Forecasting

Forecasting Demand
Compiled by G.Gençyılmaz
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Forecasting
 Forecasting is a process of predicting a future event

 Forecasts are critical inputs to business plans,
annual plans, and budgets
 Finance, human resources, marketing, operations,
and supply chain managers need forecasts to plan:
output levels, purchases of services and materials,
workforce and output schedules, inventories, and
long-term capacities
 Forecasts are made on many different variables
 Forecasts are important to managing both processes
and managing supply chains
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Forecasting Time Horizons
 Short-range forecast
 Up to 1 year, generally less than 3 months
 Purchasing, job scheduling, workforce levels, job
assignments, production levels
 Medium-range forecast
 3 months to 3 years
 Sales and production planning, budgeting
 Long-range forecast
 3+ years
 New product planning, facility location, research
and development
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Distinguishing Differences
 Medium/long range forecasts deal with

more comprehensive issues and support
management decisions regarding
planning and products, plants and
processes
 Short-term forecasting usually employs
different methodologies than longer-term
forecasting
 Short-term forecasts tend to be more
accurate than longer-term forecasts
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Influence of Product Life Cycle
Introduction – Growth – Maturity – Decline

Introduction and growth require longer
forecasts than maturity and decline
As product passes through life cycle,
forecasts are useful in projecting
 Staffing levels
 Inventory levels
 Factory capacity
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Product Life Cycle
Introduction Growth
Poor time to
Maturity Decline
Company Strategy/Issues
Best period to Practical to Cost

change image,
increase market change price control
price, or quality
share R&D or quality Competitive costs critical
engineering is image become critical
critical Strengthen niche Defend market
position Drive-through
Internet search engines restaurants
CD-ROMs
iPods LCD &
Xbox 360 plasma TVs
Sales
Avatars
Boeing 787 Analog

TVs
Twitter
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Introduction Growth Maturity Decline
Product design Forecasting
critical Standardization
and Little product
development Product and Fewer product differentiation
OM Strategy/Issues
critical process changes, more

minor changes Cost
Frequent reliability minimization
product and Competitive Optimum
process design capacity Overcapacity
product in the industry
changes improvements Increasing
Short production and options stability of Prune line to
runs process eliminate
Increase items not
High production capacity Long returning
costs Shift toward production runs good margin
Limited models product focus Product Reduce
Enhance improvement capacity
Attention to and cost cutting
quality distribution
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Strategic Importance of Forecasting
Human Resources – Hiring, training, laying

off workers
Capacity – Capacity shortages can result in
undependable delivery, loss of customers,
loss of market share
Supply Chain Management – Good supplier
relations and price advantages
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Seven Steps in Forecasting
1. Determine the use of the forecast

2. Select the items to be forecasted
3. Determine the time horizon of the
forecast
4. Select the forecasting model(s)
5. Gather the data
6. Make the forecast
7. Validate and implement results
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The Realities!
Forecasts are seldom perfect

Most techniques assume an underlying
stability in the system
Product family and aggregated forecasts
are more accurate than individual product
forecasts
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Forecasting Approaches
Qualitative Methods
Used when situation is uncertain and little

data exist
 New products
 New technology
Involves intuition, experience
 e.g., forecasting sales on Internet
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Forecasting Approaches
Quantitative Methods
Used when situation is ‘stable’ and

historical data exist
 Existing products
 Current technology
Involves mathematical techniques
 e.g., forecasting sales of color televisions
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Types of Forecasts
 Economic forecasts
 Address business cycle – inflation rate,
money supply, housing starts, etc.
 Technological forecasts
 Predict rate of technological progress
 Impacts development of new products
 Demand forecasts
 Predict sales of existing products and
services
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Overview of Qualitative Methods
1. Jury of executive opinion

 Pool opinions of high-level experts,
sometimes augment by statistical models
2. Delphi method
 Panel of experts, queried iteratively
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Overview of Qualitative Methods
3. Sales force composite

 Estimates from individual salespersons are
reviewed for reasonableness, then
aggregated
4. Consumer Market Survey
 Ask the customer
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Jury of Executive Opinion
 Involves small group of high-level

experts and managers
 Group estimates demand by working
together
 Combines managerial experience with
statistical models
 Relatively quick
 ‘Group-think’
disadvantage
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Sales Force Composite
 Each salesperson projects his or

her sales
 Combined at district and national
levels
 Sales reps know customers’ wants
 Tends to be overly optimistic
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Delphi Method
 Iterative group
process, continues Decision Makers
(Evaluate
until consensus is responses and
reached make decisions)
 3 types of
participants Staff
(Administering
 Decision makers survey)
 Staff
 Respondents
Respondents
(People who can
make valuable
judgments)
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Consumer Market Survey
 Ask customers about purchasing

plans
 What consumers say, and what
they actually do are often different
 Sometimes difficult to answer
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Overview of Quantitative
Approaches
1. Naive approach
2. Moving averages
3. Exponential smoothing time-series
models
4. Trend projection
associative
5. Linear regression model
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Time Series Forecasting
 Set of evenly spaced numerical data

 Obtained by observing response variable at
regular time periods
 Forecast based only on past values, no
other variables important
 Assumes that factors influencing past and
present will continue influence in future
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Time Series Methods
 We will focus on time series methods, and

not causal methods, in this chapter.
 The objective of time series analysis is to
discover a pattern in the historical data or
time series and then extrapolate the
pattern into the future.
 The forecast is based solely on past
values of the variable and/or past forecast
errors.
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Time Series Patterns
 A time series is a sequence of

measurements taken every hour, day,
week, month, quarter, year, or at any other
regular time interval.
 The pattern of the data is an important
factor in understanding how the time
series has behaved in the past.
 If such behavior can be expected to
continue in the future, we can use it to
guide us in selecting an appropriate
forecasting method.
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Time Series Plot
 A useful first step in identifying the

underlying pattern in the data is to
construct a time series plot.
 A time series plot is a graphical
presentation of the relationship between
time and the time series variable.
 Time is on the horizontal axis, and the
time series values are shown on the
vertical axis.
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Time Series Plot
 Example
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 The common types of data patterns that can be

identified when examining a time series plot
include:
Horizontal
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 Horizontal Pattern
• A horizontal pattern exists when the data
fluctuate around a constant mean.
• Changes in business conditions can often
result in a time series that has a horizontal
pattern shifting to a new level.
• A change in the level of the time series makes
it more difficult to choose an appropriate
forecasting method.
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Demand Patterns
Quantity
Time
(a) Horizontal: Data cluster about a horizontal line
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 Trend Pattern
• A time series may show gradual shifts or
movements to relatively higher or lower values
over a longer period of time.
• Trend is usually the result of long-term factors
such as changes in the population,
demographics, technology, or consumer
preferences.
• A systematic increase or decrease might be
linear or nonlinear.
• A trend pattern can be identified by analyzing
multiyear movements in historical data.
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Quantity
Time
(b) Trend: Data consistently increase or decrease
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 Seasonal Pattern
• Seasonal patterns are recognized by seeing the
same repeating pattern of highs and lows over
successive periods of time within a year.
• A seasonal pattern might occur within a day,
week, month, quarter, year, or some other
interval no greater than a year.
• A seasonal pattern does not necessarily refer to
the four seasons of the year (spring, summer,
fall, and winter).
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Year 1
Quantity
Year 2
| | | | | | | | | | | |
J F M A M J J A S O N D
Months
(c) Seasonal: Data consistently show peaks and valleys
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 Trend and Seasonal Pattern
• Some time series include a combination

of a trend and seasonal pattern.
• In such cases we need to use a

forecasting method that has the capability
to deal with both trend and seasonality.
• Time series decomposition can be used
to separate or decompose a time series
into trend and seasonal components.
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Components of Demand
Trend
component
Demand for product or service
Seasonal peaks
Actual demand
line
Average demand
over 4 years
Random variation
| | | |
1 2 3 4
Time (years)
Figure 4.1
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 Cyclical Pattern
• A cyclical pattern exists if the time series
plot shows an alternating sequence of
points below and above the trend line
lasting more than one year.
• Often, the cyclical component of a time
series is due to multiyear business
cycles.
• Business cycles are extremely difficult, if
not impossible, to forecast.
• In this chapter we do not deal with
cyclical effects
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Quantity
| | | | | |
1 2 3 4 5 6
Years
(d) Cyclical: Data reveal gradual increases and
decreases over extended periods
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Key Decisions
 Deciding what to forecast
 Level of aggregation
 Units of measure
 Choosing a forecasting system

 Choosing the type of forecasting technique
 Judgment and qualitative methods
 Causal methods
 Time-series analysis
 Key factor in choosing the proper

forecasting approach is the time horizon
for the decision requiring forecasts
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Selecting a Forecasting Method
 The underlying pattern in the time series

is an important factor in selecting a
forecasting method.
 Thus, a time series plot should be one of
the first things developed when trying to
determine what forecasting method to
use.
 If we see a horizontal pattern, then we
need to select a method appropriate for
this type of pattern.
 If we observe a trend in the data, then we
need to use a method that has the
capability to handle trend effectively.
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Trend Projections
Fitting a trend line to historical data points
to project into the medium to long-range
Linear trends can be found using the least
squares technique
y^ = a + bx
^ where y= computed value of the
variable to be predicted (dependent
variable)
a= y-axis intercept
b= slope of the regression line
x= the independent variable
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Least Squares Method
Values of Dependent Variable
Actual observation Deviation7

