MANAGEMENT SCIENCE 4.

Comparison of results – actual results versus

estimated results
CHAPTER 4: FORECASTING 5. Refining the forecast – through deviations
FORECASTING Importance

 An operational technique used as a basis for 1. Pivotal role in an organization – planning is

management planning and decision making based on forecasting
 It is an art and science of predicting future 2. Development of a business - performance
events of specified objectives depends upon the
 It involves historical data in projecting the proper forecasting
future 3. Coordination – collection of information
 It is a mathematical model adjusted by (internal and external factors)
managers’ good judgment 4. Effective control – can ascertain strength
and weaknesses
Features
5. Key to success – provides clues and reduce
 It is concerned with future events risk
 It is necessary for planning process 6. Implementation of project – entrepreneur
 The impact of future events has to be gain experience to succeed
considered in the planning process 7. Primary to planning
 It is a guessing of future events
Strategic Importance
 It considers all the factors which affect
organizational function 1. Human Resource – hiring, training, and
laying off workers all depends on
Applicability is Dependent on
anticipated demand
1. Time frame of the forecast 2. Capacity – inadequacy results to shortages
 Short range – immediate future, daily and undependable delivery, loss of
operations customers and market share
 Medium range – from 1 or 2 mos to 1 year 3. Supply Chain Management – good supplier
 Long range – longer than or 2 years (plan relations and price advantages
new products for changing markets, build Types
new facilities, or secure long term financing
2. The existence of patterns in the forecast 1. Economic forecasts – addresses the
 Trend – long term movement of the item business cycle by predicting inflation rates,
forecasts money suppliers, housing starts, and other
 Random variations – unpredictable planning indicators
movements 2. Technological forecasts – concerned with
 Cycle – undulating movement in demand rates of technological progress (new
(more than 1 year) products)
 Seasonal pattern – hesitating movement in 3. Demand forecasts – projections of demand
demand (short run) for a company’s products or services (sales
3. The number of variables forecast, production, capacity, scheduling
systems)
Process
Methods
1. Thorough preparation of foundation
2. Estimation of future – consultation and 1. Time Series – statistical techniques that
communication with key personnel uses historical data to predict future
3. Collection of results behavior with time as factor (short and long
range forecasting)
 2. Regression (causal) methods – attempt to
develop a mathematical relationship
between the item being forecast and factors
that cause it
3. Qualitative methods – use management
judgment, expertise, and opinion (the jury
of executive opinion)
TIME SERIES METHODS (THE MOVING AVERAGE)
The Moving Average – uses historical actual data
values to develop a forecast; computed for a specific
periods in such as 3 or 5 months
1. Simple Moving Average – computed for
specified time period
∑D
MA=
n ∑D
2. Weighted Moving Average – puts more
weight on recent data and less on past data
WMA=
∑ WD
i
TIME SERIES METHODS (EXPONENTIAL
SMOOTHING)
Exponential Smoothing – an average method that
weight the most recent past data more strongly than
more distant past data
Two forms:
1. Simple Exponential Smoothing
F t+ 1=a Dt +(1−a) F t
2. Adjusted Exponential Smoothing – with a
trend adjustment factor added to it
AFt =1=Ft +1 +T t +1
TIME SERIES METHODS (LINEAR TREND LINE)
Linear Regression
- Causal method of forecasting in which a
mathematical relationship is developed
between demand and some other factor
that causes demand behavior.
- when demand displays an obvious trend
over time, a least squares regression line or
linear trend line, can be used to forecast
demand
- linear trend is a linear regression model that
relates demand to time
Linear Equation y=a+bx
Trend Line (Regression line)
TIME SERIES METHODS (SEASONAL ADJUSTMENTS)
Seasonal Adjustments
- repetitive up-and-down movement in
demand
- adjusting seasonality by multiplying it by
seasonal factor
- resulting seasonal factors = 0&1
Si =
D
SF= S x F
FORECAST ACCURACY (FORECAST ERROR)
Forecast Error – the difference between the
forecast and actual demand
1. Mean Absolute Deviation (MAD) – the
average, absolute difference between the
forecast and the demand
2. Mean Absolute Percent Deviation
(MAPD) – the absolute error as a
percentage of demand
3. Cumulative Error (E) – sum of the
forecast error
4. Average Error or Bias (Ē)- per-period
average of cumulative error
5. Mean Squared Error (MSE) - each
individual error value is squared,
summed and averaged (the smaller
MSE, the better)
REGRESSION METHODS
Regression - is a forecasting technique that
measures the relationship of one variable to one or
more other variables
Simple Linear Regression
- simplest form
- relates one dependent variable to one
independent variable in the form of a linear
equation
Correlation SIMPLE LINEAR REGRESSION
- a measure of the strength of the  Regression Lines
relationship between the independent and - Shows the average relationship
dependent variables between two variables (Best Fit)
- Two variables = Two Regression Lines:
Coefficient of Determination (r2 )
- Regression Line of X on Y
- another measure of the strength of the - Regression Line of Y on X
relationship between the variables in a - Nature of Regression Lines
linear regression equation - If r = ±1 (two regression lines are
- percentage of the variation in the coincident)
dependent variable that results from - If r = 0, two regression lines intersect
independent variable each other
- the ratio of the explained variation to the
- The nearer the regression lines, the greater the
total variation
degree of correlation

