Chapter 3 Forecasting PDF

Chapter 03 - Forecasting
CHAPTER 03
FORECASTING
Forecasting is placed early in the text mainly because it is a point of departure. Some instructors like to
emphasize the operations part of operations management and de-emphasize the design part. Other
instructors prefer to blend the two. However, forecasting is an important input for both, and for that
reason, it is presented as early as possible.
Teaching Notes
This is a long chapter, so you may want to be selective about the topics covered to shorten the time
devoted to it. I tend to devote more time to the time series methods than I do to regression analysis, for
several reasons. One is that students often are exposed to regression in their stat course(s). Another is that
time series models are used more than associative models are. Other optional materials that can be
mentioned briefly, but not explored in detail, include trend-adjusted exponential smoothing (mentioned so
that students will realize that exponential smoothing does not work well if there is trend present) and
computation of seasonal relatives (you may want to explain how relatives are used without getting into
how they are derived).
I try to emphasize an intuitive approach to forecasting, with frequent reference to the importance of
plotting the data to assist the decision-maker in determining which forecasting technique may be more
appropriate to use.
In operations management, we forecast a wide range of future events, which could significantly affect the
long-term success of the firm. Most often, the basic need for forecasting arises in estimating customer
demand for a firms products and services. However, we may need aggregate estimates of demand as well
as estimates for individual products. In most cases, a firm will need a long-term estimate of overall
demand as well as a shorter-run estimate of demand for each individual product or service. Short-term
demand estimates for individual products are necessary to determine daily or weekly management of the
firms activities such as scheduling personnel and ordering materials. On the other hand, long-term
estimates of overall or aggregate demand can be used in determining company strategy, planning long-
term capacity and establishing facility location needs of the firm.
Finally, it is important to point out the difference between forecasting and planning. Planning is often in
response to a forecast. A passive response would be to reduce output because of a predicted decrease in
demand, while an active response would be to advertise in an effort to offset the predicted decrease in
demand.
Reading: Gazing at the Crystal Ball
1. Demand forecasting (DF) is part science and part art (intuition) for estimating what future
demand for a product or service will be. The science part uses information technology to generate
demand forecasts using existing data from a variety of sources, e.g., distribution channels, factory
outlets, value-added resellers, historical sales data, and macroeconomic data. The art/intuition
part involves subject matter experts (SMEs) making educated guesses about future demand.
2. A company executive might make bold predictions about future demand to Wall Street analysts to
maintain the companys stock price.
3-1
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
3. An executives comments to Wall Street analysts may result in the company changing its demand
forecast to reflect the comments made by the executive. The result often is excessive inventory
build-up starting at the distribution channels to the upstream suppliers.
Answers to Discussion and Review Questions