(y-value)
Deviation5 Deviation6
Deviation3
Deviation4
Deviation1
(error) Deviation2
Trend line, y^ = a + bx
Time period Figure 4.4

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Values of Dependent Variable
Actual observation Deviation7

(y-value)
Deviation5 Deviation6
Deviation3 Least squares method

minimizes the sum of the
squared errors (deviations)
Deviation 4
Deviation1
(error) Deviation2
Trend line, y^ = a + bx
Time period Figure 4.4

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Equations to calculate the regression variables
y^ = a + bx
xy - nxy
b=
x2 - nx2
a = y - bx
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Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2003 1 74 1 74
2004 2 79 4 158
2005 3 80 9 240
2006 4 90 16 360
2007 5 105 25 525
2008 6 142 36 852
2009 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86
∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(4 )
2
a = y - bx = 98.86 - 10.54(4) = 56.70
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Time Electrical Power
Year Period (x) Demand x2 xy
2003 1 74 1 74
2004 2 79 4 158
2005 3 80 9 240
2006 4 90 16 360
2007 5 105 25 525
2008 6 142 36 852
2009 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86
∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(4 )
2
a = y - bx = 98.86 - 10.54(4) = 56.70
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Trend line,
160 –
150 –
y^ = 56.70 + 10.54x
140 –
Power demand
130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
2003 2004 2005 2006 2007 2008 2009 2010 2011
Year
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Assosiative Forecasting: Linear
Regression
 A dependent variable is related to one or more
independent variables by a linear equation
 The independent variables are assumed to
“cause” the results observed in the past
 Simple linear regression model is a straight line
Y = a + bX
where
Y = dependent variable
X = independent variable
a = Y-intercept of the line
b = slope of the line
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Forecasting an outcome based on predictor
variables using the least squares technique
y^ = a + bx
^ where y= computed value of the
variable to be predicted (dependent
variable)
a= y-axis intercept
b= slope of the regression line
x= the independent variable though
to predict the value of the
dependent variable
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Associative Forecasting Example
Sales Area Payroll

($ millions), y ($ billions), x
2.0 1
3.0 3
2.5 4
4.0 –
2.0 2
2.0 1
3.0 –
3.5 7 Sales
2.0 –
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
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Sales, y Payroll, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
∑y = 15.0 ∑x = 18 ∑x2 = 80 ∑xy = 51.5
∑xy - nxy 51.5 - (6)(3)(2.5)

x = ∑x/6 = 18/6 = 3 b= = = .25
∑x - nx
2 2 80 - (6)(3 2
)
y = ∑y/6 = 15/6 = 2.5 a = y - bx = 2.5 - (.25)(3) = 1.75
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y^ = 1.75 + .25x Sales = 1.75 + .25(payroll)
If payroll next year

is estimated to be 4.0 –
$6 billion, then: 3.25
Nodel’s sales
3.0 –
Sales = 1.75 + .25(6) 2.0 –

Sales = $3,250,000
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
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Standard Error of the Estimate
 A forecast is just a point estimate of a

future value
 This point is
4.0 –
actually the 3.25
mean of a Nodel’s sales
3.0 –
probability
2.0 –
distribution
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Figure 4.9
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∑(y - yc)2
Sy,x =
n-2
where y = y-value of each data

point
yc = computed value of the
dependent variable, from the
regression equation
n = number of data points
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Computationally, this equation is

considerably easier to use
∑y2 - a∑y - b∑xy

Sy,x =
n-2
We use the standard error to set up

prediction intervals around the
point estimate
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∑y2 - a∑y - b∑xy = 39.5 - 1.75(15) - .25(51.5)

Sy,x =
n-2 6-2
Sy,x = .306 4.0 –

3.25
Nodel’s sales
3.0 –
The standard error
of the estimate is 2.0 –
$306,000 in sales
1.0 –
| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
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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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Correlation Coefficient
nxy - xy
r=
[nx2 - (x)2][ny2 - (y)2]
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y y
Correlation Coefficient
nxy - xy
r=
[nx
(a) Perfect positive x
2
- (x)2
][ny
(b) Positive ]
2
- (y) 2
x
correlation: correlation:
r = +1 0<r<1
y y
(c) No correlation: x (d) Perfect negative x

r=0 correlation:
r = -1
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Correlation
 Coefficient of Determination, r2,
measures the percent of change in y
predicted by the change in x
 Values range from 0 to 1
 Easy to interpret
For the Nodel Construction example:

r = .901
r2 = .81
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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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Linear Regression
Deviation, Regression
Y or error equation:
Y = a + bX
Estimate of
Y from
Dependent variable
regression
equation
Actual
value
of Y
Value of X used
to estimate Y
X
Independent variable
Figure 13.2 – Linear Regression Line Relative to Actual Data
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Linear Regression
 The sample correlation coefficient, r

 Measures the direction and strength of the relationship
between the independent variable and the dependent
variable.
 The value of r can range from –1.00 ≤ r ≤ 1.00
 The sample coefficient of determination, r2
 Measures the amount of variation in the dependent
variable about its mean that is explained by the
regression line
 The values of r2 range from 0.00 ≤ r2 ≤ 1.00
 The standard error of the estimate, syx

 Measures how closely the data on the dependent variable
cluster around the regression line
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Using Linear Regression
EXAMPLE 13.1
The supply chain manager seeks a better way to forecast the
demand for door hinges and believes that the demand is
related to advertising expenditures. The following are sales and
advertising data for the past 5 months:
Month Sales (thousands of units) Advertising (thousands of $)

1 264 2.5
2 116 1.3
3 165 1.4
4 101 1.0
5 209 2.0
The company will spend $1,750 next month on advertising for

the product. Use linear regression to develop an equation and
a forecast for this product.
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SOLUTION
We used POM for Windows to determine the best values of a, b,
the correlation coefficient, the coefficient of determination, and
the standard error of the estimate
a= –8.135
b= 109.229X
r= 0.980
r2 = 0.960
syx = 15.603
The regression equation is

Y = –8.135 + 109.229X
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The regression line is shown in Figure 13.3. The r of 0.98
suggests an unusually strong positive relationship between
sales and advertising expenditures. The coefficient of
determination, r2, implies that 96 percent of the variation in
sales is explained by advertising expenditures.
Brass Door Hinge
250 – X
Sales (000 units)
200 – X
150 – X X
Data
X X
100 –
Forecasts
50 –
| |
0– 1.0 2.0
Advertising ($000)
Figure 13.3 – Linear Regression Line for the Sales and Advertising Data
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Time Series Methods
1. In a naive forecast the forecast for the next

period equals the demand for the current
period (Forecast = Dt)
2. Simple Moving Average
 Used to estimate the average of a demand time
series and thereby remove the effects of
random fluctuation
 Most useful when demand has no trend or
seasonal influences
 The stability of the demand series generally
determines how many periods to include
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Time Series Methods
450 –
430 –
Patient arrivals
410 –
390 –
370 –
350 –
| | | | | |
0 5 10 15 20 25 30
Week
Figure 13.4 – Weekly Patient Arrivals at a Medical Clinic
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Moving Averages
 The term moving is used because every

time a new observation becomes
available for the time series, it replaces
the oldest observation in the equation.
 As a result, the average will change, or
move, as new observations become
available.
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Moving Averages
 To use moving averages to forecast, we

must first select the order n, or number of
time series values, to be included in the
moving average.
 A smaller value of n will track shifts in a
time series more quickly than a larger
value of n.
 If more past observations are
considered relevant, then a larger value
of n is better.
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Simple Moving Averages
 Specifically, the forecast for period t + 1 can be

calculated at the end of period t (after the actual
demand for period t is known) as
Sum of last n demands Dt + Dt-1 + Dt-2 + … + Dt-n+1

Ft+1 = =
n n
where
Dt = actual demand in period t
n = total number of periods in the average
Ft+1 = forecast for period t + 1
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Moving Average Example
Actual 3-Month
Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 (10 + 12 + 13)/3
13 = 11 2/3
May 19 (12 + 13 + 16)/3 = 13 2/3
June 23 (13 + 16 + 19)/3 = 16
July 26 (16 + 19 + 23)/3 = 19 1/3
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Graph of Moving Average
Moving
Average
30 –
28 –
Forecast
26 – Actual
24 – Sales
Shed Sales
22 –
20 –
18 –
16 –
14 –
12 –
10 –
| | | | | | | | | | | |
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Example: Moving Average
 Example: Rosco Drugs

