Spring 2018: Chapter 3: Forecasting

Forecasting; Chapter3
Department of Mechanical Engineering
Spring 2018
I see that you will
get an A from this Course.
Chapter 3: Forecasting
MGMT 405, POM, 2014/15. Lec Notes © Stevenson, McGraw Hill, 2010- Prof. Dr. Sami Fethi, EMU, All Right Reserved.
Forecasting; Chapter 3
Outline: What You Will Learn . . .
 List the elements of a good forecast.

 Outline the steps in the forecasting process.
 Describe at least three qualitative forecasting techniques and
the advantages and disadvantages of each.
 Compare and contrast qualitative and quantitative approaches
to forecasting.
 Briefly describe averaging techniques, trend and seasonal
techniques, and regression analysis, and solve typical
problems.
 Describe two measures of forecast accuracy.
 Describe two ways of evaluating and controlling forecasts.
 Identify the major factors to consider when choosing a
forecasting technique
2
What is meant by Forecasting and Why?

 Forecasting is the process of estimating a variable,
such as the sale of the firm at some future date.
 Forecasting is important to business firm,
government, and non-profit organization as a
method of reducing the risk and uncertainty
inherent in most managerial decisions.
 A firm must decide how much of each product to
produce, what price to charge, and how much to
spend on advertising, and planning for the growth
of the firm.
3
The aim of forecasting

 The aim of forecasting is to reduce the risk or
uncertainty that the firm faces in its short-term
operational decision making and in planning for its
long term growth.
 Forecasting the demand and sales of the firm’s
product usually begins with macroeconomic forecast
of general level of economic activity for the economy
as a whole or GNP.
4
The aim of forecasting
 The firm uses the macro-forecasts of general economic

activity as inputs for their micro-forecasts of the
industry’s and firm’s demand and sales.
 The firm’s demand and sales are usually forecasted on
the basis of its historical market share and its planned
marketing strategy (i.e., forecasting by product line
and region).
 The firm uses long-term forecasts for the economy and
the industry to forecast expenditure on plant and
equipment to meet its long-term growth plan and
strategy.
5
Forecasting Process Map
Demand Statistical
Statistical Causal
History Model
Model Factors
Product Production &

Executive
Sales Marketing Management Inventory
Management
& Finance Control
Consensus
Process
 This slide is excluded from the exam
Consensus
Forecast
6
Features of Forecasts
 Assumes causal system
past ==> future
I see that you will
 Forecasts rarely perfect get an A this semester.
because of randomness
 Forecasts more accurate for
groups vs. individuals
 Forecast accuracy decreases
as time horizon increases
7
Elements of a Good Forecast
Timely
Reliable Accurate
l s e
g fu u
i n Written to
n s y
a
M
e Ea

8
Steps in the Forecasting Process
“The forecast”
Step 6 Monitor the forecast

Step 5 Make the forecast
Step 4 Obtain, clean and analyze data
Step 3 Select a forecasting technique
Step 2 Establish a time horizon
Step 1 Determine purpose of forecast

9
Forecasting Techniques
 A wide variety of forecasting methods are
available to management. These range from the
most naïve methods that require little effort to
highly complex approaches that are very costly in
terms of time and effort such as econometric
systems of simultaneous equations.
 Mainly these techniques can break down into three
parts: Qualitative approaches (Judgmental
forecasts) and Quantitative approaches (Time-
series forecasts) and Associative model forecasts.
10
Forecasting Techniques
 Judgmental - uses subjective inputs

such as opinion from consumer surveys,
sales staff etc..
 Time series - uses historical data
assuming the future will be like the past
 Associative models - uses explanatory
variables to predict the future
11
Qualitative Forecasts or Judgmental Forecasts

