b= slope of straight line
Where a = [(∑X2 .∑Y) – (∑X. ∑XY)] / (n ∑X2) – (∑X2)
And b= [(n∑XY) – (∑X ∑Y)] / [(n ∑X2) – (∑X2)]
WORKED PROBLEM:
1. A manufacturer of children’s cycle believes that the demand for the

cycles is correlated tothe birth of babies in the area during the previous
year.
The data given below shows this relationship.

Year No. of births in the previous Cycles sold during the
year year
1 40,000 3,000
2 48,000 3,200
3 66,000 4,000
4 78,000 5,200
5 92,000 7,900
6 1,05,000 7,900
7 1,25,000 9,000
8 1,40,000 10,000
Compute the probable sales of cycles in the 9th year given the no. of births in
the previous year as1, 66,000.

REGRESSION ANALYSIS:
Year No. of births in previous Cycles sold this year X2 x 103 XY x 103
year Yx 103
X x 103
1 40 30 1600 1200
2 48 32 2304 1536
3 66 37 4356 2442
4 78 40 6084 3120
5 92 52 8464 4784
6 105 79 11025 8295
7 125 90 15625 11250
8 140 100 19600 14000
n=8 ∑X ∑Y = 460 ∑X2 = 69058 ∑XY =

= 46627
694
i) To find co-efficient’s ‘a’ and ‘b’ in the regression equation,
Y= a + b X
a = [(∑X2 .∑Y) – (∑X. ∑XY)] / (n ∑X2) – (∑X2)
a= (69058x4600) – (694 X 46627) / (8 X 69058) – (694)2
a = -8.36
b= [(n∑XY) – (∑X ∑Y) ] / [(n ∑X2
) – (∑X2 )]
b=(8 x 46627) – (694x 460) / (8 x
69058) – (694)2

b=0.76
Y= a + b X
Y= -8.36 + 0.76X
If X is considered in multiples of 103, answer Y will be in multiples of 102, as

defined in theinitial table.
If No. of births is
X = 166000Or X=
166 x 102
No. of cycles sold, Y =?
∴ Y = -8.36 + 0.76 x 166
Y = 117.8 or Y= 117.8 x 102
Y = 11780 cycles
This is corresponding expected sales of cycles in the 9th year when no. of births touches
166000.
CORRELATION CO-EFFICIENT:
Regression Analysis basically tries to express the relationship between two variables
in the form of a straight line. The extent to which the two variables are related to each
other is explained by correlation analysis. In other words, correlation is a means of
expressing the degree of relationship between two or more variables.
A single figure which expresses the degree and direction of correlation is called co-
efficient of correlation®. The correlation coefficient(r) is a number between -1 and
+1 and is designated as positive if Y increases with increase in X and negative if Y
decreases with increases in X. If r=0, this indicates the lack of relationship between
the two variable. Fig. illustrates the meaning of thelinear correlation coefficient as
shown in figure 2.4.

Fig. 2.4: Meaning of Correction Co-efficient
WORKED PROBLEM:
1. The following data table gives the five months of average monthly
temperatures and corresponding monthly attendance.
Month
1 2 3 4 5
Average temperature
24 41 32 30 38
Resort attendance (‘000s)

43 31 39 38 35
Compute linear regression equation of the relationship between the two if next

month’s averagetemperature is forecast to be 45 degrees.
i) Use linear regression equation to develop a forecast.
ii) Compute a correlation coefficient for the above data and determine the
strength of the linear relationship between temperature and attendance. How
good predictor is temperature for attendance?
Months Average Temp Resort X2 Y2 XY

(ºC) X Attendance
1 24 48 x 103 576 1849 x 1032 x 103

106
2 41 31 x 103 1681 1271 x 103
961 x
3 32 39 x 103 1024 106 1248 x 103
1521 x
106
4 30 38 x 103 900 1444 x 1140 x 103
106
5 38 35 x 103 1444 1330 x 103
1225 x
106
n=5 ∑X = 165 ∑Y = 186 x 103 ∑X2 ∑Y2 ∑XY
= 5625 = 7000 x = 6021 x

106 103

CONTROL OF FORECAST (OR) FORECAST ERRORS:
Forecasts errors tend to be inaccurate, and you need to find out how (in)
accurateyour forecasting model is. Forecasting error is the difference between the forecast
and actual values. Forecasts are inaccurate for many reasons. Correctly identifying
variables has an impact on your forecast.


Worked Example:
1. A dealer for carrier air-coolers forecasted the demand for his air-coolers 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 errors measures (i) MAD and, (ii) Bias and
interpret the same.