If Rosco Drugs uses a 3-period moving average to
forecast sales, what are the forecasts for weeks 4-
11?
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3MA Forecast
(110 + 115 + 125)/3
116.7
120.0
123.3
121.7
125.0
121.7
118.3
118.3
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Simple Moving Averages
 For any forecasting method, it is important to

measure the accuracy of its forecasts. Forecast
error is simply the difference found by subtracting
the forecast from actual demand for a given
period, or
Et = Dt – Ft
where
Et = forecast error for period t
Dt = actual demand in period t
Ft = forecast for period t
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Using the Moving Average Method
EXAMPLE 13.2
a. Compute a three-week moving average forecast for the
arrival of medical clinic patients in week 4. The numbers of
arrivals for the past three weeks were as follows:
Week Patient Arrivals

1 400
2 380
3 411
b. If the actual number of patient arrivals in week 4 is 415,

what is the forecast error for week 4?
c. What is the forecast for week 5?
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Using the Moving Average Method
SOLUTION
1 400
a. The moving average forecast at 2 380
the end of week 3 is 3 411
411 + 380 + 400

F4 = = 397.0
3
b. The forecast error for week 4 is
E4 = D4 – F4 = 415 – 397 = 18
c. The forecast for week 5 requires the actual arrivals from

weeks 2 through 4, the three most recent weeks of data
415 + 411 + 380

F5 = = 402.0
3
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Application 13.1a
Estimating with Simple Moving Average using the following
customer-arrival data
Month Customer arrival

1 800
2 740
3 810
4 790
Use a three-month moving average to forecast customer

arrivals for month 5
D4 + D3 + D2 790 + 810 + 740

F5 = = = 780
3 3
Forecast for month 5 is 780 customer arrivals
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Application 13.1a
If the actual number of arrivals in month 5 is 805, what is the
forecast for month 6?
Month Customer arrival

1 800
2 740
3 810
4 790
D5 + D4 + D3 805 + 790 + 810

F6 = = = 801.667
3 3
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Application 13.1a
Forecast error is simply the difference found by subtracting the
forecast from actual demand for a given period, or
Et = Dt – Ft
Given the three-month moving average forecast for month 5,

and the number of patients that actually arrived (805), what is
the forecast error?
E5 = 805 – 780 = 25
Forecast error for month 5 is 25
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Weighted Moving Averages
 Weighted Moving Averages
• To use this method we must first select the
number of data values to be included in the
average.
• Next, we must choose the weight for each of
the data values.
The more recent observations are typically given
more weight than older observations.
For convenience, the weights should sum to 1.
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In the weighted moving average method, each

historical demand in the average can have its own
weight, provided that the sum of the weights equals
1.0. The average is obtained by multiplying the
weight of each period by the actual demand for that
period, and then adding the products together:
Ft+1 = W1D1 + W2D2 + … + WnDt-n+1
A three-period weighted moving average model with

the most recent period weight of 0.50, the second
most recent weight of 0.30, and the third most
recent might be weight of 0.20
Ft+1 = 0.50Dt + 0.30Dt–1 + 0.20Dt–2
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Weights Applied Period
Weighted Moving
3 Average
Last month
2 Two months ago
1 Three months ago
6 Sum of weights
Actual 3-Month Weighted

Month Shed Sales Moving Average
January 10
February 12
March 13
April 16 [(3 x 13)
13 + (2 x 12)
12 + (10)]/6
10 = 121/6
May 19 [(3 x 16) + (2 x 13) + (12)]/6 = 141/3
June 23 [(3 x 19) + (2 x 16) + (13)]/6 = 17
July 26 [(3 x 23) + (2 x 19) + (16)]/6 = 201/2
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• An example of a 3-period weighted moving
average (3WMA) is:
3WMA = .2(110) + .3(115) + .5(125) = 119
Weights (.2, .3, Most recent of the

and .5) sum to 1 three observations
13 – 88
Week Sales 3WMA
1 110
2 115
3 125
4 120 119.0
5 125 120.5
6 120 123.5
7 130 121.5
8 115 126.0
9 110 120.5
10 130 115.0
13 – 89
Potential Problems With
Moving Average
 Increasing n smooths the forecast but

makes it less sensitive to changes
 Do not forecast trends well
 Require extensive historical data
13 – 90
Moving Average And
Weighted Moving Average
Weighted
moving
30 – average
25 –
Sales demand
20 – Actual
sales
15 –
Moving
10 – average
5 –
| | | | | | | | | | | |
Figure 4.2
13 – 91
Application 13.1b
Revisiting the customer arrival data in Application 13.1a. Let
W1 = 0.50, W2 = 0.30, and W3 = 0.20. Use the weighted moving
average method to forecast arrivals for month 5.
F5 = W1D4 + W2D3 + W3D2

= 0.50(790) + 0.30(810) + 0.20(740) = 786
Given the number of patients that actually arrived (805), what

is the forecast error?
E5 = 805 – 786 = 19
13 – 92
Application 13.1b
If the actual number of arrivals in month 5 is 805, compute
the forecast for month 6
F6 = W1D5 + W2D4 + W3D3

= 0.50(805) + 0.30(790) + 0.20(810) = 801.5
13 – 93
Exponential Smoothing
 A sophisticated weighted moving average that

calculates the average of a time series by giving
recent demands more weight than earlier demands
 Requires only three items of data
 Forecast calculated past period for this period, Ft
 The demand for this period, Dt
 A smoothing parameter, alpha (α), where 0 ≤ α ≤ 1.0
 The equation for the forecast is
Ft+1 = α(Demand this period) + (1 – α)(Forecast calculated last period)
Ft+1 = αDt + (1 – α)Ft

or the equivalent
Ft+1 = Ft + α(Dt – Ft)
13 – 94
• This method is a special case of a weighted

moving averages method; we select only the
weight for the most recent observation.
• The weights for the other data values are
computed automatically and become smaller as
the observations grow older.
The exponential smoothing forecast is a
weighted average of all the observations in the
time series.
The term exponential smoothing comes from
the exponential nature of the weighting scheme
for the historical values.
13 – 95
 Exponential Smoothing Forecast
Ft+1 = Dt + (1 – )Ft
where:
Ft+1 = forecast of the time series for period t + 1
Dt = actual value of the time series in period t
Ft = forecast of the time series for period t
α = smoothing constant (0 < α < 1)
and let:
F2 = D1 (to initiate the computations)
13 – 96
 Exponential Smoothing Forecast

• With some algebraic manipulation, we can
rewrite Ft+1 = α Dt + (1 – α)Ft as:
Ft+1 = Ft + Dt – Ft)
• We see that the new forecast Ft+1 is equal to the

previous forecast Ft plus an adjustment, which
is α times the most recent forecast error,
Dt – Ft.
13 – 97
 Desirable Value for the Smoothing Constant α.

 If the time series contains substantial
random variability, a smaller value (nearer
to zero) is preferred.
 If there is little random variability present,
forecast errors are more likely to represent
a change in the level of the time series ….
and a larger value for  is preferred.
13 – 98
Example: Exponential Smoothing

If Rosco Drugs uses exponential smoothing
to forecast sales, which value for the smoothing
constant α = .1 or .8, gives better forecasts?
13 – 99
Example: Exponential
Smoothing
 Using Smoothing Constant Value α = .1
F2 = D1 = 110
F3 = .1D2 + .9F2 = .1(115) + .9(110) = 110.50
F4 = .1D3 + .9F3 = .1(125) + .9(110.5) = 111.95
F5 = .1D4 + .9F4 = .1(120) + .9(111.95) = 112.76
F6 = .1D5 + .9F5 = .1(125) + .9(112.76) = 113.98
F7 = .1D6 + .9F6 = .1(120) + .9(113.98) = 114.58
F8 = .1D7 + .9F7 = .1(130) + .9(114.58) = 116.12
F9 = .1D8 + .9F8 = .1(115) + .9(116.12) = 116.01
F10= .1D9 + .9F9 = .1(110) + .9(116.01) = 115.41
13 – 100
F2 = = 110
F3 = .8(115) + .2(110) = 114.00
F4 = .8(125) + .2(114) = 122.80
F5 = .8(120) + .2(122.80) = 120.56
F6 = .8(125) + .2(120.56) = 124.11
F7 = .8(120) + .2(124.11) = 120.82
F8 = .8(130) + .2(120.82) = 128.16
F9 = .8(115) + .2(128.16) = 117.63
F10= .8(110) + .2(117.63) = 111.53
13 – 101
 The emphasis given to the most recent demand

levels can be adjusted by changing the smoothing
parameter
 Larger α values emphasize recent levels of
demand and result in forecasts more responsive
to changes in the underlying average
 Smaller α values treat past demand more
uniformly and result in more stable forecasts
 Exponential smoothing is simple and requires
minimal data
 When the underlying average is changing, results
will lag actual changes
13 – 102
Exponential Smoothing and
Moving Average
3-week MA 6-week MA
450 – forecast
forecast
430 –
410 –
Patient arrivals
390 –
370 –
Exponential
smoothing
 = 0.10
| | | | | |
0 5 10 15 20 25 30
Week
13 – 103
Exponential Smoothing Example
Predicted demand = 142 Fiat Doblo

