Quantitative methods

for business
CHAPTER 5
FORECASTING
 Chapter Outline

5.1 Introduction
5.2 Types of Forecasts
5.3 Scatter Diagrams
5.4 Measures of Forecast Accuracy
5.5 Time-Series Forecasting Models
5.6 Monitoring and Controlling Forecasts
5.7 Using the Computer to Forecast
Introduction

Why forecasting
are important?
Introduction 8 steps to forecasting:

Step 1: Determine the Step 2: Select the Step 3: Determine the Step 4: Select the
use of the forecast— forecasted items or time horizon of the forecasting model or
objective quantities forecast models

Step 8: Implement Step 7: Make Step 6: Validate the Step 5: Gather the
results the forecast forecasting model data needed to
make the forecast
 Forecasting Models
Forecasting
Techniques

Qualitative Time-Series Causal

Models Methods Methods
judgmental or Predict the future Variables or factors that
subjective factors based on the past. might influence the
Delphi Moving quantity being forecasted
Methods Average, Weighted . Regression
moving average Analysis
Jury of Executive
Exponential
Opinion Smoothing, Multiple
Exponential Regression
smoothing with trend
Sales Force adjustment
Composite
Trend
Projections
Consumer
Market Survey
Decomposition
 Scatter Diagrams

 Wacker Distributors wants to forecast sales for

three different products

RADIO Scatter diagrams are helpful when

YEAR TV CDS
S forecasting time-series data because
1 250 300 110 they depict the relationship between
2 250 310 100 variables.
3 250 320 120
450
4 250 330 140 400
350
5 250 340 170
Annual Sales

300
6 250 350 150 250
200
7 250 360 160 150
100
8 250 370 190 50
0
9 250 380 200 0 2 4 6 8 10 12

10 250 390 190 Time (Years)

 Evaluating Forecasts

Forecast is always wrong, isn’t it?

Forecasts

Demands

What do we do with this information?

 Measures of Forecast Accuracy the last period's actuals are used as
 Using a naïve forecasting model: F = A this period's forecast, without adjusting
t t-1
them or attempting to establish causal
ACTUAL factors.
ABSOLUTE VALUE OF
SALES OF CD FORECAST SALES ERRORS (DEVIATION),
YEAR PLAYERS (At) (Ft) (ACTUAL – FORECAST)
1 110 — —
2 100 110 |100 – 110| = 10
3 120 100 |120 – 110| = 20
4 140 120 |140 – 120| = 20
5 170 140 |170 – 140| = 30
6 150 170 |150 – 170| = 20
7 160 150 |160 – 150| = 10
8 190 160 |190 – 160| = 30
9 200 190 |200 – 190| = 10
10 190 200 |190 – 200| = 10
11 — 190 —
Sum of |errors| = 160
MAD = 160/9 = 17.8

MAD 
 forecast error 
160
 17.8
n 9
 Measures of Forecast Accuracy
 We compare forecasted values with actual values to see how well one model
works or to compare models
Forecast error = Actual value – Forecast value
 One measure of accuracy is the mean absolute deviation (MAD)
MAD

MAD 
 forecast error
n
 There are other popular measures of forecast accuracy
 The mean squared error

MSE 
 ( error) 2

n
 The mean absolute percent error
error
 actual
MAPE  100%
n

 And bias is the average error

bias 
 error
n
TIME SERIES FORECASTING MODELS

What is time series method?

•Predict the future by using historical data.

What is time series data?

•a sequence of numerical data points in
successive order.
TIME SERIES FORECASTING MODELS
DECOMPOSITION OF A TIME-SERIES
If there is a trend or seasonal
1. Trend (T) is the gradual upward or
pattern, we should use the
downward movement of the data over time
techniques:
•Exponential smoothing with
trend
2. Seasonality (S) is a pattern of demand •Trend projections
fluctuations above or below trend line that •Seasonal variations
repeats at regular intervals •Seasonal variations with trend
If both trend and seasonal
components are present, we
3. Cycles (C) are patterns in annual data that
should use:
occur every several years •Decomposition method
•Regression with trend and
seasonal components
No trend, seasonal, or cyclical
4. Random variations (R) are “blips” in the component
data caused by chance and unusual
•Moving average
situations
•Weighted moving average
•Exponential smoothing
TIME SERIES FORECASTING MODELS
DECOMPOSITION OF A TIME-SERIES
Demand for Product or Service

