SEASONAL VARIATIONS

DECOMPOSITION METHOD
CHAPTER 5: FORCASTING

Lorenze Virnuel Ibanez

M O R E D E TA I L S MBA 213 B

200610271@my.xu.edu.ph
FORECASTING • In Business Management, managers must
account for variations in Demand and Supply.
For an effective allocation of resources, it is
SEASONAL essential to be able to have good set of historical
data as basis for future business projections.
VARIATIONS
• The ability to do a good forecast can make a
business well-suited and well-prepared for the
upcoming time period, it can literally make or
break a company

2
• Seasonal variation is variation in a time
series within one year that is repeated more
or less regularly. Seasonal variation may be
caused by the temperature, rainfall, public
holidays, cycles of seasons or holidays.
• Recurring variations over time may indicate
the need for seasonal adjustments in the
trend line.
• A seasonal index indicates how a particular
season compares with an average season
• When no trend is present, the seasonal index
can be found by dividing the average value
for a particular season by the average of all
the data
3
REMEMBER

AN AVERAGE SEASON

HAS AN INDEX OF 1
For example, if the average sales in
January were 120 and the average sales
in all months were 200, the seasonal
index for January would be
120/200=0.60 so January is below
average

4
 AIR CONDITIONERS Single’s Day

Demand is higher in the Summer Months and Popularized by Alibaba, November 11 is

less on Rainy or Cold Season China’s version of Black Friday where goods
are sold on discount
11.11

Elections COVID-19

In The Philippines, Elections provide a boost The Pandemic has disrupted almost all
of earnings for Networks and other allied industries in the world and has recently
industries as candidates spend to get their induced a world-wide recession.
names across

5
 • Eichler Supplies sells telephone
answering machines.
• Sales data for the past two years
has been collected for one
particular model.
• The firm wants to create a forecast
EICHLER SUPPLIES that includes seasonality.

6
 Eichler Sales Eichler Supplies Answering Machine
January February March April June July Sales Demand
August September October November December
Year
80
85 Ye ar 1 Ye ar 2
80
110
January 80 100
120 February 85 75
Year 1 100
110 March 80 90
85
75
April 110 90
85 May 115 131
YEAR

M onth
80
June 120 110
100
75 July 100 110
90
90
August 110 90
110
September 85 95
Year 2 110
90 October 75 85
95
85 November 85 75
75
80
December 80 80
7
 CALCULATION

YEAR 1 YEAR 2 AVERAGE 2-YEAR DEMAND S

AVE. MONTHLY DEMAND AVERAGE SEASONAL INDEX
JANUARY 80 100 90 94 0.957
FEBRUARY 85 75 80 94 0.851
MARCH 80 90 85 94 0.904
APRIL 110 90 100 94 1.064
MAY 115 131 123 94 1.309
JUNE 120 110 115 94 1.223
JULY 100 110 105 94 1.117
AUGUST 110 90 100 94 1.064
SEPTEMBER 85 95 90 94 0.957
OCTOBER 75 85 80 94 0.851
NOVEMBER 85 75 80 94 0.851
DECEMBER 80 80 80 94 0.851

     
𝐴𝑣𝑒𝑟𝑎𝑔𝑒2𝑦𝑒𝑎𝑟𝑑𝑒𝑚𝑎𝑛𝑑
==94 𝑆𝑒𝑎𝑠𝑜𝑛𝑎𝑙𝐼𝑛𝑑𝑒𝑥=
𝐴𝑣𝑒𝑟𝑎𝑔𝑒𝑀𝑜𝑛𝑡h𝑙𝑦 𝑑𝑒𝑚𝑎𝑛𝑑
 GETTING THE SEASONAL

  1,200
INDICES   1,200
Jan. ×0.957=96 July ×1.117=112
12 12
  1,200   1,200
Feb. ×0.851=85 Aug. ×1.064=106
12 12
  1,200
×0.904= 90
  1,200 Suppose
×0.957=96
3 Year
RD
Mar. 12 Sept. 12
Annual Demand
  1,200   1,200
Apr. 12
×1.064=106 Oct. 12 is
×0.851=85 1200
  1,200   1,200
May ×1.309=131 Nov. ×0.851=85
12 12
  1,200   1,200
June ×1.223=122 Dec. ×0.851=85
12 12 9
TREND AND SEASONALITY

SEASONAL 01
Compute the CMA for each observation

(where possible)

VARIATIONS WITH 02
Compute the Seasonal Ratio =

Observation / CMA for that observation.