 Survey Techniques
 Some of the best-know surveys
Planned Plant and Equipment Spending
Expected Sales and Inventory Changes
Consumers’ Expenditure Plans
 Opinion Polls
Business Executives
Sales Force
Consumer Intentions
12
 Survey Techniques– The rationale for forecasting

based on surveys of economic intentions is that
many economic decisions are made in advance of
actual expenditures (Ex: Consumer’s decisions to
purchase houses, automobiles, TV sets, furniture,
vocation, education etc. are made months or years in
advance of actual purchases)
 Opinion Polls– The firm’s sales are strongly
dependent on the level of economic activity and
sales for the industry as a whole, but also on the
policies adopted by the firm. The firm can forecast
its sales by pooling experts within and outside the
firm.
This slide is excluded from the exam
13
 Executive Polling- Firm can poll its top

management from its sales, production,
finance for the firm during the next quarter or
year.
 Bandwagon effect (opinions of some experts
might be overshadowed by some dominant
personality in their midst).
 Delphi Method – experts are polled
separately, and then feedback is provided
without identifying the expert responsible for
a particular opinion.
 This slide is excluded from the exam 14
Quantitative Forecasting Approaches
 Based on the assumption, the “forces” that generated

the past demand will generate the future demand, i.e.,
history will tend to repeat itself.
 Analysis of the past demand pattern provides a good
basis for forecasting future demand.
 Majority of quantitative approaches fall in the
category of time series analysis.
15
Time Series Analysis

 A time series (naive forecasting) is a set of numbers
where the order or sequence of the numbers is
important, i.e., historical demand
 Attempts to forecasts future values of the time series
by examining past observations of the data only. The
assumption is that the time series will continue to
move as in the past.
 Analysis of the time series identifies patterns
 Once the patterns are identified, they can be used to
develop a forecast
16
Forecast Horizon
 Short term
 Up to a year
 Medium term
 One to five years
 Long term
 More than five years
17
Reasons for Fluctuations in Time Series Data

 Secular Trend are noted by an upward or downward sloping
line- long-term movement in data (e.g. Population shift, changing
income and cultural changes).
 Cycle fluctuations is a data pattern that may cover several
years before it repeats itself- wavelike variations of more
than one year’s duration (e.g. Economic, political and agricultural
conditions).
 Seasonality is a data pattern that repeats itself over the
period of one year or less- short-term regular variations in
data (e.g. Weekly or daily restaurant and supermarket experiences).
 Irregular variations caused by unusual circumstances (e.g.
Severe weather conditions, strikes or major changes in a product or
service).
 Random influences (noise) or variations results from
random variation or unexplained causes. (e.g. residuals) 18
Forecast Variations
Irregular
variation
Trend
Cycles
90
89
88
Seasonal variations
19
Uses for Naïve Forecasts

 Stable time series data
F(t) = A(t-1)
 Seasonal variations
F(t) = A(t-n)
 Data with trends
F(t) = A(t-1) + (A(t-1) – A(t-2))
20
Techniques for Averaging
 Moving average
 Weighted moving average
 Exponential smoothing
21
Moving Averages
 Moving average – A technique that averages a number of

recent actual values, updated as new values become
available.
At-n + … At-2 + At-1

Ft = MAn= n
Weighted moving average – More recent values
in a series are given more weight in computing the
forecast.
wnAt-n + … wn-1At-2 + w1At-1
Ft = WMAn=
n
22
Simple Moving Average
Actual
MA5
47
45
43
41
39
37 MA3
35
1 2 3 4 5 6 7 8 9 10 11 12
At-n + … At-2 + At-1

Ft = MAn=
n
23
Simple Moving Average

 An averaging period (AP) is given or selected
 The forecast for the next period is the arithmetic
average of the AP most recent actual demands
 It is called a “simple” average because each period
used to compute the average is equally weighted
 It is called “moving” because as new demand data
becomes available, the oldest data is not used
 By increasing the AP, the forecast is less responsive
to fluctuations in demand (low impulse response and
high noise dampening)
 By decreasing the AP, the forecast is more responsive
to fluctuations in demand (high impulse response and
low noise dampening)
24
Exponential Smoothing
Ft = Ft-1 + (At-1 - Ft-1)
Ft = forecast for period t
Ft-1 = forecast for the previous period
smoothing constant
At-1 = actual data for the previous period
 Premise--The most recent observations might have

the highest predictive value. Therefore, we should
give more weight to the more recent time periods
when forecasting.
 Weighted averaging method based on previous
forecast plus a percentage of the forecast error
 A-F is the error term,  is the % feedback
25
Exponential Smoothing Forecasts

