Chapter 1

Forecasting

1- Wha t is the forecast?

2- Uses of forecasts
3- Types of forecast
3-1 : Qualitative forecast
3-2: Quantitati- : forecast
3-2-1: Causal Forecast
3-2-1-1: Cur ve Fitting Met hods
3-2-1-2: Qui ck and dirty fit method
3-2-1-3: Lea st squa res fit "LS F
3-2-1-3-a: Stra ight -line form
3-2- 1-3- b: Qua drat ic fonn
3-2-1-3-c.:.Polynomial form
3-2;..2: Time· series forecasting models
3-2-2-a:· Short Range Forecasting·
3--2-2-a·-1: Last period demand·
3-2- 2-a -2~Arithmetic- aver age
3--2 -2-a -J:·Mov inga vera ge
3-2--2-a--.3--a: Simple· moving a-verage
J-2- 2-a--3-b-: Wei ghte d mov ing aver age
3--2-2-a--J-c:· Exponentlally weighted moving average
3-2- 2-a- 3-d: Exponential Smoothing with Tren d Aqj
ustm ent
3-2-2-b: Med ium -Ran ge Fore cast ing
3-2-2-b- l: Trend Proj ection
3-2-2-b-2: Exponential Smo othi ng ~tiodel with
Tren d and Seas onal
Vari ations.
3-2-3: Reg ressfrm and Corr elati on
1: What is the foreea-st?
Forecast is an estimate of the level of demand to be' expected for a product
or several products for some period of time in the future.

"certain techniques" ~ ~ \ ~l~ ~ ~ <Y" le y . )i~t t)fa, ~ ~ .J

2 : Uses offorecasts
There are three majorpmposes for the forecasts:
1- To determine the necessary for and the size of plant expansions {long- range
forecast or facility forecast).
2- To determine the intermediate planning for existing products to be
manufactured with existing facilities (plarmiug forecast).
3- To determine the short -range scheduling of existing products to be
manufactured on existing equipment (product forecast).

_}_;--ill J--J y_,lh..ll i,)&jll ~-'.:i•Jll ;jiilt ,;.; ,:,i ~W~Y.t .~ 04 ~ ~ 3

Types offorecast
Two types of forecasts can be classified to:
a: Forecasts based on the method of generation of the foTecast t.o:
1- Subjective opinion forecast .
This type based on the subjective opinion of people working in th~ ~
sales and marketing field .

4
 2- Fore-carts based orr irrdex
This type of forecast based on an index am be illustrated from the
follow,ng example;_ a bmlding_supply manufactmer might base ms forecast f"r
-sales· -on the mmrber of ~ g permits issued in the area or on the nation al
index of construction value.

1 " .Index foundation " ~ ~ ~ la u1 ~ ) ~ J.i.iill ~ t_,ilt t~~ 0.k l41.1

3- i+oreca.fts ·based on avera ges

1ms typed "based on the averaging of the past sales data repres ents the
implied assumption that past demand rs· indicative of future deman d. This
assumption can be valid by the use of control charts.
) ~L... Jl w~ ~ k µ "arith metic average ,.. c.,r.~ .hi.a..,tt ~ ..i <) LJ--Al'l L>-1" 3

5
 . • . ·• . •
• . •• ' .: ·:_:•'-? ·', )}
• ! ~' ,

Sttcal· jore cmt . _ .- _··•.·.::.. :I<'-.

~4:.--StatJ .- . ;,•1:7."'l · ·..,.
. •. . .

-. · .This type -based on a statistical: _- analysis past demands:,; :" ~hi~,ttilif of fl•
. ....... •·.:· . .
. . . . ·:·.··'.-' .
··~,\...~}:~~- '• .., __ '; _. '.~

·, .

'. -: ~s~ibt1ities ofre,ing the most a.ccurate method arrd ~d ed fhere ,.f~:! ~~~
-., ---~g- pas1>and the future. One m.ust• moo ny the·prediction uom ·- ·• -~-.. ·_,~--~• .,\t· ~,":' /): r? ~
the-pa~f~~~J,~:~:::<'t•· _
• , . . .. : .
ertam events will be happ en m the future.
., .., ..- :, '.:" ,c,: .__ ;., ;· £. 1