WORKED EXAMPLES FROM QUESTION PAPERS
1. A company adopts method of least squares to develop a linear trend

equation for the dataas shown in the table below:
Year(x) 1 2 3 4 5 6 7 8 9 10 11
Shipment
2 3 5 10 8 7 12 14 14 18 19
in tons
(y)
Calculate the trend forecast for the year 12 and 20. [10 Marks)
Dec.2019/Jan.2020]
2. A firm use simple exponential smoothing with α =0.1 to forecast demand. The
forecast for the week of February 1 was 500 units, whereas actual demand
turned out to be 450 units.

i) Forecast the demand for the week of February 8
ii) Assume that the actual demand during the week of February 8 turned out to
be 505 units. Forecast the demand for the week of February 15. Continue on
forecasting through March 15, assuming the subsequent demands were
actually 516, 488, 467,554 and 510 units.
[07 Marks, Aug/Sept.2020]
3. The general manager of a building materials production plant feels that

the demand for plasterboard shipments may be related to the number of
construction permits issued in the country during the previous quarter.
The manager has collected the data shown in the accompanying table.
Determine the regression line. Find the forecast for plasterboard

shipments when the number of construction permits is 30.

QUESTION BANK
S. VTU QP Month No. of

Name of the Question Marks
No and Year Times
What is forecasting? List the steps involved in Dec 2016/Jan 2017 05
forecasting process?
Dec 2017/Jan 2018 04
1. Four
June/ July 2014 05
Jan/Feb 2021 10
What is forecasting? Why are forecasts important to
2. Dec 2015/Jan 2016 05 One
organization? What are features?
What is forecasting? State the benefits and costs
3. Dec 2018/Jan 2019 06 One
associated with forecasting.
Briefly explain the various factors affecting

4. June/ July 2014 05 One
forecasting.
Define forecast. Explain the elements of a good

5. June/July 2018 10 One
forecast.
Briefly explain the following: (i) Time series

forecasting; (ii) Forecasting error tracking signal.
7. List the elements of good forecasting technique. Dec 2016/Jan 2017 05 One
Mention the forecasting procedure for using time series
8. Dec 2015/Jan 2016 05 One
method.
Briefly explain the components of time series

9. Dec 2018/Jan 2019 04 One
method.
Briefly explain the components of time series method
10. Jan/Feb 2021 10 One
with sketches.

Explain the moving average and simple exponential

11. Dec 2017/Jan 2018 08 One
smoothing methods of forecasting.
Explain the following forecasting methods: Jan/Feb 2021 10
12. (i) Exponential smoothing Two
(ii) Linear Regression July 2019 08
A car manufacturing firm finds a relation of sales of

car and index of demand for a car. Sales for the past
five years are given in the table below. Find the
relations between the demand index and sale of car
by least square of linear regression. Further make a
13. Dec 2016/Jan 2017 10 One
forecasting for the sixth year assuming the index of
demand is 210.
The sales for the domestic water pumps

manufactured by a company is given in the table. The
forecast the demand for the pumps for the next 3
years using least square method.
The table below gives a sales record of a firm.

Determine the regression line for the firm and find
the forecast of sales in the month of January for next
15. year. Dec 2017/Jan 2018 08 One

The following table gives the annual shipment (tons)

of welded tube by an aluminum producer to
machinery manufactures.
16. Dec 2018/Jan 2019 10 One
Use 3 years moving average method with the estimate

made using least square method.
The following table gives the annual shipment (tons)

of welded tube by an aluminum producer to
machinery manufactures.
Use the least square method to develop a linear trend

equation for the data given, state the equation and
forecast the shipment for 2015.
A company adopts method of least square to develop a
linear trend equation for the data as shown in the table
below:
18. Jan/Feb 2021 10 One
Calculate the trend forecast for the year 12 and 20.

A company believes that its annual profit depends on
its expenditure for research. The information for the
preceding 6 years is given in the table below. Estimate
the profit when the expenditure for the research is 6

units. Also compute the values for slope and intercept.
The table below gives a sales record of a firm.

Determine the regression line for the firm and find
the forecast of sales in the month of January for the
20. next year. Dec 2015/Jan 2016 10 One

TWO-MARKS QUESTION AND ANSWER:

1. What is Forecasting and its uses?
Definition of Forecasting:
It is defined as the estimation of future activities. It is the art and science of
predicting future events. Sales forecasting is the estimation of future sales of the
company’s products.
Uses of Forecasting:
• Inventory Schedule
• Production Schedule
• Material Requirement
• Purchasing Schedules
• Equipment Requirement
• Man Power Requirement
• Decide upon the expansion of the plant
• Intermediate Schedule
• Cash Requirement.
2. What are the various types of Forecasting?

• Short-Term Forecasting
• Medium-Term Forecasting
• Long-Term Forecasting.
3. What are the factors affect the Forecasts?

• Accounting
• Finance
• Human Resources Marketing
• Management Information Systems (MIS)
• Other parts of an organization.