Trend
Component

Seasonal Peaks

Actual
Demand
Line
Average Demand
over 4 Years

| | | |

Year Year Year Year

1 2 3 4
Time
 TIME SERIES FORECASTING MODELS

1. Moving Averages
 used when demand is relatively steady over time

 The next forecast is the average of the most recent n data values from
the time series
 Tend to smooth out short-term irregularities in the data series

Sum of demands in previous n periods

Moving average forecast 
n
Yt  Yt 1  ...  Yt  n1
Ft 1 
n
re
Ftfor
= forecast  1 time period t + 1
Yt in time period t
= actual value
n= number of periods to average
TIME SERIES FORECASTING MODELS
Moving Averages
Wallace Garden Supply’s Three-
Month Moving Average
MONTH ACTUAL SHED SALES THREE-MONTH MOVING AVERAGE
January 10
Forecasted
February 12
values
March 13
April 16 (10 + 12 + 13)/3 = 11.67
May 19 (12 + 13 + 16)/3 = 13.67
June 23 (13 + 16 + 19)/3 = 16.00
(16 + 19 + 23)/3 = 19.33
July 26
(19 + 23 + 26)/3 = 22.67
August 30
(23 + 26 + 30)/3 = 26.33
September 28
(26 + 30 + 28)/3 = 28.00
October 18
(30 + 28 + 18)/3 = 25.33
November 16 (28 + 18 + 16)/3 = 20.67
December 14 (18 + 16 + 14)/3 = 16.00
TIME SERIES FORECASTING MODELS

1. Moving Averages - Example

TIME SERIES FORECASTING MODELS
1. Moving Averages
 TIME SERIES FORECASTING MODELS
2. Weighted Moving Averages
 Weighted moving averages use weights to put
more emphasis on recent periods
 Often used when a trend or other pattern is
emerging

Ft 1 
 ( Weight in period i )( Actual value in period)
 ( Weights )
 Mathematically
w1Yt  w2Yt 1  ...  w nYt  n1
Ft 1 
w1  w2  ...  w n
ere
wi= weight for the ith observation
TIME SERIES FORECASTING MODELS

2. Weighted Moving Averages

 Wallace Garden Supply decides to try a
weighted moving average model to forecast
demand for its Storage Shed
 They decide on the following weighting
scheme
WEIGHTS APPLIED PERIOD
3 Last month
2 Two months ago
1 Three months ago
3 x Sales last month + 2 x Sales two months ago + 1 X Sales three months ago

6
Sum of the weights
TIME SERIES FORECASTING MODELS
2. Weighted Moving Averages
THREE-MONTH WEIGHTED
MONTH ACTUAL SHED SALES MOVING AVERAGE
January 10 Forecasted
February 12 values
March 13
April 16 [(3 X 13) + (2 X 12) + (10)]/6 = 12.17
May 19 [(3 X 16) + (2 X 13) + (12)]/6 = 14.33

June 23 [(3 X 19) + (2 X 16) + (13)]/6 = 17.00

[(3 X 23) + (2 X 19) + (16)]/6 = 20.50
July 26
[(3 X 26) + (2 X 23) + (19)]/6 = 23.83
August 30
[(3 X 30) + (2 X 26) + (23)]/6 = 27.50
September 28
[(3 X 28) + (2 X 30) + (26)]/6 = 28.33
October 18
[(3 X 18) + (2 X 28) + (30)]/6 = 23.33
November 16 [(3 X 16) + (2 X 18) + (28)]/6 = 18.67
December 14 [(3 X 14) + (2 X 16) + (18)]/6 = 15.33
January —
 TIME SERIES FORECASTING MODELS

3. Exponential Smoothing
 Exponential smoothing is easy to use and
requires little record keeping of data
 It is a type of moving average

ecast = Last period’s forecast

+ (Last period’s actual demand
– Last period’s forecast)
Mathematical Ft 1  Ft   (Yt  Ft )
form:

Where  is a weight (or smoothing constant)

constant
with a value between 0 and 1 inclusive
develop trial forecasts with different values of 
and select the  that results in the lowest MAD
TIME SERIES FORECASTING MODELS