t)mt _c . . ' :· ·. :_~: -· _~.t.:_(/ ~J;•/--~:\-~~ _}~

. ;
.: . . . .
c.iJ.--loll .:a. .,1 Ji.-fill r ,«... I.!; ..m c} •l i-;,;. J c:iS- ~ ~ ti)l,i ,,. ;itt4'Y:~ ; !ii.
• •- - I . - • <!t~;t~Jh,
·•-~ "·• ·:·.->•->~.\·;
5- Comhmatzon method
-- - . - _· ; ·; \ . :id'.-)X.···t-. . -- .
·11 is poSSiole - and· perm.rps desi@JJJe.-to .comf #ne some or an -~~f~:~~f -f;i~
. . . ; . - ·.:··:_ -/- . · ~/t
forecasting. .
· --. ._ -. - . -__ '. .\)'n:.,~\i,f
· ..l~..;-.It ~~ ~ •~ yfo . ~_,lhd-Ultt·4.>l ~., · .o'
1
:~:;\;~~sr~t~
sofieformation to:.: .. ·•·'. :- ~IA\.
h- Forecasts based Ofl the iype
. . . --~>··. / ~!f
·:,.: .. r:,:
.. _I-_Qual itativ eforecavt
- 2-Quantitativeforecavt .wl!iclt can he d~,rsijied tq: .
i) Caus alfo~CQSI.
ii) Time series fo~ t.

4- Ct111sal Forecast
In the causal model,. our .knowledge of.the value of one variable
{ or several;

variable quantities ) enables us to forecast the value ofanother varia

bt~.

te the true valu e for some variables; and Y' denote the predicted
if Y deno
value for the variable then
. 7

,
Y = f( X1, X2, ........ .. X0 J
Where:
f: forecasting function
X J, X2,. .... .... Xn: set of variables.
 e variable X are called independent variables, and Y is the dependent or

response variable. So, we have to know the independent variables to use them in
the forecasting model to forecast the dependent variable.

_, J-,.i.l.i. .lJc. ;..,J. XJ,. X2 D.fo "plumbing fixtures" ~~~ Y u.iiS t~J -2

-z.

One commonly used appioach in creating a causal-forecasting model is

called " Curve fitting". The fimdamentaf ideas ·of curve fitting are illustrated by a
problem in which one independent variable is used to predict the value of the
dependent variable.

Example-.
An oil company is planning to expand its modem gasoline stations. They
plan to use traffic flow (average number of cars per hour) to forecast sales (average
do11ars sales per hour). The historical data for 5 stations shown in the·foHowing
table:

7
 Stations . Cars I hour · Saks- I .hour .
} }50 $ 220
-
2 55 75
'
' 250
3 220 '

4 130 145
5 95 200

What are the sales for 183 cars /hour?

Answer.

To illustrate the curveJ:ittinf

1- These data are plotted as,ascatter... diagram·(figure l).
2- Find a curve that comes close enough to the points in the scatter
diagram.

Salest'IIB

JOO .

X
X

200
X

.· X
JOO .
X -&tiiirs =•
100 200 )SUC!. Zt JS- WS:#9.!,

Q
 Curve Fitting_ Methods:
Several methods·can:be used ~~r the curve fitti
ng:
4;.. J.k Quick and dirtyfit methml
This method is commonly used when
a) there is a single independent
variable and b) there is a need to produc
e quick forecast. The forecast mthis
method is to fit a type of curve to the data by
eye .
'~c att er ~L ..J\ ;.J\ J:aij_ "Cl ose enough"" t4' ~ ~
.l?,l J ~...;l:Jl ~ l...ilaJ
..;J ;,

"S c.atter .bL.ii ~ JAJ J\ t..>-:! 01 ~

t,41 y..,th.Jt ~ _, ~ ~..» diagram"

..htiil\ o:i.\ k..i.-,j./'straight line• ~ .hi.

~.J ui-ll v-i f' UAJ
Straight-line typ e of curve is most com
monly selected. The line has no any
spe cia l properties except that it appear
s to lie close to the data.
~Ji ~ c:, - ~_,U:i.Jt ~ 4 ~ J
~ f.i\ vM ,o; 6iilt Ji .h..fo, ~ kn r-.> ~

J-i---H-J ~;; ,P#tt .lnl f. LJA ~ ~ ~ ~ J.ac. c} "Frenc

h cur ve" r-' ~ ~ Li.S.
t...i_,_..J· ... { 60 - ot .;~ tfa..YA· J.-.. ~ ~ )
~ ~ ..;, ~ ~ ~. , ~ t~

~ ~ _,. "Fr enc h curve

u..~ ~ 1-33 ~ ~ t-- t.\~
11
_fo'°it ~ t t-6 117

. ubetter forecasting''~ ~ cfa Jy-o:Jl ~ ~

 Sales/hrs

Quick and dirtv fit

300

200 183¥202.5

X
100·
X
Cars/lirs

100 200
I
<It

Fignre 2: fitting a line by eye

The quick•and dirty method has two ~ g e s ~

1- Itis ffiipossible to are for more than one independent variable.
2- There is no measure of what a good fit means. Once th~ manager selects
a special fundamental form (such as straight line form ...)o/ there is no
automatic way to select one time that is better than the other possible
lines.

4-2:Least squares frt "LSF"

This method is a formal procedure for curve frtting that overcoming the two
disadvantages of the previous method. It is a two step process:
1- Select one ofthe specificfimction forms:
i- Straight line form
ii- Quadratic form
iii- Polynomial form.