4. What are the features common to all forecasts?
• Assumes a causal system approach

• Forecasts are not perfect
• Forecasts for groups tend to be more accurate than forecasts for individual items.
• Forecast accuracy decreases as the time period covered by the forecast increases
5. What are the Elements of a Good Forecast?
• Should be timely
• Should be accurate
• Should be reliable
• Expressed in meaningful units
• Should be in writing
• Techniques used should be simple to understand and use
• Should be cost-effective
6. What are the steps taken in the Forecasting process?
• Determine the purpose of the forecast

• Establish a time horizon
• Obtain, clean, and analyze appropriate data
• Select a forecasting technique
• Make the forecast
• Pass on the forecast results to the respective departments for further action
• Monitor the forecast
7. List out the approaches [types] to forecasting.
• Qualitative Approach or Opinion and Judgmental Methods
• Quantitative Approach or Time – Series Methods.

8. What are the general approaches to forecasting:

• Judgmental Forecasts
• Time-series Forecasts
• Associative Forecasts
9. List out the Classification of Forecasting methods.
I. Opinion and Judgmental Methods or Qualitative Approach
• Opinion survey method

• Market Trails method
• Delphi Technique
• Nominal Group Technique
II. Time – Series Methods or Quantitative Approach
• Simple Average
• Simple Moving Average
• Weighted Moving Average
• Simple Exponential Smoothing
• Exponential Smoothing with Trend Adjustment
III. Least squares or Regression Methods
10. List out the Forecasting by Averages.
• Moving Averages
• Simple Averages
• Weighted Averages

11. Define Correlation Co-Efficient.
Regression Analysis basically tries to express the relationship between two

variables in the form of a straight line. The extent to which the two variables are
related to each other is explained by correlation analysis. In other words, correlation
is a means of expressing the degree of relationship between two or more variables.
12. Define Control of Forecast (or) Forecast Errors.
Forecasts errors tend to be inaccurate, and you need to find out how (in) accurate
your forecasting model is. Forecasting error is the difference between the forecast and
actual values. Forecasts are inaccurate for many reasons. Correctly identifying variables
has an impact on your forecast.
13. Write down the Regression Equation.

14. Write down Forecasting Errors Equation.
15. Write down the equation of Moving Averages.

16. Write down the equation of Exponential Smoothing.
17. Write down the equation of Exponential Smoothing with Trend adjusted.
*********************************ALL THE BEST*******************************

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RV Institute of Technology & Management®

V Semester 18ME56: Operations Management

22. Least Squares (or) Regression Methods 40

26. Correlation Co-Efficient 48

27. Numerical on Correlation Co-Efficient 49

28. Control of Forecast (or Forecast Errors) 51

29. Numerical on Control of Forecast (or Forecast Errors) 53

30. Forecasting Important Formula 55

31. VTU QP Solved 57

32. Question Bank 60

33. Two-Marks Q&A 64

V Semester 18ME56: Operations Management

V Semester 18ME56: Operations Management

V Semester 18ME56: Operations Management

Forecasts Affect Decisions and Activities throughout an Organization

• Management Information Systems (MIS)

• Other parts of an organization

Here are some examples of uses of forecasts in business organizations:

• Accounting: New product/process cost estimates, profit projections, cash

• Finance: Equipment/equipment replacement needs, amount of

• Human resources: Hiring activities, including recruitment, interviewing, and

• Marketing: Pricing and promotion, business strategies

• MIS: New/revised information systems, Internet services

• Operations: Schedules, capacity planning, inventory planning, outsourcing

• Product/service design: Revision of current features, design of new products or

FEATURES COMMON TO ALL FORECASTS

1. Assumes a causal system approach

2. Forecasts are not perfect

ELEMENTS OF A GOOD FORECAST [05 Marks, Dec 2016/Jan 2017]

4. Expressed in meaningful units

6. Techniques used should be simple to understand and use

➢ The forecast should be expressed in meaningful units.

➢ The forecast should be in writing.

➢ The forecasting technique should be simple to understand and use.

STEPS IN THE FORECASTING PROCESS

1. Determine the purpose of the forecast

2. Establish a time horizon

3. Obtain, clean, and analyze appropriate data

4. Select a forecasting technique

5. Make the forecast

7. Monitor the forecast

APPROACHES [TYPES] TO FORECASTING

1. Qualitative Approach or Opinion and Judgmental Methods

2. Quantitative Approach or Time – Series Methods

There are three general approaches to forecasting:

Time-series forecasts - Forecasts that project patterns identified in recent time-series

FORECASTING VARIABLES OR FACTORS AFFECTING FORECASTING

[05 Marks, July 2014]

In any organization, generally speaking, forecasting activities are a function of the

2. Time horizon being forecast

3. Data base available

V Semester 18ME56: Operations Management

CLASSIFICATION OF FORECASTING METHODS

I. Opinion and Judgmental Methods or Qualitative Approach

1) Opinion survey method

2) Market Trails method

4) Nominal Group Technique

2) Simple Moving Average

3) Weighted Moving Average

4) Simple Exponential Smoothing

5) Exponential Smoothing with Trend Adjustment.

III. Least squares or Regression Methods

V Semester 18ME56: Operations Management

b) There is no domination of one man over others