- Regression line rise from left to right upward,

MANAGEMENT SCIENCE correlation is positive

CHAPTER 5: LINE REGRESSION ANALYSIS b=n ∑ xy−¿ ¿ ¿

REGRESSION ANALYSIS
x=
∑ x y= ∑ y a= y −b x
 A technique of studying the dependence of n n
one variable (dependent), on one or more
y=a+bx
variables (explanatory), with a view to
estimate Ex: y= 3. 08 + 16x equation of regression line
or predict the average value of the
dependent variable in terms of the known  Measures of Regression and
or fixed values of the independent variables Prediction Intervals
 Measures the nature and extent of the Variations About Regression Line
relationship between two or more variables
 Measure of the average relationship -To find the total variation, you must first calculate
between two or more variable the total deviation, the explained deviation, and the
unexplained deviation.
TYPES OF LINEAR REGRESSION
Total deviation= y i− y
Simple Linear Regression
- Gives a straight-line relationship y i− y
Explained deviation=^
between two variables
- Y= a + bx Unexplained deviaion= y i− ^
yi
Multiple Linear regression
- Contains more than one regressor The total variation about a regression line is the sum
variable (independent variable) used to of the squares of the differences between the y-
predict value of each ordered pair and the mean of y.
- Y= β 0 + β 1 x 1+ β2 x 2+∈ Total variation=∑ ¿ ¿
y- tool line
x1- cutting speed The explained variation is the sum of the squares of
x2- tool angle the differences between each predicted y-value and
the mean of y.
 Explained variation=∑ ¿ ¿
The unexplained variation is the sum of the squares
of the differences between the y-value of each
ordered pair and each corresponding predicted y-
value.

Unexplained variation=∑ ¿ ¿
 Coefficient of Determination
- The ratio of the explained variation
to the total variation.

2 Explained variation
r=
Total variation
n ∑ xy −∑ x ∑ y
r=
√¿ ¿ ¿
 Standard Error of Estimate
- The standard deviation of the observed
yi-values about the predicted ŷ-values
for a given xi -value.
- Helps to know to what extent the
estimate are accurate

se =√ ∑ ¿ ¿ ¿ ¿
n= number of ordered pairs in the data set

The closer the observed y-values are to be predicted

y-value, the smaller the standard error of estimate
will be.

MULTIPLE LINEAR REGRESSION

 a statistical technique that uses two or

more independent variables to predict
the outcome of a dependent variable
 to model the linear relationship
between the explanatory variables and
response variables.
 the extension of ordinary leastsquares
(OLS) regression because it involves
more than one explanatory variable

y i=β 0 + β 1 x 1 + β 2 x 2 +…+ β p xip +ϵ