10
 2- Within /he· set of ·atf possible- functi.on:.s· spec!fied in step J, choas-e the
specifrc fimction: tlrat minimizes the sum ef the S(Jtlared de:viatio,rs
between the data point.r CDJd the.fimctians values

4-2-a:- Straight Line Form

If we select " as in step l '; a straight line function of the form Y ::;: a + b X .
Step 2 involves the problem of how to select a and b:, then ~ c values for a and
b are chosen, the appropriate line Y = a + 'b X js drawn,,and-the deviation between
. !
observed points and the ~ction are mdicated.
,
'"Yr= a f §,11141T ~ ~ WT.,n ~ .,"Y: actual sales /hr"" ~ ~ 0:!,J t,UiIT 0fii .,
J

Where:
Y1 : actual sales/hr at location J
. X1 :· actual trafrre flow at location 1
a : intercept for the function on Y axi~
b : slope of the function

. y I ~- ~ ~ Uit-11 •.'.l4 ~ c,i,thi t-.,.lA. c.;)"l# "d, 2" 4 Dfo J

The value. of d 12' indicated how well thefunl1ion.fit at this one. point.

4-2-b: Sum of squareddeviations

One measure of how the function well fit at all points is the sum of squared
deviations, which is I: dj2. Since dj = [Yi - (a+ bX1)J, the sum of the squared

deviations can be written as:

 L dr2= fYr - ( a + bXr)J2
The method of }east squared select a and ~ to minimize the partial derivative
oi with respect to a and set the resulting expressions equal to zero,. which yields the
first equation. The second equation is derived by following the same procedure
with respect to- b. these two equations that result ·are:
I: 2 (Yi- (a+ bXi)J =0.0·r •
I:-2Xi (Yi- (a+ &Xi)}= 0.0
The sofntion for these two equations gives us the value of a and b as follow:
a=(lln)/ IY;-b-D<;J -y ;;· ~'L.
;\I\
l>=/l::x;Yt-(1111) Ixil:Yi/1 /1:X.r -{lln) IX;)2J _- ;_... _ ~:L
iX'l. -V\~'I . ·X ~-· ~
b~· 1 . l ~~)l
As in e1:ample l z. ::L - V\ - -
j X·Y·
,c~ '1 - \,JC
Xj Yi I I . Xi2
1 150 220 33000 22500 ,:..
31 'S'O e_ ')-0 I.J
2 50 75 ~ 3025
3 220 ,. 250
1500
5000 48400 i-

4 130 145 'l8850 .... 16900.

5 95 200 19000 ✓ 9025 ~

E 630- S90 : l:29975 99850

tu, V
12CJG00
-
. 99 ·3 z. f .

---
b=0.~3 ~:
' ,.
The straight-fine equation is Y = 57.1+ 0.93X. At X (traffic flow rate)= 183~
.
then the Y {sales) will be equals:
Y= 57.1 + 0..93. * l'.&3. = $. 227.29
Special case for the straight line forecasting is the constant.forecast. This
takes place ifb = 0.0,. then
... .
Y= a
and d1 = Y - Y= Y - a
 t=n
and dr -I( Y -a)1
i=l
ls to zero,.then:
To minimize di, the partial derivatives of di with respect to-a equa
11

·odj/oa-=0.0 -1:( V -a}2

f=I
The solution for this· equation is
It . ~

a= IY1/n =f )
i=l
c average.
The oest::constant forecast is Y = Y, and this is the mean aritlimeti

4-2-c: Qaa drat k. function

Suppose that we want to fit a quadratic function of the form Y =
ao + a1 X + ai
select ao, a1 and a2
x2 to our data with die method of least squares. Out goal is to
in·order to minimize the sum of squared deviations·.J
n
dr·=I/Yf-(ag+111X+ajx2)21
1='1
32 equal to·zero
By setting the partial deri\11bves with respect to-~ a-J and 7

~ .3 equations m ao~
a1 and 32. rinding the nnnrerical values for the

coefficients,. we find the.forecasting function form.

the foltowing
For the previous example,. after the partial derivatives,. we can get
three equations:

n. n n
ao+ a1IX i"!" t12I Xr= IYtI . •••••• •••••• • •• ••••• I
i=l r-1 r-1

n n n n
ao•EXi +111Xxt2 +a2Xxt3 = XXi •y; ...... 1
.,__., L_ .
L- 1 .,_ ,
 n n n 11

ao•£Xt2 +a 1I Xf +a2£Xt' =I X / *Yi ....3 1

i=l i=l i=l 1
i=l
,,,,,---. /

l Xi Yr Xi Yr . (xv .
: X
I !1/ / xiv ·'x-1"'y- '
1- 1

2.'25 3.38· 5.06 4.95

1 1.50 2.2 3.3
0-JO 0.17 0_09 0.93
2 Qj 5 0.75 . OAl
4.84 10.65 23A 12.1
3 220 2.jQ 5.5
1.69 2.2 2.86 2.45
4 1.30 1.45 1.89
0.90 0.86 0.&1 1.8 0
5 0.% 2.0 0 l .90
····· .
' ----~ . .. ... . ..
11.26 32.25 2I. 53 *I0 .
6.5 * S.9 * I3. 0* . 9.98*
L *108' 6
102 1()2 104 104 *106

get:
Substitute in equations· l) and 3,. we can
5 * 3tJ I 65fl. * a1 I 998()() * 8:z. =
890