Actual demand = 153
Smoothing constant  = .20
New forecast = 142 + .2(153 – 142)

= 142 + 2.2
= 144.2 ≈ 144 cars
13 – 104
Effect of
Smoothing Constants
Weight Assigned to
Most 2nd Most 3rd Most 4th Most 5th Most
Recent Recent Recent Recent Recent
Smoothing Period Period Period Period Period
Constant () (1 - ) (1 - )2
(1 - )3
(1 - )4
 = .1 .1 .09 .081 .073 .066
 = .5 .5 .25 .125 .063 .031
13 – 105
Impact of Different 
225 –
Actual  = .5
demand
200 –
Demand
175 –
 = .1
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter
13 – 106
Impact of Different 
225 –
Actual  = .5
 Chose high values
demandof 
when underlying average
Demand
200 –
is likely to change
175
Choose
– low values of 
when underlying average  = .1
is stable
| | | | | | | | |
150 –
1 2 3 4 5 6 7 8 9
Quarter
13 – 107
Using Exponential Smoothing
EXAMPLE 13.3
a. Reconsider the patient arrival data in Example 13.2. It is
now the end of week 3. Using α = 0.10, calculate the
exponential smoothing forecast for week 4.
b. What was the forecast error for week 4 if the actual demand
turned out to be 415?
c. What is the forecast for week 5?

1 400
2 380
3 411
4 415
13 – 108
SOLUTION
a. The exponential smoothing method requires an initial
forecast. Suppose that we take the demand data for the first
two weeks and average them, obtaining (400 + 380)/2 = 390
as an initial forecast. (POM for Windows and OM Explorer
simply use the actual demand for the first week as a default
setting for the initial forecast for period 1, and do not begin
tracking forecast errors until the second period). To obtain
the forecast for week 4, using exponential smoothing with
and the initial forecast of 390, we calculate the average at
the end of week 3 as
F4 = 0.10(411) + 0.90(390) = 392.1
Thus, the forecast for week 4 would be 392 patients.
13 – 109
b. The forecast error for week 4 is
E4 = 415 – 392 = 23
c. The new forecast for week 5 would be
F5 = 0.10(415) + 0.90(392.1) = 394.4
or 394 patients. Note that we used F4, not the integer-value

forecast for week 4, in the computation for F5. In general, we
round off (when it is appropriate) only the final result to
maintain as much accuracy as possible in the calculations.
13 – 110
Application 13.1c
Suppose the value of the customer arrival series average in month
3 was 783 customers (let it be F4). Actual arrivals in month 4 is 790.
Use exponential smoothing with α = 0.20 to compute the forecast
for month 5.
Ft+1 = Ft + α(Dt – Ft) = 783 + 0.20(790 – 783) = 784.4
Given the number of patients that actually arrived (805),

what is the forecast error?
E5 = 805 – 784 = 21
13 – 111
Application 13.1c
Given the actual number of arrivals in month 5 as 805, what is

the forecast for month 6?
Ft+1 = Ft + α(Dt – Ft) = 784.4 + 0.20(805 – 784.4) = 788.52
13 – 112
Choosing 
The objective is to obtain the most

accurate forecast no matter the
technique
We generally do this by selecting the
model that gives us the lowest forecast
error
Forecast error = Actual demand - Forecast value

= At - Ft
13 – 113
Forecast Accuracy
 Measures of forecast accuracy are used to

determine how well a particular forecasting
method is able to reproduce the time series data
that are already available.
 Measures of forecast accuracy are important
factors in comparing different forecasting
methods.
 By selecting the method that has the best
accuracy for the data already known, we hope to
increase the likelihood that we will obtain better
forecasts for future time periods.
13 – 114
Forecast Accuracy
 The key concept associated with measuring

forecast accuracy is forecast error.
Forecast Error = Actual Value  Forecast

 A positive forecast error indicates the
forecasting method underestimated the actual
value.
 A negative forecast error indicates the
forecasting method overestimated the actual
value.
13 – 115
Forecast Accuracy
 Mean Error
A simple measure of forecast accuracy is the
mean or average of the forecast errors. Because
positive and negative forecast errors tend to offset
one another, the mean error is likely to be small.
Thus, the mean error is not a very useful measure.
 Mean Absolute Error/Deviation (MAE)/(MAD)
This measure avoids the problem of positive
and negative errors offsetting one another. It is
the mean of the absolute values of the forecast
errors.
13 – 116
Common Measures of Error
Mean Absolute Deviation (MAD)

∑ |Actual - Forecast|
MAD =
n
Mean Squared Error (MSE)

∑ (Forecast Errors)2
MSE =
n
13 – 117
Forecast Accuracy
 Mean Squared Error (MSE)

This is another measure that avoids the
problem of positive and negative errors offsetting
one another. It is the average of the squared
forecast errors.
 Mean Absolute Percentage Error (MAPE)

The size of MAE and MSE depend upon the
scale of the data, so it is difficult to make
comparisons for different time intervals. To make
such comparisons we need to work with relative
or percentage error measures. The MAPE is the
average of the absolute percentage errors of the
forecasts.
13 – 118
Common Measures of Error
Mean Absolute Percent Error (MAPE)
n
∑100|Actuali - Forecasti|/Actuali
MAPE = i=1
n
13 – 119
Forecast Accuracy
 To demonstrate the computation of these

measures of forecast accuracy we will introduce
the simplest of forecasting methods.
 The naïve forecasting method uses the most
recent observation in the time series as the
forecast for the next time period.
Ft+1 = Actual Value in Period t
13 – 120
Forecast Accuracy

Sales of Comfort brand headache medicine for the
past 10 weeks at Rosco Drugs are shown below.
If Rosco uses the naïve
forecast method to Week Sales Week Sales
forecast sales for weeks 1 110 6 120
2 – 10, what are the 2 115 7 130
resulting MAE, MSE, 3 125 8 115
4 120 9 110
and MAPE values?
5 125 10 130
13 – 121
Forecast Accuracy
Naïve Forecast Absolute Squared Abs. Val.of%

Week Sales Forecast Error Error Error Error
1 110 (115-110)/115=0.0435
2 115 110 5 5 25 4.35
3 125 115 10 10 100 8.00
4 120 125 -5 5 25 4.17
5 125 120 5 5 25 4.00
6 120 125 -5 5 25 4.17
7 130 120 10 10 100 7.69
8 115 130 -15 15 125 13.04
9 110 115 -5 5 25 4.55
10 130 110 20 20 400 15.38
Total 80 850 65.35
13 – 122
Forecast Accuracy
 Naive Forecast Accuracy
80
MAE   8.89
9
850
MSE   94.44
9
65.35
MAPE   7.26%
9
13 – 123

If Rosco Drugs uses a 3-period moving average to
forecast sales, what are the forecasts for weeks 4-
11?
what are the resulting MAE, MSE, and MAPE values?

13 – 124
3MA Forecast
(110 + 115 + 125)/3
116.7
120.0
123.3
121.7
125.0
121.7
118.3
118.3
13 – 125
Forecast Absolute Squared Abs.%

3MA
Error Error Error Error
Week Sales Forecast
1 110
2 115
3 125
3.3 3.3 10.89 2.75
4 120 116.7
5.0 5.0 25.00 4.00
5 125 120.0
-3.3 3.3 10.89 2.75
6 120 123.3
8.3 8.3 68.89 6.38
7 130 121.7
-10.0 10.0 100.00 8.70
8 115 125.0
-11.7 11.7 136.89 10.64
9 110 121.7
11.7 11.7 136.89 9.00
10 130 118.3
Total 6.6 53.3 489.45 44.22
13 – 126
 3-MA Forecast Accuracy
53.3
MAE   7.61
7
489.45
MSE   69.92
7
44.22
MAPE   6.32%
7
The 3-week moving average approach provided

more accurate forecasts than the naïve approach.
13 – 127

• An example of a 3-period weighted moving
average (3WMA) is:
3WMA = .2(110) + .3(115) + .5(125) = 119
Weights (.2, .3, Most recent of the

and .5) sum to 1 three observations
What are the resulting MAE, MSE, and MAPE values?
13 – 128
Example: Weighted Moving Average

1.0 1.0 1.00 2.75

4.5 4.5 20.25 4.00
-3.5 3.5 12.25 2.75
8.5 8.5 72.25 6.38
-11.0 11.0 121.00 8.70
-10.5 10.5 110.25 10.64
14.5 14.5 210.25 9.00
Total 3.5 53.5 547.25 44.15
13 – 129
Example: Weighted Moving Average
 3-WMA Forecast Accuracy
53.5
MAE   7.64
7
547.25
MSE   78.18
7
44.15
MAPE   6.31%
7
The 3-WMA approach (with weights of .2, .3,
and .5) provided accuracy very close to that of the
3-MA approach for this data.
13 – 130

If Rosco Drugs uses exponential smoothing
to forecast sales, which value for the smoothing
constant α = .1 or .8, gives better forecasts?
What are the resulting MAE, MSE, and MAPE values?

