TREND ANALYSIS
Linear trend:
At = + t
Exponential trend:
At = t
Note that:
ln At = ln lnt
Gompertz trend:
At =
ADM 3301 ~ Rim Jaber
NON LINEAR TREND
Parabolic
Trend
Exponential
Trend
Asymptotic
Trend
Product life cycle: Gompertz trend
SCurve Trend
ADM 3301 ~ Rim Jaber
EXAMPLE 4
(Blitz Beer Sales)
Pertiod
12
34
56
78
9
10
SaA
lets
44,,899100
45,,907100
55,,016000
55,,015700
55,,128400
Pertiod
1112
1134
1156
1178
1290
ADM 3301 ~ Rim Jaber
SaA
lets
55,,222800
55,,333800
55,,444600
55,,542900
55,,565000
BLITZ BEER SALES
6000
SALES
5500
5000
4500
0
10
12
PERIOD
14
16
18
20
4
CAUSAL (ASSOCIATIVE) MODELS:
Linear Regression Model For Linear Trend
Technique for fitting a straight line to a set of
points to describe the relationship between two
variables:
^
Quantity being forecasted ( y )
Variable that influence the quantity being forecasted (x)
y^ = a + bx
Estimated by least squares method
Minimizes sum of squared errors
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Values of Dependent Variable
Least Squares Method
Actual observation
(yvalue)
Deviation7
Deviation5
Deviation6
Deviation3
Deviation4
Deviation1
(error)
Deviation2
Trend line, ^y = a + bx
Time period
2011 Pearson Education, Inc. publishing as Prentice Hall
Figure 4.46
Values of Dependent Variable
Least Squares Method
Actual observation
(yvalue)
Deviation7
Deviation5
Deviation3
Deviation6
Least squares method
minimizes the sum of the
Deviation
squared errors (deviations)
4
Deviation1
(error)
Deviation2
Trend line, ^y = a + bx
Time period
2011 Pearson Education, Inc. publishing as Prentice Hall
Figure 4.47
CAUSAL METHODS: LINEAR REGRESSION
MODEL FOR LINEAR TREND
Y = + T +
T is the independent (explanatory, stimulus,
exogenous, predictor) variable (in this case, time);
Y is the dependent (explained, response, endogenous,
predicted) variable;
is the yintercept of the line Y = + T (value of
Y when T = 0);
is the slope of the regression line Y = + T
(increment in Y when T increases by 1);
is a random error term (deviation)
=Y ( + T)= Y T
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ESTIMATING THE MODEL
PARAMETERS
To find the line that best fits the data, we minimize
sum of squared errors
2 (yi   ti)2
The value b of which minimizes the sum of the
errors squared is the slope of the regression line
The value a of which minimizes the sum of the
errors squared is the yintercept of the regression
line
a + bT is the forecast at time T
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How Good Is the Regression
We need a relative measure of the degree of
variation of data about the regression line
Relative measure: compares the variation of Y
about the regression line with the variation of Y
without the regression line. This measure is called
coefficient of determination, R2
R2 is a descriptive measure of strength of the
regression relationship, a measure of how well the
regression line fits the data
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11
The three sources of variation
Total variation: variation in Y or AT from its mean (Y or AT)
before using the regression (Y Y or AT AT)
Total Variation = Explained Variation + Residual
Explained Variation/Regression Deviation: What has been
eliminated from the total variation by using the regression
It is FT  AT
Residual/Deviation: what is left after using the regression.
It is = AT FT
The coefficients of determination and of correlation:
R2 = Explained Variation / Total Variation
r = R 2 Coefficient of correlation
12
Coefficient of Determination: R2
0 <= R2 <= 1
R2 = 0.85
85% of the variability in Y or AT can be explained by the
regression equation
85% of the variability in Y or AT can be explained through
the knowledge of the independent variable X or T
R2 >= 0.8 would indicate that the independent
variable is a good predictor of values of the
dependent variable.
0.25 <= R2 <= 0.8 would indicate a moderate
predictor
R2 <= 0.25 would indicate a poor predictor
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Correlation
How strong is the linear relationship
between the variables?
Correlation does not necessarily imply
causality!