6.5 *·a0. + 998 *~ + 17260() *~ - 1300

9':98 * ~ 1 l726 * a1 1 322500 * 8i = 2153
ns gives:
The solution of the above three equatio
~ =-6 5.7
~- =3 .00
3z = -0.007
Then,. the quadratic equation form is:·
Y= -65 .7 +3 X- 0.0 07 X2
At X = 183, then

t = - 6.s.1 + 3 * 183.- 0.0 01 er 83) 2 = 24&.9

4-2-c: Polynomial fits

In this metho d, fun ctio n of the fo ~ Y = a 0

+ a 1
X + a2 an Xn , are often Y: ......
res ent s a bro ad and flex ible cla ss of functions. Fo r n = 2, we hav e
suggested . It rep

14
 a quadratic function· and for n :: 3,. a cubic ~ o n and for n = 4 ,. a quarter
function ...... etc.
Suppose,. we h~e seven observations,. denoted ( Xi,. Y{),, Ii = l,. 2,. 3,. .....7. It is

possible to fmd a sixth degree.polynomial Y = ~ + a1 X + 8i ,;f ••••••.+a6 X , that

6

exactly passes through each of these seven data points as shown in figure ( ).
It produce a perfect fit (giving zero for the sum ofsquared deviations).
When the independent wriable at future time bas the value X8" the true value of Y
might be given by Y8, whereas the predicted value is ¥8• Despite the previous fit,
,. the forecast is very maccmate.

4-J:· 6Dodness efFit

In method of least squares,. the sum of squared deviations is selected as a
measure of goodness of fit: lfwe compare the linear and the quadratic fit with this
criterion as shown m 'the following table:

} Xi Y·I linear di2 quadratic d•2

l

l 150 220 196 576· 220.57 0.32

2 55 75 100 1089 77.64 6.96
3 · 220 250 262 144 261.87 140.8
4 130 145 17& 10&9 200.71 j

5 95 200 145 · 3025 246.31 3104

2145
I 5923 5398
 •

The value of L d12 for the quadratit~ function is smaller tL m for linear
-
function (5398 < 5923}. Then,. the quadratic gives us a 10 '% decrease in the sum
of squares.

'-tri IIIA ~ r' ,;; "!i'_cnusa/ foreca~1 ~)! ,uU .J-.fiil1 ~Jj....-.i iJJ L Y.:;JJJ

~ J .de.pendent variable: c:its11 ~ J.,,_,,{, (,t._.,f fol) independent variable

5: Time series forecasting models

In this model,. the historical observations of the dependent variable are
plotted against time,. and then fit to these data. The cmve is then extended into the
future to yield a forecast.
The nse oftnn e as independent variable has more serious impljcations; their
altering a few formula; the manager should imderstand the difference between the
causal model usmg curve fitting · and tnne·s ~es model using curve fitting
. The
mathematical teclnriqnes are identical in both models but the philosophy
js
basically quit different.

(Time ~ j ! l ~j}-4,i l\ .J ( Causal ~lfodel ) ~ I ~j-~ t 0M J_jll ~ ~

16
 ~ 0 u L -s ~ ~ .u..c.
~ _.,..s f' ~ ., "Stable • uJi.
rlA l v ,.; ~
iiii ~ .J ~ , . )'• . OJ ~ t.S-~'-Jt J..1._,..n ~ 04jl1 ~ J
u-I-:I· l». _, .~ W l

fim e series analysis js defined

as a set of tmre ordered observa
tjons on a
variable during successive and ,eq
ual time periods~ The analysis of'
time series
decomposes·the·data·into 5 compmr
ents:
l - Leve·J of demand
I... Trend represents long term mo
vemept of variable;
2- Seasonal variation: consists· of
similar periodic patterns that oceur
e~ch year) ... E xample. o f. p r~ are~ sQft dri
nh~ ire er ~, . toys,.
grass seeds ... .....).
3- Cyclical variation: represent
the ~m re nt and. lotions of a
variable
over a number of years.
4..: Random variation: are poracfic
movement related to cham;e even
ts that
last only for short time.

