FORCASTING

SIMPLE MOVING AVERAGE

A SIMPLE MOVING AVERAGE forecast uses a

number of historical actual data values to
generate forecast. Simple moving averages
are useful if we can assume that market
demands will stay fairly steady over time.
  
Simple

moving average =
n

• Where n is the number of periods in the moving average.

Example:

Donna’s Garden supply wants a 3-month

moving average forecast, including a
forecast for the next January, for shed
sales.
MONTH ACTUAL SHED 3-MONTH MOVING AVERAGE
SALES
January 10
February 12
March 13
April 16 (10+12+13)/3= 11.67
May 19 (12+13+16)/3= 13.67
June 23 (13+16+19)/3= 16
July 26 (16+19+23)/3= 19.33
August 30 (19+23+26)/3= 22.67
September 28 (23+26+30)/3= 26.33
October 18 (26+30+28)/3= 28
November 16 (30+28+18)/3= 25.33
December 14 (28+18+16)/3= 20.67
 Solution : The forecast for December is 20.67. To
project the demand for sched in the coming
January, we sum the October, November, and
December sales and divided by 3: (18+16+14)/3 =
16.
Insight!
Get ½ Crosswise!
 Month Sales
January 20 a.) Forecast A 3-month simple
February 21 moving Average
March 15
April 14 b.) Forecast A 6-month simple
May 13 moving average
June 16
July 17 c.) if actual sales in December were
August 18 18 (rather than 23), what is the new
September 20
January forecast?
November 20
October 21
December 23
Weighted Moving Average

  

Weighted moving average =

Example:

Donna’s Garden supply wants to

forecast storage shed sales by
weighting the past 3 months, with
more weight given to recent data to
make more significant.
MONTH ACTUAL SHED 3-MONTH MOVING AVERAGE
SALES
January 10
February 12
March 13
April 16 [(3x13)+(2x12)+(10)]/6= 12.17
May 19 [(3x16)+(2x13)+(12)]/6= 14.33
June 23 [(3x19)+(2x16)+(13)]/6= 15.33
July 26 [(3x23)+(2x19)+(16)]/6= 20.5
August 30 [(3x26)+(2x23)+(19)]/6= 23.83
September 28 [(3x30)+(2x26)+(23)]/6= 27.5
October 18 [(3x28)+(2x30)+(26)]/6= 28.33
November 16 [(3x18)+(2x28)+(30)]/6= 23.33
December 14 [(3x16)+(2x18)+(28)]/6= 18.67
Insight!

In this particular forecasting situation, you can

see that more heavily weighting the latest month
provides a much more accurate projection.
FORECASTING WITH LEAST SQUARE

  least-square method for finding the best fitting straight line.

The


a=-
 Example: Year Electrical
Power
Demand
The demand for electric power
1 74
at N.Y. Edison over the past 7
2 79
years is shown in the following
3 80
table, in megawatts. The firm
4 90
forecast next years’ demand by
5 105
fitting a straight line trend to
this data. 6 142
7 122
Solution # 1
Year (x) ELECTRICAL POWER
DEMAND (y)
xy
1 74 1 74
2 79 4 158
3 80 9 240
4 90 16 360
5 105 25 525
6 142 36 852
7 122 49 854
= 28 = 692 = 140 = 3, 063
Solution #2