Coefficient of correlation, r, measures
degree of association
Values range from 1 to +1
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COEFFICIENT OF
CORRELATION VALUES, r
Perfect
Negative
Correlation
1.0
Perfect
Positive
Correlation
No
Correlation
.5
Increasing degree of
negative correlation
+.5
+1.0
Increasing degree of
positive correlation
ADM 3301 ~ Rim Jaber
15
Correlation Coefficient
r=
Copyright 2014 Pearson
Canada Inc.
nxy  xy
[nx2  (x)2][ny2  (y)2]
Correlation Coefficient
r=
nxy  xy
2
2
2
2
[nx
(x)
][ny
(y)
]
x
(a) Perfect positive
correlation:
r = +1
(b) Positive
correlation:
0<r<1
(c) No correlation:
Copyright 2014 Pearson
Canada Inc. r = 0
x
Fig. 4.10
(d) Perfect negative x
correlation:
r = 1
EXCEL OUTPUT
(Blitz Beer Sales)
SUMMARY OUTPUT
Regression Statistics
r
Multiple R 0.9937799
R2
R Square 0.9875985
Adjusted R Square 0.9869096
Standard Error 25.426602
Observations
20
n
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ANOVA
df
Regression
Residual
Total 19
EXCEL OUTPUT
(Blitz Beer Sales)
SS MS F
1
926737.78 926737.78 1433.4423
18
11637.218 646.51211
938375
a
Coefficients
Standard Error t Stat Pvalue
Intercept
4850.5263
11.811457
410.66284
X Variable 1 37.330827
0.9860014
37.860827
b
3.331E37
1.294E37
t Stat >= 2
Pvalue <= 0.05
ADM 3301 ~ Rim Jaber
19
MINITAB OUTPUT FOR
BLITZ BEER SALES
MTB > Regress C2 1 C1;
The regression equation is
SALES = 4851 + 37.3 PERIOD
Predictor
Constant
PERIOD
Coef
Stdev
4850.53 11.81
37.33
0.99
tratio p
410.66 0.000
37.86 0.000
s = 25.43
Rsq = 98.8%
Rsq(adj) = 98.7%
ADM 3301 ~ Rim Jaber
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MINITAB OUTPUT FOR
BLITZ BEER SALES
Analysis of Variance
SOURCE
Regression
Error
Total
DF
1
18
19
SS
926738
11637
938375
MS
F
p
926738 1433.44 0.000
647
Unusual Observations
Obs. PERIOD
7
7.0
SALES
5050.00
Fit
5111.84
Stdev.Fit
6.65
R denotes an obs. with a large st. resid.
Residual
61.84 R
21
SIGNIFICANCE
(Is the model useful?)
The regression will only be useful if there is a linear
relationship between T and Y (that is, if 0)
We must test the hypotheses:
H0: =0
H1: 0
The tratio must be larger than t, where is the
desired significance level (generally, a tratio which
is greater than 2 in absolute value is significant)
The Pvalue must be small (smaller than 0.05)
ADM 3301 ~ Rim Jaber
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CAVEATS
Variation ( around the regression line must be
random, with mean equal to 0 and standard
deviation (typically normally distributed).
Predictions outside the range of observed values
are not very accurate. Unfortunately, in
forecasting, you are almost always going out of
the observed range of T values.