 The weights used to compute the forecast
(moving average) are exponentially distributed.
 The forecast is the sum of the old forecast and
a portion (a) of the forecast error (A t-1 - Ft-1).
 The smoothing constant, , must be between
0.0 and 1.0.
 A large  provides a high impulse response
forecast.
 A small  provides a low impulse response
forecast.
26
Example-Moving Average
Central Call Center (CCC)
Days Call Volume wishes to forecast the number of
1 159 incoming calls it receives in a day
from the customers of one of its
2 217 clients, BMI.
3 186 CCC schedules the appropriate
4 161 number of telephone operators
5 173 based on projected call volumes.
6 157 CCC believes that the
7 203 most recent 12 days of call
8 195 volumes (shown on the next
9 188 slide) are representative of
10 168 the near future call volumes.
11 198
12 159
27
Example-Moving Average
 Moving Average
 Use the moving average method with an AP = 3

 days to develop a forecast of the call volume in
Day 13 (The 3 most recent demands)
 compute a three-period average forecast given
scenario above:
 F13 = (168 + 198 + 159)/3 = 175.0 calls
28
Example-Weighted Moving Average

 Weighted Moving Average (Central Call Center )
 Use the weighted moving average method with an AP = 3
days and weights of .1 (for oldest datum), .3, and .6 to
develop a forecast of the call volume in Day 13.
 compute a weighted average forecast given scenario
above:
 F13 = .1(168) + .3(198) + .6(159) = 171.6 calls

1
 Note: The WMA forecast is lower than the MA forecast
because Day 13’s relatively low call volume carries
almost twice as much weight in the WMA (.60) as it does
in the MA (.33).
29
Example-Exponential Smoothing
 Exponential Smoothing (Central Call Center)
 Suppose a smoothing constant value of .25 is used and
the exponential smoothing forecast for Day 11 was
180.76 calls.
 what is the exponential smoothing forecast for Day 13?
 F12 = 180.76 + .25(198 – 180.76) = 185.07

 F13 = 185.07 + .25(159 – 185.07) = 178.55
30
Example 2-Exponential Smoothing

Period Actual
1 42
2 40
3 43
4 40
5 41
6 39
7 46
8 44
9 45
10 38
11 40
12
Suppose a smoothing constant value of .10 is used and the exponential

smoothing forecast for the previous period was 42.
what is the exponential smoothing forecast for the next periods?
Illustrate its graphical presentation on a diagram.
31

Period Actual Alpha = 0.1 Error Alpha = 0.4 Error
1 42
2 40 42 -2.00 42 -2
3 43 41.8 1.20 41.2 1.8
4 40 41.92 -1.92 41.92 -1.92
5 41 41.73 -0.73 41.15 -0.15
6 39 41.66 -2.66 41.09 -2.09
7 46 41.39 4.61 40.25 5.75
8 44 41.85 2.15 42.55 1.45
9 45 42.07 2.93 43.13 1.87
10 38 42.36 -4.36 43.88 -5.88
11 40 41.92 -1.92 41.53 -1.53
12 41.73 40.92
what is the exponential smoothing forecast for the next periods?

Using Alpha as 0.1 F12 = 41.92 + .10(40 – 41.92) = 41.73
Using Alpha as 0.4 F12 = 41.53 + .40(40– 41.53) = 40.92
32

Graphical presentation
Actual
50
.4
.1
45
Demand
40
35
1 2 3 4 5 6 7 8 9 10 11 12
Period
33
Trend Projection
 The simplest form of time series is projecting the
past trend by fitting a straight line to the data either
visually or more precisely by regression analysis.
 Linear regression analysis establishes a relationship
between a dependent variable and one or more
independent variables.
 In simple linear regression analysis there is only one
independent variable.
 If the data is a time series, the independent variable
is the time period.
 The dependent variable is whatever we wish to
forecast.
34
Linear Trend Equation

Ft
Ft = a + bt
0 1 2 3 4 5 t
 Ft = Forecast for period t

 t = Specified number of time periods
 a = Value of Ft at t = 0
 b = Slope of the line
35
Trend Projection
 Linear Trend:
S t = S0 + b t
b = Growth per time period
 Non-linear
St = S0 (1 + g)t
g = Growth rate
 Estimation of non linear form
ln St = ln S0 + t ln (1 + g)
36
Trend Projection- Simple Linear Regression