13 – 131
Example: Exponential
Smoothing
F2 = D1 = 110
F3 = .1D2 + .9F2 = .1(115) + .9(110) = 110.50
F4 = .1D3 + .9F3 = .1(125) + .9(110.5) = 111.95
F5 = .1D4 + .9F4 = .1(120) + .9(111.95) = 112.76
F6 = .1D5 + .9F5 = .1(125) + .9(112.76) = 113.98
F7 = .1D6 + .9F6 = .1(120) + .9(113.98) = 114.58
F8 = .1D7 + .9F7 = .1(130) + .9(114.58) = 116.12
F9 = .1D8 + .9F8 = .1(115) + .9(116.12) = 116.01
F10= .1D9 + .9F9 = .1(110) + .9(116.01) = 115.41
13 – 132
F2 = = 110
F3 = .8(115) + .2(110) = 114.00
F4 = .8(125) + .2(114) = 122.80
F5 = .8(120) + .2(122.80) = 120.56
F6 = .8(125) + .2(120.56) = 124.11
F7 = .8(120) + .2(124.11) = 120.82
F8 = .8(130) + .2(120.82) = 128.16
F9 = .8(115) + .2(128.16) = 117.63
F10= .8(110) + .2(117.63) = 111.53
13 – 133
Example: Exponential Smoothing (= .1)

5.00 5.00 25.00 4.35

14.50 14.50 210.25 11.60
8.05 8.05 64.80 6.71
12.24 12.24 149.94 9.79
6.02 6.02 36.25 5.02
15.42 15.42 237.73 11.86
-1.12 1.12 1.26 0.97
-6.01 6.01 36.12 5.46
14.59 14.59 212.87 11.22
Total 82.95 974.22 66.98
13 – 134
Example: Exponential Smoothing (α = .1)
 Forecast Accuracy
82.95
MAE   9.22
9
974.22
MSE   108.25
9
66.98
MAPE   7.44%
9
Exponential smoothing (with  = .1) provided

less accurate forecasts than the 3-MA approach.
13 – 135

5.00 5.00 25.00 4.35

11.00 11.00 121.00 8.80
-2.20 2.20 7.84 1.83
4.44 4.44 19.71 3.55
-4.11 4.11 16.91 3.43
9.18 9.18 84.23 7.06
-13.16 13.16 173.30 11.44
-7.63 7.63 58.26 6.94
18.47 18.47 341.27 14.21
Total 75.19 847.52 61.61
13 – 136
 Forecast Accuracy
75.19
MAE   8.35
9
847.52
MSE   94.17
9
61.61
MAPE   6.85%
9
Exponential smoothing (with  = .8) provided
more accurate forecasts than ES with  = .1, but
less accurate than the 3-MA.
13 – 137
Comparison of Forecast Error
Rounded Absolute Rounded Absolute
Actual Forecast Deviation Forecast Deviation
Tonnage with for with for
Quarter Unloaded  = .10  = .10  = .50  = .50
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
13 – 138
∑ |deviations|
MADActual
= Forecast Deviation Forecast Deviation
Tonnage n
with for with for
1
For  =
180
.10 175 5.00 175 5.00
2 168 = 82.45/8
175.5 = 10.31
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For 175
= .50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 = 98.62/8
175.02 = 12.33
29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
13 – 139
∑ (forecast
Rounded
errors) 2
Absolute Rounded Absolute
MSE = Actual Forecast Deviation Forecast Deviation
Tonnage n
with for with for
1
For  =
180
.10 175 5.00 175 5.00
2 = 1,526.54/8
168 175.5 = 190.82
7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For 175
= .50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 = 1,561.91/8
205 175.02 = 195.24
29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
13 – 140
n
∑100|deviation
Rounded i|/actual
Absolute Rounded
i Absolute
MAPE = i=1
Quarter Unloaded  = .10 n  = .10  = .50  = .50
1
For 180
 = .10 175 5.00 175 5.00
2 168 = 44.75/8
175.5 = 7.50
5.59% 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 For 175
= .50 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 = 54.05/8
175.02 =29.98
6.76% 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.24
13 – 141
1 180 175 5.00 175 5.00
2 168 175.5 7.50 177.50 9.50
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.30
82.45 98.62
MAD 10.31 12.33
MSE 190.82 195.24
MAPE 5.59% 6.76%
13 – 142
Including a Trend(Holt’s Method)
 A trend in a time series is a systematic

increase or decrease in the average of the
series over time
 The forecast can be improved by
calculating an estimate of the trend
 Trend-adjusted exponential smoothing
requires two smoothing constants
13 – 143
Exponential Smoothing with Trend
Adjustment
When a trend is present, exponential

smoothing must be modified
Forecast Exponentially Exponentially

including (FITt+1)= smoothed (Ft) + smoothed (Tt)
trend forecast trend
13 – 144
Including a Trend
 For each period, we calculate the At (average) and the Tt
(trend):
At = α(Demand this period)
+ (1 – α)(Average last period + Trend estimate last period)
At = αDt + (1 – α)(At–1 + Tt–1)
Tt = β(Average this period – Average last period)
+ (1 – β)(Trend estimate last period)
Tt = β(At – At–1) + (1 – β)Tt–1
Ft+1 = At + Tt
where
At =exponentially smoothed average(estimate) of the series in period t
Tt =exponentially smoothed average of the trend in period t (trend
estimate)
α =smoothing parameter for the average, with a value between 0 and 1
β =smoothing parameter for the trend, with a value between 0 and 1
Ft+1 =forecast for period t + 1
13 – 145
Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (Dt) Estimate, At Trend Estimate, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24
6 21
7 31
8 28
9 36
10
Table 4.1
13 – 146
Adjustment Example
Forecast
Month(t) Demand (Dt) Estimate, At Trend Estimate, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24 Step 1: Forecast for Month 2
6 21
7 31 A2 = D1 + (1 - )(A1 + T1)
8 28
9 36
A2 = (.2)(12) + (1 - .2)(11 + 2)
10 = 2.4 + 10.4 = 12.8 units
Table 4.1
13 – 147
Adjustment Example
Forecast
Month(t) Demand (Dt) Forecast, At Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80
3 20
4 19
5 24 Step 2: Trend Estimate for Month 2
6 21
7 31 T2 = (A2 - A1) + (1 - )T1
8 28
9 36
T2 = (.4)(12.8 - 11) + (1 - .4)(2)
10 = .72 + 1.2 = 1.92 units
Table 4.1
13 – 148
Adjustment Example
Forecast
1 12 11 2 13.00
2 17 12.80 1.92
3 20
4 19
5 24 Step 3: Calculate FIT for Month 2
6 21
7 31 FIT2 = A2 + T2
8 28
FIT2 = 12.8 + 1.92
9 36
10 = 14.72 units
Table 4.1
13 – 149
Adjustment Example
Forecast
1 12 11 2 13.00
2 17 12.80 1.92 14.72
3 20 15.18 2.10 17.28
4 19 17.82 2.32 20.14
5 24 19.91 2.23 22.14
6 21 22.51 2.38 24.89
7 31 24.11 2.07 26.18
8 28 27.14 2.45 29.59
9 36 29.28 2.32 31.60
10 32.48 2.68 35.16
Table 4.1
13 – 150
Adjustment Example
35 –
Actual demand (At)
30 –
Product demand
25 –
20 –
15 –
10 –
Forecast including trend (FITt)
with  = .2 and  = .4
5 –
0 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Figure 4.3
Time (month)
13 – 151
Using Trend-Adjusted Exponential
Smoothing
EXAMPLE 13.4
 Medanalysis, Inc., provides medical laboratory services
 Managers are interested in forecasting the number of blood
analysis requests per week
 There has been a national increase in requests for standard
blood tests
 Medanalysis recently ran an average of 28 blood tests per
week and the trend has been about three additional patients
per week
 This week’s demand was for 27 blood tests
 We use α = 0.20 and β = 0.20 to calculate the forecast for
next week
13 – 152
Smoothing
SOLUTION
A0 = 28 patients and T0 = 3 patients
The forecast for week 2 (next week) is
A1 = 0.20(27) + 0.80(28 + 3) = 30.2
T1 = 0.20(30.2 – 28) + 0.80(3) = 2.8
F2 = 30.2 + 2.8 = 33 blood tests
If the actual number of blood tests requested in week 2
proved to be 44, the updated forecast for week 3 would be
A2 = 0.20(44) + 0.80(30.2 + 2.8) = 35.2