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Pattern of Forecast Error
Trend Not Fully
Accounted for
Desired Pattern
Error
Error
0
Time (Years)
Time (Years)
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BLITZ BEER SALES
6000
SALES
5500
5000
4500
0
10
12
PERIOD
ADM 3301 ~ Rim Jaber
14
16
18
20
25
Multiple Regression Analysis
If more than one independent variable is to be used in
the model, linear regression can be extended to
multiple regression to accommodate several
independent variables
y^ = a + b1x1 + b2x2
Computationally, this is quite complex and
generally done on the computer
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26
TECHNIQUES FOR
SEASONALITY
Nave Method
Time Series Decomposition Models
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Time Series Components
Trend
Cyclical
Seasonal
Random
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Components of Demand
Demand for product or service
Trend
component
Seasonal peaks
Actual demand
line
Average demand
over 4 years

1
Random variation


2
3
Time (years)
2011 Pearson Education, Inc. publishing as Prentice Hall

4
Figure 4.1
29
Time Series Decomposition Models
Any observed value in a time series is the product
(or sum) of time series components
Multiplicative model
At = Tt St Ct Rt
Additive model
At = Tt + St + Ct + Rt
Objective
Isolate the four components of the model and
determine their effect on the time series in order
to be able to forecast the future
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30
Quantity
Quantity
months
months
Additive Model
Multiplicative model
ADM 3301 ~ Rim Jaber
31
EXAMPLE 5
(Tackey Toys)
M
o1nthD
e
m
a
n
dM
o
n
t
h
D
e
m
a
n
dM
o
n
t
h
D
e
m
a
n
dM
o
n
t
h
D
e
m
a
n
d
54525 13 52978 25 52066 37 51141
14
23 5188134622 1145 5189174556 2267 6213922419 3389 6223624778
45 2252432292 1167 2253977250 2289 2275008732 4401 2267145405
67 1145651374 1189 1136367069 3301 1154589087 4423 1168527691
89 1155140088 2201 1188315294 3323 1280926092 4445 1282602874
1101 5833911888 2223 5863227998 3345 5862114796 4467 5864806684
12 72913 24 74194 36 75539 48 76531
32
DEMAND
90000
DEMAND
70000
50000
30000
10000
12
24
MONTH
36
48
33
The Multiplicative Model
At = Tt St Ct Rt
Estimating seasonal indices, St ,from the
history of the series (At):
The seasonal indices are used:
To include seasonality in the forecasts
Or to remove such effects from the observed
values (Deseasonalize the data) in order to
get a clearer picture of the non seasonal
components.
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ISOLATING THE FOUR
COMPONENTS OF THE MODEL:
ESTIMATING St
A = T S C R
t
Eliminate S R : centered moving average = T C .
The number of periods needed in a moving average (MA) is
equal to the number of seasons , N, involved
t
If the number of period, N, is odd then MA(N) = Centered Moving
average (CMA)
MA(N) will be centered at the period: t + (N1)/2
If the number of period, N, is even then use MA(2) on the MA(N)
which will correspond to the Centered Moving Average (CMA)
monthly data 12month moving average MA(12) then MA(2) on the
MA(12) (MA(2) = CMA)
quarterly data 4quarter moving average MA (4) then MA(2) on
35 the
MA(4) (MA(2) = CMA)
ISOLATING THE FOUR
COMPONENTS OF THE MODEL:
ESTIMATING St
A = T S C R
Eliminate S R : centered moving average = T C .
Calculate S R = (T S C R ) / (T C ) =
A / (centered moving average).
Calculate the seasonal indices S by averaging.
t
Example: to compute the seasonal index for the month of
January, we average out all the value of S R that
corresponding to the month of January.
(1.41 + 1.33 + 1.29)/3 = 1.34
t
Adjust the seasonal indices such as the total sum of the
indices over one year is equal to the number of period, N.
SEASONAL INDICES
2.2
2.0
1.8
1.6
S. I.
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0
12
24
MONTH
36
48
37
ISOLATING THE FOUR
COMPONENTS OF THE MODEL:
ESTIMATING Tt
A = T S C R
Eliminate S R : centered moving average = T C
Calculate S R = (T S C R ) / (T C ) =
A / (centered moving average).
Calculate the seasonal indices S by averaging.
Deseasonalize the data: deseasonalized demand = A / S
Determine a trend curve using regression:
y = deseasonalized demand
x or t = period.
t
ADM 3301 ~ Rim Jaber
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DESEASONALIZED DEMAND
WITH TREND
DES DEM
47000
42000
37000
32000
0
12
18
24
30
36
42
48
MONTH
ADM 3301 ~ Rim Jaber
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ISOLATING THE FOUR COMPONENTS
OF THE MODEL: ESTIMATING Ct
A = T S C R
t
Eliminate S R : centered moving average = T C
Calculate S R = (T S C R ) / (T C ) =
A / (centered moving average).
Calculate the seasonal indices S by averaging.
Deseasonalize the data: deseasonalized demand = A / S
Determine a trend curve using regression:
y = deseasonalized demand and t = period.
t
Calculate C R = A / (T S )
t
40
CYCLE AND RANDOM
VARIATIONS
1.15
1.10
C*R
1.05
1.00
0.95
0.90
0
12
18
24
30
36
42
48
MONTH
ADM 3301 ~ Rim Jaber
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USING THE
MULTIPLICATIVE MODEL
F = T S C
Here, C 1, so we can neglect it).
t
90000
80000
DEMAND
70000
60000
50000
40000
30000
20000
10000
0
12
24
MONTH
36
48
42