 Regression Equation
 This model is of the form:
 Y = a + bX
 Y = dependent variable (the value of time series to be

forecasted for period t)
 X = independent variable ( time period in which the time
series is to be forecasted)
 a = y-axis intercept (estimated value of the time series, the
constant of the regression)
 b = slope of regression line (absolute amount of growth per
period)
37
The correlation coefficient, determination of

coefficient and standard deviation
s yt 
  a y  b ty
Y 2
Standard deviation
n2
n ty   t  y
r
n  t 2
  t 
2
 n  y 2
  y
2
 Correlation coefficient
Determination of coefficient
38
Trend Projection- Calculating a and b

 Constants a and b
 The constants a and b are computed
using the equations given: a
 t 2
 y   t  ty
n  t 2  ( t ) 2
 Once the a and b values are
computed, a future value of t can be n  ty   t  y
entered into the regression equation b
n  t 2  ( t ) 2
and a corresponding value of F (the
forecast) can be calculated.
39
Example 1 for Trend Projection- Electricity sales

ELECSALE  Suppose we have the electricity sales
Year
1997Q1
(Y)
11 data in a city between 1997.1 and
1997Q2
1997Q3
15
12
2000.4. The data are shown in the
1997Q4 14 following table.
1998Q1 12
1998Q2 17  Construct the forecast equation.
1998Q3 13
1998Q4 16  Briefly explain the relationship in the
1999Q1
1999Q2
14
18
forecast equation.
1999Q3
1999Q4
15
17
 Calculate the next four quarters.
2000Q1
2000Q2
15
20
 Compute the correlation coefficient,
2000Q3 16 determination of coefficient and standard
2000Q4 19
deviation.
40
Example1 for Trend Projection

ELECSALE
Year Trent (t) (Y) (t )SQ Y*t (y) SQ (Σt) SQ (ΣY) SQ
  y   t  ty
1997Q1 1 11 1 11 121 2
1997Q2 2 15 4 30 225 t
a
n t 2  ( t ) 2
1997Q3 3 12 9 36 144
1997Q4 4 14 16 56 196
1998Q1 5 12 25 60 144
1998Q2 6 17 36 102 289
1998Q3 7 13 49 91 169
1998Q4 8 16 64 128 256
n  ty   t  y
1999Q1 9 14 81 126 196
b
1999Q2 10 18 100 180 324 n t 2  ( t ) 2
1999Q3 11 15 121 165 225
1999Q4 12 17 144 204 289
2000Q1 13 15 169 195 225
2000Q2 14 20 196 280 400
2000Q3 15 16 225 240 256
2000Q4 16 19 256 304 361
(SUM) Σ 136 244 1496 2208 3820 18496 59536
a 11.9
b 0.394
Av 15.25
41

Y = 11.90 + 0.394X
Y17 = 11.90 + 0.394(17) = 18.60 in the first quarter of 2001

Y18 = 11.90 + 0.394(18) = 18.99 in the second quarter of 2001
Y19 = 11.90 + 0.394(19) = 19.39 in the third quarter of 2001
Y20 = 11.90 + 0.394(20) = 19.78 in the fourth quarter of 2001
Note: Electricity sales are expected to increase

by 0.394 mn kilowatt-hours per quarter.
42

s yt 
  a y  b ty
y 2
Std.dev n2
 Syt = SQRT( [3820-(11.9) (244)- (0.394) (2208)]/(16-2))=1.82
 Syt is a measure of how historical data points have been dispersed about
the trend line. If it is large (reference point in mean of the data) , the
historical data points have been spread widely about the trend line and if
otherway around, the data points have been grouped tightly about the
trend.
43

n ty   t  y
r
Corr. coef
n  t 2
  t 
2
 n  y 2
  y
2

r= ((16) (2208)- (136) (244))/SQRT( [(16) (1496)-(18496)*((16)(3820-59536)]=0.73
r lies between -1 and 1, -1 is strong negative whereas 1 is

strong positive. 0 means that there is no relationship
between the two variables (x and y). In this case, there is a
strong positive relationship between the two variables and if
an increase in independent variable, it will be a rise in
dependent variable.
44

