Forecasting

Forecast Accuracy
Summarizing Forecast Accuracy

Forecast accuracy is a significant factor when deciding among forecasting alternatives.

Accuracy is based on the historical error performance of a forecast.

Three commonly used measures for summarizing historical errors are the following:
1. mean absolute deviation (MAD)
2. mean squared error (MSE)
3. mean absolute percent error (MAPE) .

MAD is the average absolute error

MSE is the average of squared errors, and
MAPE is the average absolute percent error.
 Forecasting
Forecast Accuracy
The formulas used to compute MAD, MSE, and MAPE are as follows:

Ʃ│Actualt – Forecastt│
MAD =
n

2
Ʃ [Actualt – Forecastt] Error = Actualt - Forecastt
MSE = n = number of periods
n-1

[Actualt – Forecastt]
Ʃ Actualt
x 100
MAPE =
n
 Forecasting
Forecast Accuracy
Example 1 illustrates the computation of MAD, MSE, and MAPE.

Compute MAD, MSE, and MAPE for the following data, showing actual and forecasted
numbers of accounts serviced.

Sum (Ʃ) Error = (A-F) = Actualt - Forecastt

n = number of periods
Using the figures shown in the table,
Ʃ│Actualt – Forecastt│
MAD =
n
Ʃ│e│ 22
MAD = = = 2.75 Sum (Ʃ)
n 8
2
Ʃ [Actualt – Forecastt]
MSE =
n-1
Ʃe2 76
MSE = = = 10.86 From a computational standpoint, the difference between
n-1 8-1 these measures is:
 MAD weights all errors evenly
[Actualt – Forecastt]
 MSE weights errors according to their squared values,
Ʃ Actualt
x 100
 MAPE weights according to relative error.
MAPE =
n
│e│
Ʃ Actualt x 100 10.26%
MAPE = = = 1.28%
n 8
Trends Formula
Trends Formula
1. Open the excel file “forecasting examples for P&OM.xlsx”.
2. Select the cell phones worksheet that contains the table below
3. Select all the range of cells that needs to be included in the forecast by:

…(1) clicking the first cell of the forecast column, (2) steady press shift key
then (3) press down arrow to (4) move to the last cell of the forecast column.

4. Release the shift button only when you had selected all the cell needed
for the forecast.
5. Type the TREND formula below
=trend(

Excel then completes the SYNTAX of the formula as seen below.

known_x’s

known_y’s
new_x’s

Known_y’s – the dependent variables, the values to be forecasted (i.e. unit sales)
Known_x’s – the independent variables (i.e. time or periods 1 to 10)
New_x’s – the period where we want to have a forecast (i.e. period 1 to 12)
6. Complete the formula below by selecting the range of cells of
known_y, known_x, and new_x.

a. After typing =trend(

b. Select all the values of known_y’s by:
1. Clicking the first cell of known_y’s.
2. Steady press shift key then press down arrow to move to the last
cell of the known_y’s column.
3. Release the shift button

known_y’s
6. Type comma(,) to enter the known_x’s. Select all the values of
known_x’s by:
1. Clicking the first cell of known_x’s.
2. Steady press shift key then press down arrow to move to the last
cell of the known_x’s column.
3. Release the shift button.

known_x’s
6. Type comma(,) to enter the known_x’s. Select all the values of known_x’s by:
1. Clicking the first cell of new_x’s.
2. Steady press shift key then press down arrow to move to the last cell of the
new_x’s column.
3. Release the shift button.

new_x’s
7. Type close parenthesis ‘)’ to complete the trend formula. That is =trend(………..)
8. Press Ctrl + Shift + Enter button to run the trend analysis.
Excel then fill-up all the Forecast column with the computed forecast.
How to solve for the slope (b)
1. Type Slope(b) and Intercept (a) anywhere below the data.
2. Move your cursor where you want to enter the SLOPE formula
3. Type ‘=slope(‘ as seen below. Excel then completes the SYNTAX of the formula.
4. Selecting the range of cells of known_y, known_x (same process as done in trend
analysis but without the new x values)
5. Complete the formula below by typing the close parenthesis ‘)’.
6. Press ENTER to run the slope formula.
How to solve for the intercept (a)
1. Move your cursor where you want to enter
the INTERCEPT formula
2. Type ‘=intercept(‘ as seen below. Excel then completes the SYNTAX of the formula.
4. Selecting the range of cells of known_y, known_x (same process as done in trend
analysis but without the new x values)
5. Complete the formula below by typing the close parenthesis ‘)’.
6. Press ENTER to run the intercept formula
Regression analysis
Regression Analysis
1. Make sure that the Analysis ToolPak was already enabled in EXCEL.
2. Open the excel file ‘regression example for P&OM’
3. Select the healthy hamburger worksheet that contains the table below
4. Select ‘Data’ from the ribbon.
5. Click Data Analysis.
The Data Analysis menu should appear.
6. Select Regression, then click OK.
5
4

6
7. In the regression analysis screen, click/check Residuals box.
8. Move your cursor and click in the Input Y Range box and fill it with the values of
Profits, y $ millions.
Move your cursor and
click it here

7
Move your cursor in the first value of the Profits, y column (0.15) and the cell $C$4 shall
appear in the screen.

Move your cursor and

click it here

9
9. Steady press ‘Shift’ button of the keyboard and move the cursor up to the last value of
the Profits, y column. The ‘Input Y range’ should now be filled with $C$4:$C$15

9
10. Move your cursor and click in the Input X Range box and fill it with the values of
Unit Sales, x $ millions.
11. Move your cursor in the first value of the Unit Sales, x $ millions (7) and the cell $B$4
shall appear in the screen. 10
Move your cursor and Move your cursor and
11 click it here click it here
12. Steady press ‘Shift’ button of the keyboard and move the cursor up to the last value of
the Unit Sales, x column. The ‘Input X range’ should now be filled with
$B$4:$B$15.
13. Click OK to run regression analysis.

13
12
14. The table below shows the SUMMARY OF OUTPUT of the regression analysis
14. The table below shows the SUMMARY OF OUTPUT of the regression analysis
yc = a + bx yc = 0.0506 + 0.0159x

Intercept = a = 0.050601
X variable = b = 0.01593