6: Time Series Forecasting Te

ch niques
There are· many techniques for
time series analysis. Some of
common ones the most
-are.:
6-1: Sh or t- Range Forecasting
us ing Smoothing·Metb()ds
6-1-a: Last peridd demand·
6-I-b: Arithmetic average
6-l-c: Moving average
6-1-d: Exponentially weighted mo
ving ~verage.
6-1-e: Exponential Smoothing wi
th Trend Adjustment
6-2 : Medium- Range Forecasting
Model

17
 6-2-a: Trend Projection
With Trend ,:rnd Seasonal
6--2-b: Exp one ntia l Sm oot hin g IvfodeJ
Variations.

hin g Methods
6-l:- Sh ort -Ra ng e Forecasting using Smoot
g the bes t tech njq nes js th""
The objective fnnctjon ~J oy ed jn det erm inin
me asu re the forecast error. The for eca st
me an abs olu te deviation (MAD),. wh ich
n the fore cas ted and the actu al value. The
erro r is the num. eric al diff erence bet wee
--. ,: .. .
-_:... -
. . -

teclmicpres has the.srhaf}es t MA O is sele cted as the for eca ~ i11sh mnent.
fi-om the following form ula :
The me an absolute dev iati on is calc ula ted
I

MA D= I,fY "r- Y{ J/n

_..
-'v
-·-·- ----
Where-:
Y'1 : forecasted dem and for per iod i.

Yi : actual demanp for per iod i.

n : number ofperiods.
Yi'-Yj ; aI~eora deviation forecasted erro!·
[V'i,- Y j]:.aRSQJil.t.e.value (d~viation),

6-1~: Last peribd tlemand

next period the level of dem and
This technique simplifies foreq1sts for the
forecast values Jag beh ind act ual
that occurred in the pre vio us per iod . The
demand by one period.
· Yt= Yt-1
Where:
Yt : forecasted val ue for per iod t

Yt-1 : actual ·demand in pre vio us per iod .

Example:
list ed bel ow:
Mo nth ly dem and for the last 8 mo nth s is

18
 l 2 3- 4 5· 6 T . g·

34 44 · 42 30 46- 44 56- 50
Find the last period technique?

Answer
The forecast vahres in last period demand are~

. .. -- .. -
Month Demand Last period .Demand absolute
Yt;.l forecast Yt deviation fYt -Yt-11
r 34 - - -
2 44 34 p
10
3- 42 44 2
4 30 42 12
5 46 30 16
6 44 46 2
7 56 LPl 12
8 50 56 6
50
r J96 60

Notes~
l- The forecasted value for the second month is the actual value for the first
month.
2- The fore casted value for the 8th month is the actual value for the 7th
month.
3- The mean absolute vah1e is the absofote difference betwe·en the
forecasted-value and the actual value,. then
The mean absolute value (d_eviation) = 60 / 8 = 7.5

10
 ;sa
I

6-1.J>: Arithmetic- average

erage ofa11 past demands marriving 1t a t crecast.
This technique-takes the av
Yt = (1 /n ) L <Yi)
Yn) In
= (Y 1 + Y2 +· Y3 + Y4 +........
Where: ..
r period t
Yt ~ forecasted demand pe
di
Yj : actna) demand in perio
JJ _: mm:rber oftim~ periQ
ds.
tOQ ffttft ·accmmt o f
r~t
t~ th~ m etho d is tm rt it ta ke s
~ basic o b j~ ~
tc ch an ge s in de m an d pattern. It is appropriate
e enotfg h
data and is not responsiv
for dam th at ~ statifmary·
and randomly·distributed.
:
ns ex am pk wi _th ~ to t~ Arithmetic a v ~ e
'fb.c·answer fqr th.epre:vio
L, 3 / z )
Yt = (1 /n ) L IV ·\
l lJ J:,

44 + 56 + 50 ) l 8 = 34 6 ;•ii
I 8 ... ... :.:.
1

= (34+ 44 + 4 ~ 30+ 46+

/

e MAD
Month , Demand· Arith. Av
34 42'1./31 I .; . 8:
l
-
44 42 2
2
42 ()
3 42
,
4 30 42 12'
46 42 4 f
5
42 2·
6 44
56 42 l4

I
7
50 42 &
8

r 346 { 50 ~

M A D = 50 I 8 = -6. 25

20
6-1-c: ·Movin g average
6-1-c-1 :· Slmp/e MtMn g Averf l#
This technique ~erat cs t~ next periodic fore.c ast by averaging t~.actual

clem®4 for-tbe:_last n-time periods: The av~g e of a f'DCed nu;mber-( say·n-)-of·t bc

most recent observations is used· as an estimate of the next value ofY. For
e_xampl~;, ff 1t equals 4" thcm_afkr: we. ~ o ~ the vahr~ of: Y m_pe.rio.d· l S-,_
OJir-~ ~ ~- for period 16 wotdd ~ :

In.g_en~-•-al:
A A A A A·

Y~1- (Y; + Y;_l+ v;_l-+"."'"·"-".'•. Y;_~l} ln.