T2 = 0.2(35.2 – 30.2) + 0.80(2.8) = 3.2
F3 = 35.2 + 3.2 = 38.4 or 38 blood tests
13 – 153
Smoothing
TABLE 13.1 | FORECASTS FOR MEDANALYSIS USING THE TREND-ADJUSTED EXPONENTIAL
| SMOOTHING MODEL
Calculations to Forecast Arrivals for Next Week
Smoothed Trend
Forecast for This Week
Week Arrivals Average Average Forecast Error
(Forecast including Trend)
(estimate) (estimate)
0 28 28.00 3.00
1 27
2 44
3 37
4 35
5 53
6 38
7 57
8 61
9 39
10 55
11 54
12 52
13 60
14 60
15 75
13 – 154
Smoothing
TABLE 13.1 | FORECASTS FOR MEDANALYSIS USING THE TREND-ADJUSTED EXPONENTIAL
| SMOOTHING MODEL
Calculations to Forecast Arrivals for Next Week
Smoothed Trend
Week Arrivals Forecast for This Week Forecast Error
Average Average
0 28 28.00 3.00
1 27 30.20 2.84 28.00 + 3.00 = 31.00 –4
2 44 35.23 3.28 30.20 + 2.84 = 33.04 10.96
3 37 38.21 3.22 35.23 + 3.28 = 38.51 –1.51
4 35 40.14 2.96 38.21 + 3.22 = 41.43 –6.43
5 53 45.08 3.36 40.14 + 2.96 = 43.10 9.90
6 38 46.35 2.94 45.08 + 3.36 = 48.44 –10.44
7 57 50.83 3.25 46.35 + 2.94 = 49.29 7.71
8 61 55.46 3.52 50.83 + 3.25 = 54.08 6.92
9 39 54.99 2.72 55.46 + 3.52 = 58.98 –19.98
10 55 57.17 2.62 54.99 + 2.72 = 57.71 –2.71
11 54 58.63 2.38 57.17 + 2.62 = 59.79 –5.79
12 52 59.21 2.02 58.63 + 2.38 = 61.01 –9.01
13 60 60.99 1.97 59.21 + 2.02 = 61.23 –1.23
14 60 62.37 1.86 60.99 + 1.97 = 62.96 –2.96
15 75 66.38 2.29 62.37 + 1.86 = 64.23 10.77
13 – 155
Smoothing
80 –
Trend-adjusted
70 – forecast
Patient arrivals
60 –
50 –
Actual blood
test requests
40 –
30 –
| | | | | | | | | | | | | | | |
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Week
Figure 13.5 – Trend-Adjusted Forecast for Medanalysis
13 – 156
Application 13.2
The forecaster for Canine Gourmet dog breath fresheners
estimated (in March) the sales average to be 300,000 cases sold
per month and the trend to be +8,000 per month. The actual
sales for April were 330,000 cases. What is the forecast for May,
assuming α = 0.20 and β = 0.10?
AApr = αDMar + (1 – α)(AMar + TMar)

= 0.20(330,000) + 0.80(300,000 + 8,000) = 312,400 cases
TApr = β(AApr – AMar) + (1 – β)TMar
= 0.10(312,400 – 300,000) + 0.90(8,000) = 8,440 cases
Forecast for May = AApr + pTApr
= 312,400 + (1)(8,440) = 320,840 cases
13 – 157
Application 13.2
Suppose you also wanted the forecast for July, three months
ahead. To make forecasts for periods beyond the next period,
we multiply the trend estimate by the number of additional
periods that we want in the forecast and add the results to the
current average.
Forecast for July = AApr + pTApr
= 312,400 + (3)(8,440) = 337,720 cases
13 – 158
Seasonal Patterns
 Seasonal patterns are regularly repeated

upward or downward movements in
demand measured in periods of less than
one year
 Account for seasonal effects by using one
of the techniques already described but to
limit the data in the time series to those
periods in the same season
 This approach accounts for seasonal
effects but discards considerable
information on past demand
13 – 159
Multiplicative Seasonal Method
Multiplicative seasonal method, whereby seasonal

factors are multiplied by an estimate of the average
demand to arrive at a seasonal forecast
1. For each year, calculate the average demand for
each season by dividing annual demand by the
number of seasons per year
2. For each year, divide the actual demand for each
season by the average demand per season,
resulting in a seasonal index for each season
3. Calculate the average seasonal index for each
season using the results from Step 2
4. Calculate each season’s forecast for next year
13 – 160
Seasonal Variations In Data
Steps in the process:
1. Find average historical demand for each season
2. Compute the average demand over all seasons
3. Compute a seasonal index for each season
4. Estimate next year’s total demand
5. Divide this estimate of total demand by the
number of seasons, then multiply it by the
seasonal index for that season
13 – 161
Seasonal Index Example
Demand Average Average Seasonal
Month 2007 2008 2009 2007-2009 Monthly Index
Jan 80 85 105 90 94
Feb 70 85 85 80 94
Mar 80 93 82 85 94
Apr 90 95 115 100 94
May 113 125 131 123 94
Jun 110 115 120 115 94
Jul 100 102 113 105 94
Aug 88 102 110 100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 75 72 83 80 94
Dec 82 78 80 80 94
13 – 162
Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94
Mar 80 93 Average
82 85 monthly 94
2007-2009 demand
Seasonal90index95= 115
Apr 100 94
Average monthly demand
May 113 125 131 123 94
= 90/94 = .957
Jun 110 115 120 115 94
Jul 100 102 113 105 94
Aug 88 102 110 100 94
Sept 85 90 95 90 94
Oct 77 78 85 80 94
Nov 75 72 83 80 94
Dec 82 78 80 80 94
13 – 163
Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90 95 115 100 94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 115 94 1.223
Jul 100 102 113 105 94 1.117
Aug 88 102 110 100 94 1.064
Sept 85 90 95 90 94 0.957
Oct 77 78 85 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851
13 – 164
Jan 80 85 105 90 94 0.957
Feb 70 85 Forecast
85 for802010 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90Expected
95 115annual demand
100 = 1,200
94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 1,200 115 94 1.223
Jul
Jan
100 102 113 12
x .957 = 96 94
105 1.117
Aug 88 102 110 100 94 1.064
1,200
Sept 85 Feb
90 95 x90.851 = 85 94 0.957
Oct 77 78 85 12 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851
13 – 165
2010 Forecast
140 – 2009 Demand
130 – 2008 Demand
2007 Demand
120 –
Demand
110 –
100 –
90 –
80 –
70 –
| | | | | | | | | | | |
Time
13 – 166
Using the Multiplicative Seasonal
Method
EXAMPLE 13.5
The manager of the Stanley Steemer carpet cleaning company
needs a quarterly forecast of the number of customers
expected next year. The carpet cleaning business is seasonal,
with a peak in the third quarter and a trough in the first quarter.
Following are the quarterly demand data from the past 4 years:
Quarter Year 1 Year 2 Year 3 Year 4
1 45 70 100 100
2 335 370 585 725
3 520 590 830 1160
4 100 170 285 215
Total 1000 1200 1800 2200
The manager wants to forecast customer demand for each

quarter of year 5, based on an estimate of total year 5 demand
of 2,600 customers
13 – 167
Method
SOLUTION
Figure 13.6 shows the solution using the Seasonal Forecasting
Solver in OM Explorer. For the Inputs the forecast for the total
demand in year 5 is needed. The annual demand has been
increasing by an average of 400 customers each year (from
1,000 in year 1 to 2,200 in year 4, or 1,200/3 = 400). The
computed forecast demand is found by extending that trend,
and projecting an annual demand in year 5 of 2,200 + 400 =
2,600 customers.
The Results sheet shows quarterly forecasts by multiplying the
seasonal factors by the average demand per quarter. For
example, the average demand forecast in year 5 is 650
customers (or 2,600/4 = 650). Multiplying that by the seasonal
index computed for the first quarter gives a forecast of 133
customers (or 650 × 0.2043 = 132.795).
13 – 168
Method
Figure 13.6 – Demand Forecasts

Using the Seasonal
Forecast Solver of OM
Explorer
13 – 169
Application 13.3
Suppose the multiplicative seasonal method is being used to
forecast customer demand. The actual demand and seasonal
indices are shown below.
Year 1 Year 2
Average
Quarter Demand Index Demand Index Index
1 100 0.40 192 0.64 0.52
2 400 1.60 408 1.36 1.48
3 300 1.20 384 1.28 1.24
4 200 0.80 216 0.72 0.76
Average 250 300
13 – 170
Application 13.3
If the projected demand for Year 3 is 1320 Quarter Average Index

units, what is the forecast for each quarter 1 0.52
of that year? 2 1.48
3 1.24
1320 units ÷ 4 quarters = 330 units 4 0.76
Forecast for Quarter 1 = 0.52(330) ≈ 172 units
13 – 171
Seasonal Patterns
(a) Multiplicative pattern

Demand
| | | | | | | | | | | | | | | |
0 2 4 5 8 10 12 14 16
Period
13 – 172
Seasonal Patterns
(b) Additive pattern

Demand
| | | | | | | | | | | | | | | |
0 2 4 5 8 10 12 14 16
Period
13 – 173
Choosing a Time-Series Method
 Forecast performance is determined by forecast

errors
 Forecast errors detect when something is going
wrong with the forecasting system
 Forecast errors can be classified as either bias
errors or random errors
 Bias errors are the result of consistent mistakes
 Random error results from unpredictable factors
that cause the forecast to deviate from the actual
demand
13 – 174
Measures of Forecast Error
(Et – E )2
CFE = Et =
n–1
CFE |Et |
E= n MAD =
n
Et2 (|Et |/ Dt)(100)