R2=0.533. It varies between 0 and 1. 0 means that there is

no relationship between the two variables whereas 1
indicates that there is a perfect relationship. 53.3% variation
in dependent variable can be explained by the variation
happened in the independent variable. It is worth to
emphasize that 46.7% shows unexplained part of the
relationship.
45
Example 2 for Trend Projection
Time  Estimate the forecast equation

Period Sales  Predict the next period
Year
(t) (F)  Compute the correlation
2003 1 20 coefficient, determination of
2004 2 40 coefficient and standard
2005 3 30 deviation.
2006 4 50
2007 5 70 F  a  bt
2008 6 65
46

(continued)
 The linear trend model is:
Time
Period
F  12.333  9.5714 t
Year Sales
(t) (F)
Sales trend
2003 1 20
80
2004 2 40 70
60
2005 3 30 50
sales
40
2006 4 50 30
20
2007 5 70 10
0
2008 6 65 0 1 2 3 4 5 6 7
Year
47

Time (continued)
Year Period Sales  Forecast for time period 7:
(t) (F)
2003 1 20 F  12.333  9.5714 (7)
2004 2 40  79.33
2005 3 30 Sales
2006 4 50
80
2007 5 70 70
60
2008 6 65
50
sales
2009 7 ?? 40
30
20
 Std dev=8.91 10
0
 R2=0.83 0 1 2 3 4 5 6 7
Year
 r=0.91
48
Evaluating Forecast-Model Performance

 Accuracy
 Accuracy is the typical criterion for judging the
performance of a forecasting approach
 Accuracy is how well the forecasted values match the
actual values
 Accuracy of a forecasting approach needs to be monitored to
assess the confidence you can have in its forecasts and
changes in the market may require reevaluation of the
approach
 Accuracy can be measured in several ways
 Standard error of the forecast (SEF)
 Mean absolute deviation (MAD)
 Mean squared error (MSE)
 Mean absolute percent error (MAPE)
 Root mean squared error (RMSE)
49
Forecast Accuracy
 Error - difference between actual value and
predicted value
 Mean Absolute Deviation (MAD)
Average absolute error
 Mean Squared Error (MSE)
Average of squared error
 Mean Absolute Percent Error (MAPE)
Average absolute percent error
 Root Mean Squared Error (RMSE)
Root Average of squared error 50
MAD, MSE, and MAPE
 Actual  forecast
MAD =
n
2
 ( Actual  forecast)
MSE =
n -1
 Actual  forecast / Actual*100)
MAPE =
n
RMSE 
 t t
( A  F ) 2
n 51
MAD, MSE and MAPE

 MAD
 Easy to compute
 Weights errors linearly
 MSE
 Squares error
 More weight to large errors
 MAPE
 Puts errors in perspective
 RMSE
 Root of Squares error
 More weight to large errors
52
Example-MAD, MSE, and MAPE

Compute MAD, MSE and MAP for the following data showing actual and the
predicted numbers of account serviced.
Period Actual Forecast

1 217 215
2 213 216
3 216 215
4 210 214
5 213 211
6 219 214
7 216 217
8 212 216
53
Example-MAD, MSE, and MAPE

Compute MAD, MSE and MAP for the following data showing actual and the
predicted numbers of account serviced.
Period Actual Forecast (A-F) |A-F| (A-F)^2 (|A-F|/Actual)*100
1 217 215 2 2 4 0.92
2 213 216 -3 3 9 1.41
3 216 215 1 1 1 0.46
4 210 214 -4 4 16 1.90
5 213 211 2 2 4 0.94
6 219 214 5 5 25 2.28
7 216 217 -1 1 1 0.46
8 212 216 -4 4 16 1.89
-2 22 76 10.26
MAD= 2.75
22/8=2.75
76/8-1=10.86
MSE= 10.86 10.26/8=1.28
MAPE= 1.28 Sqroot(76/8)=3.08
RMSE 3.08
54
Example-For MA and ES Techniques

Electricity sales data from 2010 to 2015 (t=6)
a) Using MA2 and ES2 to
Year Sales forecast next period
(W=0.2).
2010 20
2011 40 b) Conduct RMSE technique
to check which model
2012 30 measures the forecasting
results more sensitive.
2013 50 Briefly explain
2014 70
c) Plot the original data, MA2
2015 65 and ES2. Briefly explain .
55