3. Exponential Smoothing
 Exponential smoothing forecast for two values of 
ACTUAL
TONNAGE FORECAST FORECAST
QUARTER UNLOADED USING  =0.10 USING  =0.50
1 180 175 (Any reasonable starting figure) 175
2 168 175.5 = 175.00 + 0.10(180 – 175) 177.5
3 159 174.75 = 175.50 + 0.10(168 – 175.50) 172.75
4 175 173.18 = 174.75 + 0.10(159 – 174.75) 165.88
5 190 173.36 = 173.18 + 0.10(175 – 173.18) 170.44
6 205 175.02 = 173.36 + 0.10(190 – 173.36) 180.22
7 180 178.02 = 175.02 + 0.10(205 – 175.02) 192.61
8 182 178.22 = 178.02 + 0.10(180 – 178.02) 186.30
9 ? 178.60 = 178.22 + 0.10(182 – 178.22) 184.15

Port of Baltimore Example

TIME SERIES FORECASTING MODELS
3. Exponential Smoothing
Selecting the Best Value of 
ACTUAL FORECAST ABSOLUTE ABSOLUTE
TONNAGE WITH  = DEVIATIONS FORECAST DEVIATIONS
QUARTER UNLOADED 0.10 FOR  = 0.10 WITH  = 0.50 FOR  = 0.50

1 180 175 175

5….. 5….

2 168 175.5 177.5

7.5.. 9.5..

3 159 174.75 172.75

15.75 13.75

4 175 173.18 165.88

1.82 9.12

5 190 173.36 170.44

16.64 19.56

6 205 175.02 180.22

29.98 24.78

7 180 178.02 192.61

1.98 12.61

8 182
Best178.22
choice 3.78
186.30
4.3..
Sum of absolute deviations
develop trial forecasts82.45
with different values of  98.63
select the  that results in the lowest MAD
andΣ|deviations|
MAD = = 10.31 MAD = 12.33
TIME SERIES FORECASTING MODELS
4. Exponential Smoothing with Trend Adjustment
Forecast including trend (FITt+1) = new forecast (Ft+1) + trend correction (Tt+1)

FITt 1  Ft 1  Tt 1
Ft 1  Ft   Yt  Ft  Tt 1  (1   )Tt   ( Ft 1  Ft )

 high : the forecast more responsive to

changes in trend where
 low : less weight to the recent trend and Tt+1 =smoothed trend for period
tends to smooth out the trend t+1
 Values are generally selected using a Tt =smoothed trend for
trial-and-error approach based on the preceding period
value of the MAD for different values of 
 =trend smooth constant that
 Simple exponential smoothing is often we select
referred to as first-order smoothing
 Trend-adjusted smoothing is called
Ft+1 =simple exponential
second-order,
second-order double smoothing,
smoothing or Holt’s smoothed forecast for period t
method +1
F =forecast for previous period
 4- Exponential Smoothing With Trend Adjustment -Example
An electronics company is selling portable CD players and estimated the demand for the first period and
forecasted the next three periods' adjusted demand using the Adjusted Exponential Smoothing model.
The first periods demand is 50 players and 54 players was used to start the forecast. α= 0.2 and β = 0.7

Step 1: Any reasonable starting

figure to start the process
Step 2:Calculate Ft+1 for period 2 Step 3: Calculate the trend Tt+1 for period 2:
F t+1 = Ft + α(Yt –Ft) T t+1 = β(F t+1 -Ft) + (1- β)Tt
F2 = 50+ 0.2*(54-50) = 50.8 T2 = 0.7(50.8-50)+(1-0.7)*0 = 0.56

Unadjusted Adjusted
Period Demand Forecast Ft Trend Tt Forecast FITt

1 54 50 0 -
2 57 50.8 0.56 51.36
3 44 - - -

Step 4: Calculate the Adjusted FITt:

* α value is 0.2 FITt+1 = F t+1 + Tt+1
** β value is 0.7
FIT2 = 50.8 + 0.56 = 51.36
Practice 1: Moving Average, Weighted moving average, exponential
smoothing, exponential smoothing with trend adjustment
Weighted
Moving Exponential
Moving Smoothed Trend Exp. Smoothing
Periods Sales Average Smoothing
Average T (β=0.7) with Trend Adj.
(n=2) (α=0.3)
(w1=1;w2=2)
Q1/2017 236 230 0 230
231.8= 1.3= 0*(1-
Q2/2017 189 233.1 = 1.3+231.8
230+0.3*(236-230) 0.7)+0.7*(231.8-230)
Q3/2017 245 212.5 204.7 219 -8.6 210.4
Q4/2017 208 217 226.3 226.8 2.9 229.7
Q1/2018 245 226.5 220.3 221.2 -3.1 218.1
Q2/2018 199 226.5 232.7 228.3 4 232.3
Q3/2018 253 222 214.3 219.5 -5 214.5
Q4/2018 213 226 235 229.6 5.6 235.2
Q1/2019 267 233 226.3 224.6 -1.8 222.8
Q2/2019 210 240 249 237.3 8.4 245.7
Q3/2019 273 238.5 229 229.1 -3.2 225.9
Q4/2019 234 241.5 252 242.3 8.3 250.6
Q1/2020 253.5 247 239.8 0.7 240.5
MAD = 23.75 31.94 26.56 30.91
MSE = 667 1112 855 1098
TIME SERIES FORECASTING MODELS