TREND
• When both trend and seasonal components
are present, the forecasting task is more 03
Average seasonal ratios to get seasonal indices
complex.
• Seasonal indices should be computed using
a centered moving average (CMA)
approach. 04
If Seasonal indices do not add to the number of seasons,
• There are four steps in computing CMAs:
multiply each index by (Number of
seasons)/(Sum of indices). 10
EXAMPLE

TURNER INDUSTRIES
QUARTER YEAR 1 YEAR 2 YEAR 3 AVERAGE

1 108 116 123 115.67

the following table shows Turner 2 125 134 142 133.67

Industries’ quarterly sales figures 3 150 159 168 159.00

for the past three years, in millions 4 141 152 165 152.67

of dollars: Average 131.00 140.25 149.50 140.25

Definite trend
Seasonal
pattern

11
 • To calculate the CMA for quarter 3 of year 1 we
compare the actual sales with an average quarter
centered on that time period.

• We will use 1.5 quarters before quarter 3 and 1.5

TURNER INDUSTRIES quarters after quarter 3 – that is we take quarters 2, 3,
and 4 and one half of quarters 1, year 1 and quarter 1,
year 2.

0.5(108) + 125 + 150 + 141 + 0.5(116)

CMA(q3, y1) = 4 = 132.00

12
 Compare the actual sales in quarter 3 to the CMA to
find the seasonal ratio:
Sales in quarter 3 150
Seasonal ratio    1.136
CMA 132

TURNER INDUSTRIES

13
 EXAMPLE

YEAR QUARTER SALES CMA SEASONAL RATIO

TURNER INDUSTRIES 1 1

2
108

125

3 150 132.000 1.136

4 141 134.125 1.051

2 1 116 136.375 0.851

2 134 138.875 0.965

3 159 141.125 1.127

4 152 143.000 1.063

3 1 123 145.125 0.848

2 142 147.875 0.960

3 168

4 165

14
 There are two seasonal ratios for each quarter, so
these are averaged to get the seasonal index:

Index for quarter 1 = I1 = (0.851 + 0.848)/2 = 0.85

Index for quarter 2 = I2 = (0.965 + 0.960)/2 = 0.96
TURNER INDUSTRIES
Index for quarter 3 = I3 = (1.136 + 1.127)/2 = 1.13
Index for quarter 4 = I4 = (1.051 + 1.063)/2 = 1.06

15
EXAMPLE

TURNER INDUSTRIES

Scatterplot of Turner Industries Sales Data

and Centered Moving Average

16
 01
Compute seasonal indices using CMAs
TREND AND SEASONALITY

DECOMPOSITION METHOD
02
Deseasonalize the data by dividing each number by its seasonal index
OF FORECASTING WITH

TREND AND SEASONAL 03

Find the equation of a trend line using the deseasonalized data.

COMPONENTS
04
Forecast for future periods using the trend line
• Decomposition is the process of
isolating linear trend and seasonal
factors to develop more accurate 05
Multiply the trend line forecast by the appropriate seasonal index.
forecasts.

17
 SALES ($1,000,000s) SEASONAL INDEX DESEASONALIZED SALES
($1,000,000s)

EXAMPLE 108 0.85 127.059

DESEASONALIZED DATA FOR 125 0.96 130.208

150 1.13 132.743

TURNER INDUSTRIES 141 1.06 133.019

116 0.85 136.471

134 0.96 139.583

159 1.13 140.708

152 1.06 143.396

123 0.85 144.706

142 0.96 147.917

168 1.13 148.673

165 1.06 155.660

18
 • Find a trend line using the deseasonalized data:

b1 = 2.34b0 = 124.78
DESEASONALIZED

DATA FOR TURNER

• Develop a forecast using this trend and multiply the
forecast by the appropriate seasonal index.
INDUSTRIES
Ŷ = 124.78 + 2.34X
= 124.78 + 2.34(13)
= 155.2 (forecast before adjustment for
seasonality)

Ŷ x I = 155.2 x 0.85 = 131.92

1

Using this same procedure, we find the forecasts for quarters 2, 3, and 4 of the next year to
be 151.24, 180.66, and 171.95, respectively.
19