~ : m.qvmg~avcmrgc te:c.lmigu~- is a ~rr,pm11.tis~- between. the ~ -p eri~.
t~hoi_gu~ and. -the. arithm--etic avern~ tecbniqu.:e with.~ -ad:va.nta~ ofboth.and
- --- . ~

th~ ctiS3 -d~~ of·oo.itb~ Ifth.~ demand rat~ is $t~dy~

-=-
tlffl moving av~~ with
.
.

th~- ~ d with ~ t- f.or~t.irrg·~JJ oo as' cMroJ ~ trurtb_o.d... Wl:tcm.t~

~ge : d.e,bar:rd ~ @t- cmm~,,, ~mQ Vmg :~~f ~~d s:f.a .irly
qqj~ldy- to th~ ~ha.nge: as 1~:~od.me:thoct. Llete.asiug thc. nmn.b «"ofperi.Qds·.in·
m.ovmg.- awrJJ ~ wiJJ pr_:Qd:u~ fo,.~cm.- b.K~ the arithm.etic. a:ve.i:.ag.tt fQ(~
.
~g- tmt ~ -qf: pcriQ<Js will pro.du ~ fqre.cas.t· lik_~- tlw last: pcriqd·
demmr d forecast:

At ;,. ufi.i.'t y,..m t~y1 ....o. ..~J; .ya11 ~.,,.~ ~~t-. ,.

ka ~ ..!ll:i WC- ''ob~ tion" olh..Jl ~ -~ ~y ~t). u-J..1, J.-

oJlilt
~ -- - .

~ La. c.:,ts.o. ~ ( D_:1) ¼ill u.J:iu 0i (),a. ~ ~ , 4 (n) c;..fo:r-J ~:_p:Wt-k_,rt

~ wYl ~ J . ,r,i ~__,.l:,.W,~Jc:-t:;i}t .~ ¢jlS ).3}_ ~ ~.J. jJ}ilt 4 Y~- ~ ,

21
I•
I .
C.
'

=5000 • 7 ~ a!~ u _,..ii 4 5000 ~ y~ (n = 8) ~ 8. .h...fa y ~

~J}·Jt ->~ ~ ~.,.. ~GY-~~_ ,35000 u..11r~u...,...i35000

• t Weighte.d n- period moving average) ? ,;; ••; l.iv}=Jt o.l.l

6-1~-i: Weigkted-,r_- peri!Jd-111t>vi.1'1:~

The notiqn • that· rec~ data ~ . mme impqrtant than qld data ~ be
imple_mentoo with: 2t. weighted n - period moving average:. For- specifi~ e.xa.mple,.
fw 1t = 3, ~ shmJJd.~;_
A
v·7
·
= ct0 Y:· 6· + ""l
r:v Y:
-5-
+ ~z
rv y·
·.f

Wher@:
a"s-: non ~ scl~ednlUDbers: so that smaller weights- are assigned to
mqve: ~ .cmt·chna. ~ -all t~ we:ights.- ~ to l.
l , "> ~ nc J dS ~ ~ ~ c)r-. •... q?Sc .Jf'ii.~ o_;;.'iS, d...>.h 4.».,

(Ct.o =5/10 ,q 1= 3/lCt q,2 =2/10.) ~_,) (a0 =3/6 ,ct.1= 216, (½ =1/6)
- .. -

Example:
For the following data (sales *IO 3 /month; starting from· Jan. to Dec. )
J F M A M· J J · A s o : N D ·
20 24 · 27 Jl }7 47 5J 62 54 · 36 }2 29
.
1- Use the STmple 3 penod and 4 period moving averag~ to forecast
the sales for next Jan.?
ii- Use a 3 period weighted moving·averag~ with the weights· (a0

=5/10,. a r= 3/10~ cr2 =2/10) to.forecast demand for next Jan.?

Solution
22
Soiuuon
rages:·
1.. Three and four month sim ple moving ave
M safe. 3 month SmipJe.M . 4--mo»th SimpTe M.
Average forecast Average forecast
Jan 20 - -
-·
"

Feb- 24 -
Ma 27 (20-+-24+27)/3 23. 7 -
Ap r 31 (24+ 27+31 )13 -2? j (2.0+24+')/J+3 l )/4=25 5
. ' Ma 37 (27+31-+37-)/3-31.7 (24 +21 +31+31)/4=29.8

Jun 4T (31 +3 7+ 47) /l 38'.3 (27 +3t+ 37+47)/4=3'5.5

Jul 53 . (37+47+53.)!3=45~ 7 (3T+37+47+53Y4=42.0

Au 62 (47+53+62)/3=54.0 (37+47+53+62)/4=49 .8

Sep 5:4 (53+6-2+5.4)LJ=S6.3 (4 7+$3+6-2.+$4)/4 -5_4 .o

-·
38 (62+54+36)/3=50.7 · (53+62+54+3&)/4 _ 51 3
Oct
)14==46:~o,
No 32 {54-+36+32)13=40.1 , , · (62+3:'4-+3&+32,
(36+32+29)'3-=32.J ·, . (54+38+-32+29)/4=
38.3-
De 29-
-