MSE = n MAPE = n
13 – 175
Calculating Forecast Errors
EXAMPLE 13.6
The following table shows the actual sales of upholstered
chairs for a furniture manufacturer and the forecasts made for
each of the last eight months. Calculate CFE, MSE, σ, MAD, and
MAPE for this product.
Month Demand Forecast Error Error2 Absolute Absolute % Error (|

t Dt Ft Et Et2 Error |Et| Et|/Dt)(100)
1 200 225 –
25
2 240 220 20
3 300 285 15
4 270 290 –
20
5 230 250 – 400 20 8.7
20
6 260 240 20 400 20 7.7
7 210 250 40 1,600 40 19.0
8 275 240 35 1,225 35 12.7
Total – 5,275 195 13 – 176
EXAMPLE 13.6
The following table shows the actual sales of upholstered
chairs for a furniture manufacturer and the forecasts made for
each of the last eight months. Calculate CFE, MSE, σ, MAD, and
MAPE for this product.
Month Demand Forecast Error Error2 Absolute Absolute % Error (|

t Dt Ft Et Et2 Error |Et| Et|/Dt)(100)
1 200 225 – 625 25
25 12.5%
2 240 220 20 400 20 8.3
3 300 285 15 225 15 5.0
4 270 290 – 400 20 7.4
20
5 230 250 – 400 20 8.7
20
6 260 240 20 400 20 7.7
7 210 250 40 1,600 40 19.0
8 275 240 35 1,225 35 12.7
Total – 5,275 195 13 – 177
SOLUTION
Using the formulas for the measures, we get
Cumulative forecast error (bias):
CFE = –15
Average forecast error (mean bias):

CFE
E = n = –1.875
Mean squared error:

Et2 5,275
MSE = =
n 8
13 – 178
Standard deviation:
= [Et – (–1.875)]2 = 27.4

n–1
Mean absolute deviation:
|Et | 195
MAD = n = = 24.4
8
Mean absolute percent error:
(|Et |/ Dt)(100) 81.3%

MAPE = = = 10.2%
n 8
13 – 179
A CFE of –15 indicates that the forecast has a slight bias to

overestimate demand. The MSE, σ, and MAD statistics provide
measures of forecast error variability. A MAD of 24.4 means
that the average forecast error was 24.4 units in absolute value.
The value of σ, 27.4, indicates that the sample distribution of
forecast errors has a standard deviation of 27.4 units. A MAPE
of 10.2 percent implies that, on average, the forecast error was
about 10 percent of actual demand. These measures become
more reliable as the number of periods of data increases.
13 – 180
Monitoring and Controlling
Forecasts
Tracking Signal
 Measures how well the forecast is
predicting actual values
 Ratio of cumulative forecast errors to
mean absolute deviation (MAD)
 Good tracking signal has low values
 If forecasts are continually high or low, the
forecast has a bias error
13 – 181
Monitoring and Controlling
Forecasts
Tracking Cumulative error

signal =
MAD
∑(Actual demand in
period i -
Forecast demand
Tracking in period i)
signal = ∑|Actual - Forecast|/n)
13 – 182
Tracking Signal
Signal exceeding limit

Tracking signal
Upper control limit
+
Acceptable
0 MADs range
– Lower control limit
Time
13 – 183
Tracking Signal Example
Cumulative
Absolute Absolute
Actual Forecast Cumm Forecast Forecast
Qtr Demand Demand Error Error Error Error MAD
1 90 100 -10 -10 10 10 10.0

2 95 100 -5 -15 5 15 7.5
3 115 100 +15 0 15 30 10.0
4 100 110 -10 -10 10 40 10.0
5 125 110 +15 +5 15 55 11.0
6 140 110 +30 +35 30 85 14.2
13 – 184
Tracking Signal Example
Cumulative
Tracking Absolute Absolute
Actual Signal
Forecast Cumm Forecast Forecast
Qtr (CummDemand
Demand Error/MAD)
Error Error Error Error MAD
1 90-10/10
100= -1 -10 -10 10 10 10.0
2 95
-15/7.5
100= -2 -5 -15 5 15 7.5
3 115 0/10
100= 0 +15 0 15 30 10.0
4 100-10/10
110= -1 -10 -10 10 40 10.0
5 125
+5/11110
= +0.5+15 +5 15 55 11.0
6 140
+35/14.2
110= +2.5
+30 +35 30 85 14.2
The variation of the tracking signal

between -2.0 and +2.5 is within acceptable
limits
13 – 185
Tracking Signals
 A measure that indicates whether a method of

forecasting is accurately predicting actual
changes in demand
 Useful when forecast systems are computerized
because it alerts analysts when forecast are
getting far from desirable limits
CFE
Tracking signal =
MAD
 Each period, the CFE and MAD are updated to

reflect current error, and the tracking signal is
compared to some predetermined limits
13 – 186
Tracking Signals
 The MAD can be calculated as a weighted average

determined by the exponential smoothing method
MADt = α|Et| + (1 – α)MADt-1
 If forecast errors are normally distributed with a

mean of 0, the relationship between σ and MAD is
simple
σ = ( /2)(MAD)  1.25(MAD)
MAD = 0.7978σ  0.8σ
13 – 187
Tracking Signals
Out of control
+2.0 –
Control limit
+1.5 –
+1.0 –
Tracking signal
+0.5 –
0–
–0.5 –
–1.0 –
Control limit
–1.5 –
| | | | |
0 5 10 15 20 25
Observation number
Figure 13.7 – Tracking Signal
13 – 188
Criteria for Selecting Methods
 Criteria to use in making forecast method and

parameter choices include
1. Minimizing bias
2. Minimizing MAPE, MAD, or MSE
3. Meeting managerial expectations of changes in the
components of demand
4. Minimizing the forecast error last period
 Statistical performance measures can be used
1. For projections of more stable demand patterns, use
lower α and β values or larger n values
2. For projections of more dynamic demand patterns try
higher α and β values or smaller n values
13 – 189
Using Multiple Techniques
 Combination forecasts are forecasts that

are produced by averaging independent
forecasts based on different methods or
different data or both
 Focus forecasting selects the best forecast
from a group of forecasts generated by
individual techniques
13 – 190
Forecasting as a Process
 A typical forecasting process

Step 1: Adjust history file
Step 2: Prepare initial forecasts
Step 3: Consensus meetings and collaboration
Step 4: Revise forecasts
Step 5: Review by operating committee
Step 6: Finalize and communicate
 Forecasting is not a stand-alone activity,
but part of a larger process
13 – 191
Forecasting as a Process
Adjust Prepare Consensus

history initial meetings and
file forecasts collaboration
1 2 3
Finalize Review by
Revise
and Operating
forecasts
communicate Committee
4
6 5
13 – 192
Forecasting Principles
TABLE 13.2 | SOME PRINCIPLES FOR THE FORECASTING PROCESS
 Better processes yield better forecasts

 Demand forecasting is being done in virtually every company, either formally
or informally. The challenge is to do it well—better than the competition
 Better forecasts result in better customer service and lower costs, as well as
better relationships with suppliers and customers
 The forecast can and must make sense based on the big picture, economic
outlook, market share, and so on
 The best way to improve forecast accuracy is to focus on reducing forecast
error
 Bias is the worst kind of forecast error; strive for zero bias
 Whenever possible, forecast at more aggregate levels. Forecast in detail only
where necessary
 Far more can be gained by people collaborating and communicating well
than by using the most advanced forecasting technique or model
13 – 193
Solved Problem 1
The monthly demand for units manufactured by the Acme
Rocket Company has been as follows:
Month Units Month Units
May 100 September 105
June 80 October 110
July 110 November 125
August 115 December 120
a. Use the exponential smoothing method to forecast June to

January. The initial forecast for May was 105 units; α = 0.2.
b. Calculate the absolute percentage error for each month
from June through December and the MAD and MAPE of
forecast error as of the end of December.
c. Calculate the tracking signal as of the end of December.
What can you say about the performance of your
forecasting method?
13 – 194
Solved Problem 1
SOLUTION
a.
Calculating Forecast for Next

Current Month, t Month Ft+1 = αDt + (1 – α)Ft Forecast for Month t + 1
May 0.2(100) + 0.8(105) = 104.0 or 104 June
June 0.2(80) + 0.8(104.0) = 99.2 or 99 July
July 0.2(110) + 0.8(99.2) = 101.4 or 101 August
August 0.2(115) + 0.8(101.4) = 104.1 or 104 September
September 0.2(105) + 0.8(104.1) = 104.3 or 104 October
October 0.2(110) + 0.8(104.3) = 105.4 or 105 November
November 0.2(125) + 0.8(105.4) = 109.3 or 109 December
December 0.2(120) + 0.8(109.3) = 111.4 or 111 January
13 – 195
Solved Problem 1
b.
Absolute
Actual Percent
Demand, Forecast, Error, Absolute Error,
Month, t Dt Ft Et = Dt – Ft Error, |Et| (|Et|/Dt)(100)
June 80 104 –24 24 30.0%
July 110 99 11 11 10.0
August 115 101 14 14 12.0
September 105 104 1 1 1.0
October 110 104 6 6 5.5
November 125 105 20 20 16.0
December 120 109 11 11 9.2
Total 765 39 87 83.7%
|Et | 87 (|Et |/Dt)(100) 83.7%