SALES- SALES-
Year Sales MA2 MA2 SQ ES02 ES02 SQ
2010 20 45,83 -25,83 667,36
2011 40 40,67 -0,67 0,44
2012 30 30 0 0 40,53 -10,53 110,95
2013 50 35 15 225 38,43 11,57 133,94
2014 70 40 30 900 40,74 29,26 856,07
2015 65 60 5 25 46,59 18,41 338,82
Next
Period 67,50 50,27
SUM 1150 2107,58
RMSE 16,96 18,74 56


RMSE 
 t t
( A  F ) 2
RMSE for MA2 Sqroot of 1150/4=16.96

RMSE for ES02 Sqroot of 1439.77/6=15.49
Thus ES02 forecast is marginally better than the

corresponding MA2 forecast due to results of RMSE. The
less error calculated, the better results forcasted.
57
SALES, MA and ES
58
Example: Unseasonalized vs. Seasonalized
Quar Deseasonalized
ter Seasonalized Sales Seasonal Index Sales 23
27.88 
1 23 0.825 27.88 0.825
2 40 1.310 30.53
3 25 0.920 27.17
4 27 0.945 28.57
5 32 0.825 38.79
6 48 1.310 36.64
7 33 0.920 35.87
8 37 0.945 39.15
9 37 0.825 44.85
10 50 1.310 38.17
11 40 0.920 43.48
… … …
 This topic is excluded from the exam. 59
Example: Unseasonalized vs. Seasonalized
Sales: Unseasonalized vs. Seasonalized

60
50
40
Sales
30
20
10
0
1 2 3 4 5 6 7 8 9 10 11
Quarter
Sales Deseasonalized Sales
 This topic is excluded from the exam.

60
Example for Trend Projection- Petrol sales

 Suppose we have the petrol sales data
Year
PETROLSALE
(Y)
in a city between 2004 and 2011. The
2004 1 data are shown in the following table.
2005 3  Construct the forecast equation.
2006 4
2007 2
Briefly explain
2008 1  Calculate the next four years.
2009 3 Briefly explain.
2010 5
2011 3
 Compute the correlation coefficient,
determination of coefficient and
standard deviation. Briefly explain.
61

Year Trent (t) PETROLSALE (Y) (t )SQ Y*t (y) SQ (Σt) SQ (ΣY) SQ
2004 1 1 1 1 1
a
 t 2
 y   t  ty
2005 2 3 4 6 9 n  t  ( t )
2 2
2006 3 4 9 12 16
n  ty   t  y
2007 4 2 16 8 4
2008 5 1 25 5 1 b
n  t 2  ( t ) 2
2009 6 3 36 18 9
2010 7 5 49 35 25
2011 8 3 64 24 9
(SUM) Σ 36 22 204 109 74 1296 484
a 1.678
b 0.238
62

Y = 1.678 + 0.238t
Y9 = 1.678 + 0.238(9) = 3.83 in 2012

Y10 = 1.678 + 0.238(10) = 4.06 in 2013
Y11 = 1.678 + 0.238(11) = 4.30 in 2014
Y12 = 1.678 + 0.238(12) = 4.54 in 2015
Note: Petrol sales are expected to increase by

0.238 mn gallons per year.
63

Std.dev s yt 
  a y  b ty
y 2
n2
1.36
 Syt =
 Syt is a measure of how historical data points have been dispersed about
the trend line. If it is large (reference point in mean of the data) , the
historical data points have been spread widely about the trend line and if
otherway around, the data points have been grouped tightly about the
trend.
64

n ty   t  y
r
Corr. coef
n  t 2
  t 
2
 n  y 2
  y
2

r=0.42
r lies between -1 and 1, -1 is strong negative whereas 1 is

strong positive. 0 means that there is no relationship
between the two variables (x and y). In this case, there is a
moderate positive relationship between the two variables and
if an increase in independent variable, it will be a rise in
dependent variable.
65

R2=0.18. It varies between 0 and 1. 0 means that there is

no relationship between the two variables whereas 1
indicates that there is a perfect relationship. 18.0% variation
in dependent variable can be explained by the variation
happened in the independent variable. It is worth to
emphasize that 82% shows unexplained part of the
relationship.
66
Example for MA, WMA and ES