: MAD . 4M- . MA D
. Mo nt Sale J.M (4M }
h s (3M )
Jan 20 - - - -
Feb 24 - - - -
Ma 27 - - - -
Ap r 31 23, 1 7.3 - -
Ma 37 21 3 9.7 2S..5 ll.5
47 31.7 15 3 29. 8 17.2
Jun
14-_7 3-$.5 l7_ J
Jul .53 3~-3
62 4-S-.'i 16. J 42. 0 20
Au
54 54_0 0.0. 49.8. 3.2
Sep
Oc t 38'· 56.3 18-.3
'.
54.0· 16.0·
No 32 50. 7 ' 18.7 51.3 19.3
40. 7 11_7 46_0 17
De 29
Jan 32 .J 38:.3
112 121.7
I:

23
The mean absolute deviation for 3 months moving average · J 1219 = J2.44
ihe mean absolute deviatio:n for 4 months moving averag~f 2J .1/8-J5. l25
The three - month meving average has-a MAD of6.62 and the four-month moving
average has-the l~t MAD of 9.34. The 3-month is the most ~ble of~ two
~Jmi~ and i~J~t -fw~ ne:xt-)anuary is l2_.3

It) T1t,tt.- lllf)nt/twejpfd. mol'ing-aw:rag~

..
Mon. sales Thee -month weighted moving foFecast MAD

Jan 20. -- -
-
Feb 24 - -
Ma 27 - -
Apr - 31 [3~+2-24 '+1-~0J /6 24.83' 6.17
-
37 [3 ..31 +2•27+ 1•·241 /6=28".50" g.5·
Ma
Jun 47· [_3*37+2*31+1*271 /6;31:33 13.14

Jul 53 [3*47+2*3_7+ 1*31] /~LOO 12

Au 62 [3*53+2*47+ 1*37) /6=48.33. 13.74

Sep 54 (3*62+2*53.+1 *47} /6=56.50 25

Oct 3g [3*54+2*6-2+ 1*53} /6=56-.50 20.5

No J2 f3*38+2*54.+1 *62J /6=46. 33 1433

Oe 29- [3*-32+2*38+ 1*541 /6=37.0fJ 8

Jan [3*29+2*32+1*38] /6=31.50 -

r 99.4&

The mean absolute deviation-for 3 months, weighted moving average

·= 99.4819 = 11 .05 _
/

Comparing the ave_ntge mean absolute deviation of the three- month simple
moving average (12_.44),_ th~ four- month smrple moving average- ( I5.125),. and the
three- month weighted moving average {l I .05) confirm the suggestion that recent
safes are better indicator of future sates than- are older data.

24
 ~r- -1- W' JJ~- ~.# u3.,l-:,,,_~ -~--~ ~ J:~ -r4.k ·
ExpOJTentia:Hy weig hted moving}. r.h1,si ~ -~ -~ J - ~ ~

._( ~.BWMA

6-1~-3.' ~~ wd gl, td~-~ e:-JJWY.J..

EWM.!.t ~ ~ .: kmd. q( moving- -~d mt ~® -t:~ t~
~
keqm.,g- ef: lQng· ~Qr ieal_~r4 ~ IP.,( )Ym g:~ t~n i.~ ~QJ U~· that.
J.4~.
dat~ ha~ no val®~~ - n_ p,er i~..:E.WMA.i$ a. ~jaJ; t~ipt Htt·~ ~ e
wl~~ P-3St: ~ - ~ t!Qt· gjytm: ~ ~gh t;. ~ ~~ ~ «.r past'
~ -
r

~e s. ~ J y wi.tl.t mc.~f!~&'. age Clf' dm#; M~ ~~ data.. '®

:
weighted lIIOfe. ~-tb a.n- past:chmr~ ·in tlri$ modellti ~ -~ p ,,~d em aud
(Yt~ 1} is esfrmated D¥ adnfo.g to th~__!~~-_a~~~ ~~~~c~~ (Y tl a ~tib n
ofthe

diffe_i:en~ be.tw.~. tlm· ~m.d· demand. (Yt)·m .d:th.t. las.t:~ '~ .

demand: .