1. It depends on the situation at hand. In certain situations, one approach will be superior to the
other.
Quantitative techniques lend themselves to computerization, they are less subject to personal
biases, and they may force managers to quantify information. On the other hand, the results are
only as good as the data, and in many cases, insufficient data exist to use a quantitative technique.
In addition, use of the computer sometimes creates an impression of preciseness, which is
misleading.
2. Poor forecasting leads to poor planning. This could result in offering products and services that
customers do not want. Poor forecasting and planning would negatively affect budgeting and
planning for capacity, sales, production and inventory, labor, purchasing, energy requirements,
capital requirements, and materials requirements.
3. a. Consumer surveys may be invalid if they are not carefully constructed, administered, and
interpreted. Moreover, respondents may be ill informed or otherwise formulate answers that
do not correctly reflect their future actions.
b. Salespeople often tend to be overly optimistic or pessimistic. They may attempt to use
estimates to influence quotas.
c. Committees of managers or executives can be expensive, diffuse responsibility for a forecast,
and reflect the opinions of a few dominant members.
4. Forecasts generally are wrong due to the use of an incorrect model to forecast, random variation,
or unforeseen events.
5. Control limits reveal the bounds of random errors; they enable managers to judge if a forecasting
technique is performing as well as it might (and hence, when a technique should be reevaluated).
6. The relative costs of reevaluating a forecast when nothing is wrong versus not reevaluating it
when something is wrong. (Can also explain in terms of relative costs of Type I and Type II
errors.)
7. MAD focuses on average error while MSE focuses on squared errors. (MSE gives considerably
more weight to large forecast errors.)
8. Exponential smoothing: requires less data storage, gives more weight to recent data, and is easier
to change to make it more responsive to changes in demand.
9. The fewer the periods in a moving average, the greater the responsiveness.
10. The choice of alpha in exponential smoothing depends on how responsive a forecast the manager
desires. This, in turn, relates to the cost of not responding to a real change relative to the cost of
responding to what are merely random variations in the data.
3-2
Education.
11. Of course, the accuracy of your five-day weather forecast will depend on a number of variables
such as time of year, where you live, etc. However, there is one trend that will establish itself and
that is as time passes from the first day to the fifth day, the accuracy of the forecast will decline.
The amount of random variation about the forecast (actual vs. forecast) would increase over time
somewhat like the following:
Weekly cost
Minutes of daytime calls
If the normal random variation inherent in the forecast technique being used is deemed too great,
then try another technique. Note: Students answers will vary depending on what actual data they
obtain.
12. For example, if each average is based on 12 months, as each new data point is added to the
moving average, its counterpart is removed from the other end of the series.
13. Sales indicate how much customers bought, while demand indicates how much they wanted. The
distinction is important when demand exceeds supply, because supply places an upper bound on
the data.
14. A reactive approach takes the forecast as a given while a proactive approach takes an
unacceptable forecast and attempts to alter demand. An example of the reactive approach is a
highway department preparing snow removal equipment for a predicted storm. Another is
evacuation of residents due to hurricane warnings. An example of the proactive approach is
colleges adopting a more aggressive stance towards applicants due to a forecast of a declining
college-age population base. Generally, firms that use advertising, promotions, discounts, and so
on tend to be proactive in dealing with forecasts.
15. There is always going to be a certain amount of random variation about the forecast. The amount
of this random variation about the forecast (actual vs. forecast) will increase as the forecasting
horizon is extended. In other words, forecasting accuracy tends to decline over time.
Consequently, one of two approaches might be employed to handle the problem. One would be to
pick out some reasonable future point in time; then, based on past forecasting data, estimate the
amount of random variation that occurs over this period. The next step would be to build or
develop enough flexibility into your production system to be able to adjust to the extremes of the
random variation.
The other approach would be to estimate the flexibility of your production system and then see
how far into the future your production system would be able to handle the random variation that
is inherent in your forecasting approach. This would give you an indication of the amount of
change your system could handle over a period of time. Then adjustments could be made to
3-3
Education.
increase your capabilities to respond to change or you could try another forecasting approach to
see if its inherent variation is less.
16. Forecasting in the context of supply chain involves connection and communication between the
supply chain databases. For example, assume that Company X is a durable goods manufacturer.
Based on the market and historical sales information, Company X determines short and
intermediate term multi-period forecasts for its products and provides this forecast information to
its suppliers databases. Let us also assume that Company Y supplies Company X with parts and
components. Company Y uses the forecasting information from Company X, as well as from
other companies it supplies, and develops its own forecasts and provides all the forecasting
information it possesses to its suppliers. This type of cooperation and communication among the
supply chain databases provides all of the companies on the supply chain with additional
information to generate better forecasts. Potential difficulties in doing supply chain forecasting
include creating the ability for sharing of data between different information systems and
establishing trust between supply chain partners so that they are willing to share data.
17. It depends on the situation. Sometimes one approach is better, sometimes the other is better, and
sometimes both are used. Considerations include the importance of the forecasts, how quickly the
forecasts are needed, the cost of obtaining the forecasts, the availability of resources, and the
availability of data. The qualitative approach is generally more popular with smaller companies
because they generally cannot afford to install a sophisticated quantitative technique. Larger
companies tend to utilize more sophisticated quantitative techniques due to the availability of
resources and the need to generate a large number of forecasts.
18. In forecasting initial sales for the new version of its software, the software producer should
consider:
a. The historical demand information for the old version.
b. The features of the new version of the software in comparison to the features of the old
version.
c. The price of the new version of the software in comparison to the price of the old version.
d. Market/consumer information and response about the new version of the software based on
the results of a market survey and the beta testing of the new version of the software.
e. The features of competitors similar software packages.
f. The price of competitors software packages.
19. a. Demand for Mothers Day greeting cards: Nave using last years demand. Alternatively,
because greeting cards have seasonal demand, we could use a seasonal model where the
season begins a few weeks before Mothers Day and ends just after Mothers Day.
b. Popularity of a new TV series: Delphi or associative based on features of existing series.
c. Demand for vacations on the moon: Delphi.
d. The impact of a price increase: Associative.
e. Demand for toothpaste: Nave or averaging.
3-4
Education.
Taking Stock
1. If the forecast system is too responsive and it becomes too sensitive to the changes in actual
demand, it will have a tendency to overreact, resulting in too much adjustment to the forecasted
demand. On the other hand, if the forecasts are too stable, they do not react fast enough to
changes in demand, resulting in insufficient response to changes in actual demand.
2. Forecasting needs to be a collaborative effort involving marketing, operations, and technical
people. In addition, the forecasting group should include employees from different levels of
management.
3. The technology has had tremendous impact on forecasting mainly because of the advancement of
the computer technology. Computer technology plays a very important role in preparing forecasts
based on quantitative data. Computer technology allows companies to generate forecasts quickly
due to the computer systems enhanced ability to update information on prices, demand, and other
variables. In addition, the ability to integrate databases along the supply chain has proved to be an
invaluable asset to companies because this feature increases the communication between
suppliers and their customers, resulting in better management of inventories and purchase orders.
Critical Thinking Exercises