5. Trend Projection (Using Regression)

 Midwestern Manufacturing Company has
experienced the following demand for it’s electrical
generators over the period of 2001 – 2007
YEAR ELECTRICAL GENERATORS SOLD
2014 74
2015 79
Regression coefficient of X b1 10.53571
2016 80 Intercept b0 56.71429

2017 90
2018 105
2019 142
2020 122
2021 ???

Midwestern Manufacturing
Company Example
TIME SERIES FORECASTING MODELS

5. Trend Projection (Using Regression)

 Trend projection fits a trend line to a series of historical data
points
 The line is projected into the future for medium- to long-range
forecasts
 The simplest is a linear model developed using regression
analysis
 The mathematical form is

Yˆ  b0  b1 X

= predicted
Ŷ value
b0= intercept
b1= slope of the line
X= time period (i.e., X = 1, 2, 3, …, n)
TIME SERIES FORECASTING MODELS

5. Trend Projection (Using Regression)

Yˆ  b0  b1 X
Dist7 *  ( X  X )(Y  Y )
b1 
Value of Dependent Variable

Dist5 * (X  X ) 2

Dist6

* Dist3 * b0  Y  b1 X
Dist4
 X  average (mean) of X values
Dist1 * Dist2
* X
n

* Y
 Y  average (mean) of Y values
n

Time
TIME SERIES FORECASTING MODELS

5. Trend Projection (Using Regression)

Notice code
instead of
actual years

Midwestern Manufacturing Company

Example
TIME SERIES FORECASTING MODELS

5. Trend Projection (Using Regression)

r2 says model predicts

about 80% of the
variability in demand

Significance level for

F-test indicates a
definite relationship
 TIME SERIES FORECASTING MODELS
6. Seasonal Variations - How a particular season compares with an average season
without trend - Without trend, found by dividing the average value for a
particular season by the average of all the data
SALES DEMAND
AVERAGE AVERAGE AVERAGE
TWO- YEAR MONTHLY SEASONAL
MONTH YEAR 1 YEAR 2 DEMAND DEMAND INDEX
January 80 100 94 0.957
90
February 85 75 94 0.851
80
March 80 90 94 0.904
85
April 110 90 94 1.064
100
May 115 131 94 1.309
123
June 120 110 94 1.223
115
July 100 110 94 1.117
105
August 110 90
1,128 94
Average 1.064
two-year demand
Average monthly demand = = 94 100
Seasonal index =
12 months Average monthly demand
Suppose the third
September year’s
85 annual
95 demand for answering94machines0.957 to
90
be 1,200 units (one year), what are the monthly demand?
TIME SERIES FORECASTING MODELS
6. Seasonal Variations without trend
We then use the seasonal indices to adjust future forecast in the third year.

1,200 1,200
Jan.  0.957  96 July  1.117  112
12 12
1,200 1,200
Feb.  0.851  85 Aug.  1.064  106
12 12
1,200 1,200
Mar.  0.904  90 Sept.  0.957  96
12 12
1,200 1,200
Apr.  1.064  106 Oct.  0.851  85
12 12
1,200 1,200
May  1.309  131 Nov.  0.851  85
12 12
1,200 1,200
June  1.223  122 Dec.  0.851  85
12 12
TIME SERIES FORECASTING MODELS

7. Seasonal Variations with Trend

 Whenboth trend and seasonal components
are present, the forecasting task is more complex
 Seasonal indices should be computed using a centered moving
average (CMA)
CMA approach
 There are four steps in computing seasonal indices

1. Compute the CMA for each observation (where possible)

2. Compute the seasonal ratio = Observation/CMA for that observation

3. Average seasonal ratios to get seasonal indices

4. If seasonal indices do not add to the number of seasons, multiply

each index by (Number of seasons)/(Sum of indices)
TIME SERIES FORECASTING MODELS
7. Seasonal Variations with Trend
 The following are Turner Industries’ sales figures
for the past three years

