FORECASTING

(continuation)
 • A linear regression
model that relates
demand to time.
• It is used to forecast
demand since it
displays an obvious
Linear Trend Lines trend over time
(the least squares
regression line).
Linear Trend Lines
• A linear trend line relates a dependent
variable, which for our purpose is demand, to
one independent variable, time, in the form of
a linear equation.
y=bx+a
Where:
a= intercept (at period 0)
b= slope of the line
x= the time period
y= forecast for demand for period x
Linear Trend Lines
b=  xy − n x y
2
 x − nx
2
a = y −bx
where :
n = number of periods
x= n x

y= n y
Solve for the
linear trend
Linear Trend Lines
x = 78 = 6.5 y = 557 = 46.42
12 12

b =  xy − n x y = 3,867 − (12)(6.5)(46.42)
 x 2 − n x 2 650 −12(6 . 5)2
=1.72
a = y −b x
= 46.42 − (1.72)(6.5)
= 35.2
y = 35.2 +1.72x linear trend line
for period 13, x = 13, y = 35.2 +1.72(13) = 57.56
6
Linear Trend Lines
 • There are several
methods available for
reflecting seasonal
patterns in a time series
forecast. One simple
method makes use of a
seasonal factor.
Seasonal • A seasonal factor is
Adjustments multiplied by the normal
forecast to get a
seasonally adjusted
forecast.
Seasonal Adjustments
Example:
Wishbone farm is a company that raises turkeys,
which it sells to a meat-processing company
throughout the year. However, the peak season
obviously occurs during the fourth quarter of
the year, October to December. Wishbone farms
has experienced a demand for turkeys for the
past years as shown.
Seasonal Adjustments

Because we have 3 years of demand data, we can

compute the seasonal factors by dividing total
quarterly demand for the years by total demand across
all years.
Seasonal Adjustments
𝐷1
S1 =
𝐷
42.0
=
148.7

= 0.28
S2 = D2/ D = 29.5/148.7 = 0.20
S3 = D3/ D = 21.9/148.7 = 0.15
S4 = D4/ D = 55.3/148.7 = 0.37
Seasonal Adjustment
56

54

52

50
y = 4.3x + 40.967
48 TOTAL
Linear (TOTAL)

46

44

42

40
2003 2004 2005

We need to multiply the forecasted demand for the next year,

2006, by each of the seasonal factors to get the forecasted
demand for each quarter.
 y = 4.3x + 40.967
= 4.3(4) + 40.967
y(4) =58.17 SF1 = (S1)(F5) = (.28)(58.17)
The forecast for = 16.28
2006 is 58,170
turkeys.
SF2 = (S2)(F5) = (.20)(58.17)
= 11.63
Compute for the SF3 = (S3)(F5) = (.15)(58.17)
seasonally
adjusted = 8.73
forecast, 𝑺𝑭𝒊 SF4 = (S4)(F5) =(.37)(58.17)
= 21.53
FORECAST ACCURACY
Forecast Accuracy
Forecasts will always deviate from actual values.
Difference between forecasts and actual values
referred to as forecast error.
We would like forecast error to be as small as
possible.
If error is large, either technique being used is
the wrong one, or parameters need adjusting.

Chapter 15 -
15
Forecasting
Forecast Accuracy
Measures of forecast errors:
Mean Absolute deviation (MAD)
Mean absolute percentage
deviation (MAPD)
Cumulative error (E bar)
Average error, or bias (E)
Forecast Accuracy
Mean Absolute Deviation
MAD is the average absolute difference
between the forecast and actual demand.
Most popular and simplest-to-use measures of
forecast error.
 Dt −Ft
Formula: MAD = n
where:
t = the period number
D = demand in period t
t
F = the forecast for period t
t
n = the total number of periods
Forecast Accuracy
Mean Absolute Deviation

Table 15.8
Computational Values for MAD
Forecast Accuracy
Mean Absolute Deviation
Example: PM Computer Services
Compare accuracies of different forecasts using
MAD:
 Dt − Ft 53.41
MAD = n = = 4 . 85
11
Forecast Accuracy
Mean Absolute Deviation (4 of 7)

The lower the value of MAD relative to the

magnitude of the data, the more accurate
the forecast.
When viewed alone, MAD is difficult to
assess.
Must be considered in light of magnitude
of the data.

Chapter 15 -
20
Forecasting
Forecast Accuracy
Mean Absolute Deviation
Can be used to compare accuracy of different
forecasting techniques working on the same
set of demand data (PM Computer Services):
Exponential smoothing ( = .50):
MAD = 4.04
Adjusted exponential smoothing
( = .50,  = .30): MAD = 3.81
Linear trend line: MAD = 2.29
Forecast Accuracy
Mean Absolute Deviation

Table 15.8
Computational Values for MAD
Forecast Accuracy
Mean Absolute Deviation
A variation on MAD is the mean absolute
percent deviation (MAPD).
Measures absolute error as a percentage of
demand rather than per period.
Eliminates problem of interpreting the measure
of accuracy relative to the magnitude of the
demand and forecast values.
Formula:  Dt − Ft 53.41
MAPD = = = .103 or 10.3%
 Dt 520
Forecast Accuracy
Mean Absolute Deviation (7 of 7)

MAPD for other three forecasts:

Exponential smoothing ( = .50):
MAPD = 8.5%
Adjusted exponential smoothing
( = .50,  = .30):
MAPD = 8.1%
Linear trend: MAPD = 4.9%
 Cumulative error is
the sum of the
forecast errors
(E =et).
A relatively large
positive value
Cumulative indicates forecast
is biased low, a
Error large negative
value indicates
forecast is biased
high.
Forecast Accuracy
Cumulative Error

Cumulative error for trend line is always

almost zero, and is therefore not a good
measure for this method.
Cumulative error for PM Computer
Services can be read directly from Table
15.8.
E =  et = 49.31 indicating forecasts are
frequently below actual demand.
Chapter 15 -
26
Forecasting
Forecast Accuracy
Cumulative Error

Cumulative error for other forecasts:

Exponential smoothing ( = .50):
E = 33.21
Adjusted exponential smoothing
( = .50,  =.30):
E = 21.14
 Average error (bias) is the per period
average of cumulative error.
Average error for exponential smoothing
forecast:
 et
E = n = 49.31 = 4.48
11
A large positive value of average error
indicates a forecast is biased low; a large
negative error indicates it is biased high.
Forecast Accuracy
Example Forecasts by Different Measures

Table 15.9
Comparison of Forecasts for PM Computer Services

Results consistent for all forecasts:

Larger value of alpha is preferable.
Adjusted forecast is more accurate than exponential
smoothing forecasts.
Linear trend is more accurate than all the others.