1. The conditions that would have to exist for driving a car that are analogous to the assumptions
made when using exponential smoothing are that the immediate future will be like the recent past.
This would suggest:
a. No sharp curves or turns on the road
b. Constant traffic conditions
c. No traffic lights or stop signs
d. Constant road conditions
2. Instantaneous re-supply and/or completely flexible capacity.
3. Potential investors would expect information on the current and future size of the market, the
expected initial market share and growth rate for 5-10 years, profit/loss projections for the
forecast horizon, and the likelihood of achieving the projected results.
4. How to handle a poor forecast (i.e., one that is substantially above or below actual demand)
would depend on what the items is, and on a number of factors. For example, a low forecast
would lead to a stockout. How critical that is would relate to how important that a stockout is to
the customers or to internal operations, how quickly the item could be restocked, whether
substitutes are available, whether it is a seasonal item, and so on. For a high forecast, the key
issues might be storage space and whether the items can be carried over to the following period(s)
or they are perishable. For perishable items, a price reduction might be an option. Another
possibility might be to return items to the vendor. If the poor forecast affects capacity required,
handling that would depend on the ability or inability to adjust capacity in the short run, or
finding other uses for an over-supply, or finding other ways to make up for an undersupply.
5. Although understandable, Omars approach is not ethical. He should turn in the forecast based on
the information he has and tell his superiors that he thinks he can get those numbers up. The only
pro to Omars optimistic forecast might be preventing Oscar from being laid off over the near-
term if he can convince customers not to cut back on orders. The cons are that if sales do not
3-5
Education.
materialize, Oscar will be laid off and inventories are going to be high at both his company and at
his customers.
6. Student answers will vary. Some possibilities follow:
a. If an executive lied and was overly optimistic about demand forecasts, this would violate the
Utilitarian Principle and the Virtue Principle.
b. If an executive forced a subordinate to adjust a forecast based on arbitrary reasons, this would
violate the Rights Principle.
c. If a company used a committee of executives to forecast and one executives views

dominated the process, this would be a violation of the Fairness Principle.
d. If a city manager lied about forecasts for demand for a new water park considered in a
referendum, this act would violate the Common Good Principle.
e. If a salesperson intentionally understated future demand to be able to earn a bonus more