QUARTER YEAR 1 YEAR 2 YEAR 3 AVERAGE

1 108 116 123 115.67
2 125 134 142 133.67
3 150 159 168 159.00
4 141 152 165 152.67
Average 131.00 140.25 149.50 140.25

Seasonal
Definite trend pattern
Turner Industries Example
TIME SERIES FORECASTING MODELS
7. Seasonal Variations with Trend
Step 1 Step 2
YEAR QUARTER SALES CMA SEASONAL RATIO = Observation/CMA
for that observation
1 1 108
2 125
3 150 132.000 1.136
4 141 134.125 1.051 The sum of these
2 1 116 136.375 0.851 indices should be the
number of seasons (4)
2 134 138.875 0.965 since an average
3 159 141.125 1.127 season should have an
index of 1. In this
4 152 143.000 1.063 example, the sum is 4.
3 1 123 145.125 0.848 If a sum were not 4, an
adjustment would be
2 142 147.875 0.960 made by multiply each
index by 4 and divide
3 168
this by the sum of the
4 165 indices.
Step 3: Calculate seasonal indices
Index for quarter 1 = I1 = (0.851 + 0.848)/2 = 0.85
 There are two seasonal
ratios for each quarter so Index for quarter 2 = I2 = (0.965 + 0.960)/2 = 0.96
these are averaged to get Index for quarter 3 = I3 = (1.136 + 1.127)/2 = 1.13
the seasonal index
Index for quarter 4 = I4 = (1.051 + 1.063)/2 = 1.06
 TIME SERIES FORECASTING MODELS
7. Seasonal Variations with Trend
Suppose the FOURTH year’s annual demand for 640
UNITS (one year), what are the QUARTERLY demand?

Q1

Q2

Q3

Q4
TIME SERIES FORECASTING MODELS
8. The Decomposition Method of Forecasting

 Decomposition is the process of isolating linear trend

and seasonal factors to develop more accurate forecasts
 There are five steps to decomposition
1. Compute seasonal indices using CMAs
2. Deseasonalize the data by dividing each number by its
seasonal index
3. Find the equation of a trend line using the deseasonalized
data
4. Forecast for future periods using the trend line
5. Multiply the trend line forecast by the appropriate seasonal
index
TIME SERIES FORECASTING MODELS
8. The Decomposition Method of Forecasting
Step 1 Step 2

YEAR QUARTER
SALES SEASONAL DESEASONALIZED
($1,000,000s) INDEX SALES ($1,000,000s)
1 1 108 0.85 127.059
2 125 0.96 130.208
3 150 1.13 132.743
4 141 1.06 133.019
2 1 116 0.85 136.471
2 134 0.96 139.583
3 159 1.13 140.708
4 152 1.06 143.396
3 1 123 0.85 144.706
2 142 0.96 147.917
3 168 1.13 148.673
4 165 1.06 155.660
TIME SERIES FORECASTING MODELS
8. The Decomposition Method of Forecasting
Step 3: Find the equation of a trend line using the deseasonalized data
 Find a trend line using the deseasonalized data

b1 = 2.34 b0 = 124.78
Step 4: Develop a forecast using this trend a multiply the forecast by
the appropriate seasonal index

Ŷ = 124.78 + 2.34X
= 124.78 + 2.34(13)
= 155.2 (forecast before adjustment for
seasonality)
Step 5: Multiply the trend line forecast by the appropriate seasonal
index
Ŷ x I1 = 155.2 x 0.85 = 131.92
TIME SERIES FORECASTING MODELS
9. Regression with Trend and Seasonal
Components
 Multiple regression can be used to forecast both
trend and seasonal components in a time series
 One independent variable is time
 Dummy independent variables are used to represent
the seasons
 The model is an additive decomposition model

Yˆ  a  b1 X 1  b2 X 2  b3 X 3  b4 X 4
where X1 = time periods
X2 = 1 if quarter 2, 0
otherwise
X3 = 1 if quarter 3, 0
otherwise
X4 = 1 if quarter 4, 0
otherwise
TIME SERIES FORECASTING MODELS
9. Regression with Trend and Seasonal
Components
TIME SERIES FORECASTING MODELS
9. Regression with Trend and Seasonal
Components
TIME SERIES FORECASTING MODELS
9. Regression with Trend and Seasonal
Components Intercept
X Variable 1
104.1041667
2.3125