MAD = n = = 12.4 MAPE = n = = 11.96%
7 7
13 – 196
Solved Problem 1
c. As of the end of December, the cumulative sum of forecast
errors (CFE) is 39. Using the mean absolute deviation
calculated in part (b), we calculate the tracking signal:
CFE 39
Tracking signal = = = 3.14
MAD 12.4
The probability that a tracking signal value of 3.14 could be

generated completely by chance is small. Consequently, we
should revise our approach. The long string of forecasts
lower than actual demand suggests use of a trend method.
13 – 197
Solved Problem 2
The Polish General’s Pizza Parlor is a small restaurant catering
to patrons with a taste for European pizza. One of its
specialties is Polish Prize pizza. The manager must forecast
weekly demand for these special pizzas so that he can order
pizza shells weekly. Recently, demand has been as follows:
Week Pizzas Week Pizzas

June 2 50 June 23 56
June 9 65 June 30 55
June 16 52 July 7 60
a. Forecast the demand for pizza for June 23 to July 14 by

using the simple moving average method with n = 3 then
using the weighted moving average method with and
weights of 0.50, 0.30, and 0.20, with 0.50.
b. Calculate the MAD for each method.
13 – 198
Solved Problem 2
SOLUTION
a. The simple moving average method and the weighted
moving average method give the following results:
Current Simple Moving Average Weighted Moving Average Forecast

Week Forecast for Next Week for Next Week
52 + 65 + 50 [(0.5  52) + (0.3  65) + (0.2  50)] = 55.5 or 56
June 16 = 55.7 or 56
3
56 + 52 + 65
June 23 = 57.7 or 58 [(0.5  56) + (0.3  52) + (0.2  65)] = 56.6 or 57
3
55 + 56 + 52
June 30 = 54.3 or 54 [(0.5  55) + (0.3  56) + (0.2  52)] = 54.7 or 55
3
60 + 55 + 56
July 7 = 57.0 or 57 [(0.5  60) + (0.3  55) + (0.2  56)] = 57.7 or 58
3
13 – 199
Solved Problem 2
b. The mean absolute deviation is calculated as follows:
Simple Moving Average Weighted Moving Average
Actual Forecast for Forecast for

Week Demand This Week Absolute Errors |Et| This Week Absolute Errors |Et|
June 23 56 56 |56 – 56| = 0 56 |56 – 56| = 0
June 30 55 58 |55 – 58| = 3 57 |55 – 57| = 2
July 7 60 54 |60 – 54| = 6 55 |60 – 55| = 5
0+3+6 0+2+2
MAD = =3 MAD = = 2.3
3 3
For this limited set of data, the weighted moving average

method resulted in a slightly lower mean absolute deviation.
However, final conclusions can be made only after analyzing
much more data.
13 – 200
Solved Problem 3
Chicken Palace periodically offers carryout five-piece chicken
dinners at special prices. Let Y be the number of dinners sold
and X be the price. Based on the historical observations and
calculations in the following table, determine the regression
equation, correlation coefficient, and coefficient of
determination. How many dinners can Chicken Palace expect
to sell at $3.00 each?
Observation Price (X) Dinners Sold (Y)
1 $2.70 760
2 $3.50 510
3 $2.00 980
4 $4.20 250
5 $3.10 320
6 $4.05 480
Total $19.55 3,300
Average 550
$3.258
13 – 201
Solved Problem 3
SOLUTION
We use the computer to calculate the best values of a, b, the
correlation coefficient, and the coefficient of determination
a= 1,454.60
b= –277.63
r= –0.84
r2= 0.71
The regression line is
Y = a + bX = 1,454.60 – 277.63X
For an estimated sales price of $3.00 per dinner
Y = a + bX = 1,454.60 – 277.63(3.00)
= 621.71 or 622 dinners
13 – 202
Solved Problem 4
The Northville Post Office experiences a seasonal pattern of
daily mail volume every week. The following data for two
representative weeks are expressed in thousands of pieces of
mail:
Day Week 1 Week 2
Sunday 5 8
Monday 20 15
Tuesday 30 32
Wednesday 35 30
Thursday 49 45
Friday 70 70
Saturday 15 10
Total 224 210
a. Calculate a seasonal factor for each day of the week.

b. If the postmaster estimates 230,000 pieces of mail to be
sorted next week, forecast the volume for each day.
13 – 203
Solved Problem 4
SOLUTION
a. Calculate the average daily mail volume for each week. Then
for each day of the week divide the mail volume by the
week’s average to get the seasonal factor. Finally, for each
day, add the two seasonal factors and divide by 2 to obtain
the average seasonal factor to use in the forecast.
13 – 204
Solved Problem 4
Week 1 Week 2
Average
Mail Seasonal Factor Mail Seasonal Factor Seasonal Factor
Day Volume (1) Volume (2) [(1) + (2)]/2
Sunday 5 5/32 = 0.15625 8 8/30 = 0.26667 0.21146
Monday 20 20/32 = 0.62500 15 15/30 = 0.50000 0.56250
Tuesday 30 30/32 = 0.93750 32 32/30 = 1.06667 1.00209
Wednesday 35 35/32 = 1.09375 30 30/30 = 1.00000 1.04688
Thursday 49 49/32 = 1.53125 45 45/30 = 1.50000 1.51563
Friday 70 70/32 = 2.18750 70 70/30 = 2.33333 2.26042
Saturday 15 15/32 = 0.46875 10 10/30 = 0.33333 0.40104
Total 224 210
224/7 =
Average 210/7 = 30
32
13 – 205
Solved Problem 4
b. The average daily mail volume is expected to be
230,000/7 = 32,857 pieces of mail. Using the average
seasonal factors calculated in part (a), we obtain the
following forecasts:
Day Calculations Forecast

Sunday 0.21146(32,857) = 6,948
Monday 0.56250(32,857) = 18,482
Tuesday 1.00209(32,857) = 32,926
Wednesday 1.04688(32,857) = 34,397
Thursday 1.51563(32,857) = 49,799
Friday 2.26042(32,857) = 74,271
Saturday 0.40104(32,857) = 13,177
Total 230,000
13 – 206

Forecasting

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Forecasting

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Forecasting Demand

 Forecasting is a process of predicting a future event

 Medium/long range forecasts deal with

Introduction – Growth – Maturity – Decline

Best period to Practical to Cost

Boeing 787 Analog

critical process changes, more

Human Resources – Hiring, training, laying

1. Determine the use of the forecast

Forecasts are seldom perfect

Used when situation is uncertain and little

Used when situation is ‘stable’ and

1. Jury of executive opinion

3. Sales force composite

 Involves small group of high-level

 Each salesperson projects his or

 Ask customers about purchasing

 Set of evenly spaced numerical data

 We will focus on time series methods, and

 A time series is a sequence of

 A useful first step in identifying the

 The common types of data patterns that can be

(a) Horizontal: Data cluster about a horizontal line

(b) Trend: Data consistently increase or decrease

(c) Seasonal: Data consistently show peaks and valleys

• Some time series include a combination

• In such cases we need to use a

 Choosing a forecasting system

 Key factor in choosing the proper

 The underlying pattern in the time series

Actual observation Deviation7

Time period Figure 4.4

Actual observation Deviation7

Deviation3 Least squares method

Time period Figure 4.4

Equations to calculate the regression variables

∑xy - nxy 3,063 - (7)(4)(98.86)

a = y - bx = 98.86 - 10.54(4) = 56.70

∑xy - nxy 3,063 - (7)(4)(98.86)

a = y - bx = 98.86 - 10.54(4) = 56.70

Sales Area Payroll

∑xy - nxy 51.5 - (6)(3)(2.5)

y = ∑y/6 = 15/6 = 2.5 a = y - bx = 2.5 - (.25)(3) = 1.75

y^ = 1.75 + .25x Sales = 1.75 + .25(payroll)

If payroll next year

Sales = 1.75 + .25(6) 2.0 –

 A forecast is just a point estimate of a

where y = y-value of each data

Computationally, this equation is

∑y2 - a∑y - b∑xy

We use the standard error to set up

∑y2 - a∑y - b∑xy = 39.5 - 1.75(15) - .25(51.5)

Sy,x = .306 4.0 –

 How strong is the linear relationship

(c) No correlation: x (d) Perfect negative x

For the Nodel Construction example:

If more than one independent variable is to be

Computationally, this is quite

Figure 13.2 – Linear Regression Line Relative to Actual Data

 The sample correlation coefficient, r

 The standard error of the estimate, syx

Month Sales (thousands of units) Advertising (thousands of $)

The company will spend $1,750 next month on advertising for

The regression equation is