easily, this would violate the Virtue Principle.
3-6
Education.
Solutions
1. a. Plotting each data set reveals that blueberry muffin orders are stable, varying around an
average. Therefore, the nave forecast is the last value, 33. The demand for cinnamon buns
has a trend. The last change was from 31 to 33 (33 31 = 2). Using the last value and adding
the last trend change, the forecast is 33 + 2 = 35. Demand for cupcakes has an apparent
seasonal variation with peaks every five days. Day 1 = 45, Day 6 = 48, and Day 11 = 47.
Since the peaks occur every five days, the next peak would be at Day 16. We could predict
that demand will be the same as it was the last seasonhere this value would equal 47.
b. The use of sales data instead of demand implies that sales adequately reflect demand. We are
assuming that no stockouts occurred because demand equals sales if there are no shortages.
2. Given:
Month Sales (000 units)
Feb. 19
Mar. 18
Apr. 15
May 20
Jun. 18
Jul. 22
Aug. 20
a.
Sales
20
0
F M A M J J A S
Month
b. 1) Using the nave approach, the forecast for the next month (September) will equal 20.
2) A five-month moving average is shown below:
15 20 18 22 20
MA5 19.00 (round to two decimals)
5
3-7
Education.
3) A weighted using average using 0.60 for August, 0.30 for July, and 0.10 for June is shown
below:
0.10(18) + 0.30(22) + 0.60(20) = 20.40 (round to two decimals)
4) Exponential smoothing, with alpha = 0.20 and an initial forecast for March of 19 are shown
below (round to two decimals):
Month Forecast = F(old) + .20[Actual F(old)]

April 18.80 = 19 + .20[ 18 19 ]
May 18.04 = 18.80 + .20[ 15 18.80 ]
June 18.43 = 18.04 + .20[ 20 18.04 ]
July 18.34 = 18.43 + .20[ 18 18.43 ]
August 19.07 = 18.34 + .20[ 22 18.34 ]
September 19.26 = 19.07 + .20[ 20 19.07 ]
5) A linear trend forecast is shown below (round b & a to two decimals):
t Y t*Y t2
1 19 19 1 n tY t Y 7(542) 28(132)
b 0.50
2 18 36 4 n t 2 ( t ) 2 7(140) (28) 2
3 15 45 9 Y b t 132 0.50(28)
a 16.86
4 20 80 16 n 7
5 18 90 25
6 22 132 36
7 20 140 49
28 132 542 140
For Sept., t = 8, and Yt = 16.86 + 0.50(8) = 20.86 = 20,860

c. The linear trend approach seems to be the least appropriate because the data appear to vary
around an average of about 19 [18.86] and because the slope is close to zero (0.50).
d. Sales are reflective of demand (i.e., no stockouts or backorders occurred).
3. a. Exponential smoothing forecast for September with alpha = 0.10:

88 + 0.10(89.6 88) = 88.16 (round to two decimals)
b. Exponential smoothing forecast for October with alpha = 0.10:
88.16 + 0.10(92 88.16) = 88.54 (round to two decimals)
3-8
Education.
4. Given:
Week Requests
1 20
2 22
3 18
4 21
5 22
a. Nave approach forecast for Week 6 = Demand in Week 5 = 22