 The resulting regression equation is

X Variable 2 15.6875
X Variable 3 38.70833333
X Variable 4 30.0625

Yˆ  104.1  2.3 X 1  15.7 X 2  38.7 X 3  30.1X 4

 Using the model to forecast sales for the first two

quarters of next year

Ŷ  104.1  2.3(13)  15.7(0)  38.7(0)  30.1(0)  134

Ŷ  104.1  2.3(14 )  15.7(1)  38.7(0)  30.1(0)  152

 Use MAD and MSE to determine the best model

 Monitoring and Controlling Forecasts

 Tracking signals can be used to monitor

the performance of a forecast
 Tacking signals are computed using the
following equation

= RSFE (running sum of forecast

error)/ MAD

where

MAD 
 forecast error
n
 Kimball’s Bakery Example
 Tracking signal for quarterly sales of croissants

TIME FORECAST ACTUAL |FORECAST | CUMULATIVE TRACKING

PERIOD DEMAND DEMAND ERROR RSFE | ERROR | ERROR MAD SIGNAL
1 100 90 –10 –10 10 10 10.0 –1
2 100 95 –5 –15 5 15 7.5 –2
3 100 115 +15 0 15 30 10.0 0
4 110 100 –10 –10 10 40 10.0 –1
5 110 125 +15 +5 15 55 11.0 +0.5
6 110 140 +30 +35 30 85 14.2 +2.5

MAD 
 forecast error 85
  14.2
n 6
RSFE 35
Tracking signal    2.5MADs
MAD 14.2
 Monitoring and Controlling Forecasts
Signal Tripped
Upper Control Limit Tracking Signal
+

Acceptable
0 MADs Range

–
Lower Control Limit

Time

 Positive tracking signals indicate demand is greater than forecast

 Negative tracking signals indicate demand is less than forecast
 Problems are indicated when the signal trips either the upper or lower
predetermined limits  an unacceptable amount of variation
 Limits should be reasonable and may vary from item to item
 Summary
Moving Average:
Yt  Yt 1  ...  Yt  n 1 Where: Ft 1 = forecast for time period t + 1
Ft 1  Yt = actual value in time period t
n
n= number of periods to
average
Weighted Moving Average:
w Y  w2Yt 1  ...  w nYt  n1
Ft 1  1 t where wi= weight for the ith observation
w1  w2  ...  w n

Exponetial Smoothing:
Ft 1  Ft   where
(Yt  Ft )
Ft+1= new forecast (for time period t + 1)
Ft= pervious forecast (for time period t)
= smoothing constant (0 ≤  ≤ 1)
Yt= pervious period’s actual demand
 Summary
Exponetial Smoothing with trend adjustment:
where
FITt 1  Ft 1  Tt 1 Tt+1 = smoothed trend for period t + 1
Tt = smoothed trend for preceding
Ft 1  Ft   Yt  Ft  period
= trend smooth constant that we
Tt 1  (1   )Tt   ( Ft 1  Ft ) select
Ft+1 = simple exponential smoothed
forecast for period t + 1
Trend Projection: Ft = forecast for pervious period
Yˆ  b0  bwhere
1X
Ŷ
= predicted value
X = time period (i.e., X = 1, 2, 3, …, n)
b1 
 ( X  X )(Y  Y )
 X  average (mean) of X values
(X  X ) 2
X
n
b0  Y  b1 X Y
 Y  average (mean) of Y values
n
 Summary
Four steps in computing seasonal indices
1. Compute the CMA for each observation (where possible)
2. Compute the seasonal ratio = Observation/CMA for that observation
3. Average seasonal ratios to get seasonal indices
4. If seasonal indices do not add to the number of seasons, multiply each
index by (Number of seasons)/(Sum of indices)
Five steps to decomposition
1. Compute seasonal indices using CMAs
2. Deseasonalize the data by dividing each number by its seasonal index
3. Find the equation of a trend line using the deseasonalized data
4. Forecast for future periods using the trend line
5. Multiply the trend line forecast by the appropriate seasonal index
Additive decomposition model
X1 = time period
Yˆ  a  b1 X 1  b2 X 2  b3 X 3  b4 X 4 X2, X3, X4 = 1 if quarter 2,3, 4;
0 otherwise
 Homework

Problems: 5-15, 5-18, 5-26, 5-27, 5-31,

5-33, 5-37, 5-38, and others.