(a) Use a simple two-year moving average to
find the next period
Year No of case
(b) Use the two year weight average method
conducting weight equally and likely to find the
2010 60 next period.
(c) Use single exponential smoothing
2011 64 technique to find the next period by employing
smoothing constant and 6. period forecast
2012 55 value are 0.2 and 60.58 respectively.
(d) Use RMSE error model and decide which
technique is better explain the data (MA and
2013 58 ES).
(e) Plot the yearly data, two-year moving
2014 64 average estimates as as well as exponential
smoothing estimates. Briefly explain the
2015 65 patterns.
67

a-b-c-d
No of Case- Case-
Year case MA2 MA2 SQ ES02 ES02 SQ WMA
2010 60 61,00 -1,00 1,00
2011 64 60,80 3,20 10,24
2012 55 62,00 -7,00 49,00 61,44 -6,44 41,47
2013 58 59,50 -1,50 2,25 60,15 -2,15 4,63
2014 64 56,50 7,50 56,25 59,72 4,28 18,30
2015 65 61,00 4,00 16,00 60,58 4,42 19,56
Next Period 64,50 61,46 64,50
SUM 123,50 95,21
RMSE 5,56 3,98

The first forecasting number for ES is calculated as average of series -
(60+64....+65)/6=61. 68

-d-
 Exponential smoothing technique is better than two-year

moving average forecast technique because the former one
gives less error than the latter one.
69

-e-
70
Thanks
71

Spring 2018: Chapter 3: Forecasting

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Forecasting; Chapter3

Department of Mechanical Engineering

 List the elements of a good forecast.

What is meant by Forecasting and Why?

The aim of forecasting

The aim of forecasting

 The firm uses the macro-forecasts of general economic

Forecasting Process Map

Product Production &

Elements of a Good Forecast

 This slide is excluded from the exam

Steps in the Forecasting Process

Step 6 Monitor the forecast

 This slide is excluded from the exam

 Judgmental - uses subjective inputs

Qualitative Forecasts or Judgmental Forecasts

Qualitative Forecasts or Judgmental Forecasts

 Survey Techniques– The rationale for forecasting

Qualitative Forecasts or Judgmental Forecasts

 Executive Polling- Firm can poll its top

Quantitative Forecasting Approaches

 Based on the assumption, the “forces” that generated

 This slide is excluded from the exam

Time Series Analysis

Reasons for Fluctuations in Time Series Data

Uses for Naïve Forecasts

Techniques for Averaging

 Moving average – A technique that averages a number of

At-n + … At-2 + At-1

Simple Moving Average

At-n + … At-2 + At-1

Simple Moving Average

 Premise--The most recent observations might have

Exponential Smoothing Forecasts

 Use the moving average method with an AP = 3

 F13 = (168 + 198 + 159)/3 = 175.0 calls

Example-Weighted Moving Average

 F13 = .1(168) + .3(198) + .6(159) = 171.6 calls

 F12 = 180.76 + .25(198 – 180.76) = 185.07

Example 2-Exponential Smoothing

Suppose a smoothing constant value of .10 is used and the exponential

Example 2-Exponential Smoothing

what is the exponential smoothing forecast for the next periods?

Example 2-Exponential Smoothing

Linear Trend Equation

 Ft = Forecast for period t

Trend Projection- Simple Linear Regression

 Y = dependent variable (the value of time series to be

The correlation coefficient, determination of

Trend Projection- Calculating a and b

Example 1 for Trend Projection- Electricity sales

Example1 for Trend Projection

Example1 for Trend Projection

Y17 = 11.90 + 0.394(17) = 18.60 in the first quarter of 2001

Note: Electricity sales are expected to increase

The correlation coefficient, determination of

 Syt = SQRT( [3820-(11.9) (244)- (0.394) (2208)]/(16-2))=1.82

The correlation coefficient, determination of

r lies between -1 and 1, -1 is strong negative whereas 1 is

The correlation coefficient, determination of

R2=0.533. It varies between 0 and 1. 0 means that there is

Example 2 for Trend Projection

Time  Estimate the forecast equation