(Yt) .,

Nc:wfq~c.a st:~ (Q~ ast+ ~ (actual <kmland- oW. fQf.~ t)

Where~
a: is- a:tJw.-- ~ e ' ~s.ta nt:~h that: O·< a:< I-..
~ -&tmend.fonnffla lhr-tk·EWMA inml.elis:M fo1lOW$:·
Yt :;a fY~1 + (.1-a), v·t-l + (t-a,-2-: Y;..J..... (-1--a. i)~l.- v;
The EWMA ~bcrtc.~·piu.t:ofthe'. dif. f~ cr~ ~ ~ua f demand.·ancf.
t~e .d <krmmd.- tQ·a:~ -~ ·a.nd·~ ~tO .cb ~~,~ - (t~g os-to
~ ~oJmtd va~-ef:~ pr.~ ~ Wfrigh_~ ~ ~~~ m.~ e.~pon.~i:ttia.l m.ao.n~•
~-
beca ~ the :6-atjion (I- a) is raised tn a powe r;
The ge_neral fonnuJa fqr: ~pfe s.s ing t~ weigb.t_- ~ a futw.e:( ~-is as
follows~

25
 Weight= a (1-_ a;n-1
·
th e . b . . _. .
no ds rem ov ed rrom the existing period.
Where n is num . er o f time pe
'). . d 4-1..-1 . able actual value is for May,. then:
For example if a
·
==
- :,
O· an . uu ;_ at~st
· ~7
avad
·

weigh t .;;; 0 .2 (T ..·O.~} 1-1 = 0.2

June
.16
July weight ~ -0.2(J.:..,0_.2)2~l :;:.0

ust weight ; 0 .2 (l -.O.~) 3-l~ 0. 128

Aug

· Z
C. .h. ~ ( .and
_for _th ew ei gh ts (whcn a =.0.17 0..3
shOW'S valu:e.s·
The following ta,bk ..5) m orc·rehnwe. weight is
{q =0
at· u~ larger values
o fq
r.r ~
- th
0.5). Yon ca
.l s and the. irdluen .®. Qf Q}de.r data is more
~ -~
tJte !t ~ Q J
as;.tjp.,ed to
ra pi dl y di.Jrmris.~. I a=o.s t
I a=o3
f v ar ia b k t ceefl le k n t /. a = 0 .I
0.5
t y· i
la
. -0 .l 0.3 I
} 0.25 I·
I t
t { l- a). 0; () 9 I 0.21 } I
/. Y t- t 1 1· 125 /
0,081 1 0.147 }~ 0.. 1
t (l-a-)2
/ Yr, 2
l. (1 -a f 0-.0729 f {t l0 2 9 I t>.062:5 ~
1
I Yt-3 0 .0656 I 0.0720 0.0312 1
f
Yt-4 f (t -a )4 f
~
1 (1 -a )5 · 0.0591 l o.t,504 J 0. 01 56 f
).
f Yt-5 / :
t 0 .0078
I
1
I (I -a )6
0-.0531 f 0.0353 f

1;~ Y t- 8 1
(I-a}7
(1-Q.)8:
0.047&
0.0431
1 0.03&7
I
I 0.0241
f 0.0173
I
/- 0.0121
f
J. -
~-0039 I.
I
I
I·
f

t Yt-9- l. (1 -a f
t l f 0.0085 I
I f (l-a.)10 J 0.0349
I Yt-10 i
I· 0. 996 ·15 I·
0-.6&6 ·19 I 0..98023 ~ I
Y. ~ f
f

26
 Example:
,.
t Mo t Safe t Y'"t J aYt + (1-a) Y t t MAD t
t t t t t t
t Jan t 20 t 771(p -- t t t
t t t· \:5] t t t
t 4.00 t
tt Feb t 24 t 2& : t Q_6~0+0.4x.~0=2~00
t
I·
t
lv1a
I -
t 21
t
t 25.26. t
t
0.6x24+0.4x28=25.66
~
,
t
t
t L74
t
t
t
t
t 31 t 26 44- t O.6x27+0.4x25. 7- .26A4
t Apr
J:
t
Ma r 37
t t
-i 2~:,s It
.
0.6x31+0.4x26. 4=29. l8- ,
t
t
t
4.56 t
S.82 t
t
t
t Jun t ♦? t 33.87 O.6rl7+o.4x29.2 J3.81 t }3.13 t
t- t t t t
t· Jul t 53 t 41.75 t 0.6x47+oAx33 .9=4l. 75 t 11.25.
t t· t ~ t
t 62 ~ 48.50 t· 0 :6x53+0:4x4l.8 =48'.50
I· Au f-3.50
I
Sep
Oct
I 54
38
56.60-
55.04
0.6x62+0.4x485CF-=56.6
;

0.6x54+0.4x56.6=55.04
2.6
17.04
No 32 - 43.62 . ' 0.6x38+0.4x5517=43.62 11.62
De. 29 36.65 0.§x32+0.4x43 .6=36.64 7.65
.
Jan .. 32.1 0.6x29+0.4x36.7 32.08 -
~ 95.92

Ntltn~
1- The coefficients of the Y 1 s decrease as the data become older.
2;.. The sum ofall coefficients (including the coefficiem of Y, 1) is. f.

>

C: _.. 0 ,: cl_,lt ~., tb I ~ YI .fa Ji: t 4 ~j ~ "'-lY ~., .>Ph t/i 41 tJ-:!i
- --