b. Four-period moving average forecast for Week 6:
22 18 21 22
20.75 (round to two decimals)
4
c. Exponential smoothing with alpha = 0.30 and a Week 2 Forecast = 20 (round to two
decimals):
F3 = 20 + 0.30(22 20) = 20.60
F4 = 20.60 + 0.30(18 20.6) = 19.82
F5 = 19.82 + 0.30(21 19.82) = 20.17
F6 = 20.17 + 0.30(22 20.17) = 20.72
5. a. Annual sales are increasing by 15,000 bottles per year (the slope of the line)
b. Forecast for Year 6:
t = 6, Yt = 80 + 15(6) = 170, which is 170,000 bottles.
6. Slope of the line is estimated by Rise/Run = (500-300)/(10-0) = 200/10 = 20.00. The Y Intercept
= 500.
Y 500.00 20.00t
3-9
Education.
7. a. t Y t*Y t2
1 220 220 1
2 245 490 4
3 280 840 9
4 275 1,100 16
5 300 1,500 25
6 310 1,860 36
7 350 2,450 49
8 360 2,880 64
9 400 3,600 81
10 380 3,800 100
11 420 4,620 121
12 450 5,400 144
13 460 5,980 169
14 475 6,650 196
15 500 7,500 225
16 510 8,160 256
17 525 8,925 289
18 541 9,738 324
171 7,001 75,713 2,109
n tY t Y 18(75,713) 171(7,001)
b 19.00
n t 2 ( t ) 2 18(2,109) (171) 2
Y b t 7,001 19.00(171)
a 208.44
n 18
b. Linear Trend Forecast for Week 20: F = 208.44 + (19.00)(20) = 588.44
Linear Trend Forecast for Week 21: F = 208.44 + (19.00)(21) = 607.44
The forecasted demand for week 20 and 21 is 588.44 and 607.44 respectively.
c. Set the trend equation = 800 and solve for t:

208.44 + 19.00t = 800
19.00t = 800 208.44
19.00t = 591.96
t = 591.96 / 19.00
t = 31.13 weeks (during Week 32)
3-10
Education.
8. a. There appears to be a long-term upward increasing trend in the data. If we use an averaging
technique, the forecast will underestimate when data values increase.
b.
Trend Analysis for Passengers
Linear Trend Model
Yt = 397.01 + 4.59t
Actual
480
Fits
470 Actual
Fits
460

Passengers
450

440
430

420

410 MAPE: 0.6765
MAD: 2.9086
400
MSD: 14.6487
0 10 20
Time
3-11
Education.
t Y t*Y t2
1 405 405 1
2 410 820 4
3 420 1,260 9
4 415 1,660 16
5 412 2,060 25
6 420 2,520 36
7 424 2,968 49
8 433 3,464 64
9 438 3,942 81
10 440 4,400 100
11 446 4,906 121
12 451 5,412 144
13 455 5,915 169
14 464 6,496 196
15 466 6,990 225
16 474 7,584 256
17 476 8,092 289
18 482 8,676 324
171 7,931 77,750 2,109
Round b & a to two decimals:

n tY t Y 18(77,750) 171(7,931)
b 4.59
n t 2 ( t ) 2 18(2,109) (171) 2
Y b t 7,931 4.59(171)
a 397.01
n 18
Forecasted demand for the next three week (round to two decimals):
Y19 = 397.01 + (4.59)(19) = 484.22
Y20 = 397.01 + (4.59)(20) = 488.81
Y21 = 397.01 + (4.59)(21) = 493.40
3-12
Education.
9. a. t Y t*Y t2
1 200 200 1
2 214 428 4
3 211 633 9
4 228 912 16
5 235 1,175 25
6 232 1,332 36
7 248 1,736 49
8 250 2,000 64
9 253 2,277 81
10 267 2,670 100
11 281 3,091 121
12 275 3,300 144
13 280 3,640 169
14 288 4,032 196
15 310 4,650 225
120 3,772 32,136 1,240
n tY t Y 15(32,136) 120(3,772)
b 7.00
n t 2 ( t ) 2 15(1,240) (120) 2
Y b t 3,772 7.00(120)
a 195.47
n 15
Forecasts for periods 16 through 19 using Linear Trend are (round to two decimals):
Y16 = 195.47 + (7.00)(16) = 307.47
Y17 = 195.47 + (7.00)(17) = 314.47
Y18 = 195.47 + (7.00)(18) = 321.47
Y19 = 195.47 + (7.00)(19) = 328.47
3-13
Education.
b. Round values to two decimals.

228 200
Initial Trend = 9.33
3
Period Actual St-1 + Tt-1 = TAFt TAFt + .3(At TAFt) = St Tt1 + .2 (TAFt TAFt1 Tt1) = Tt
5 235 228.00 + 9.33 = 237.33 237.33 + .3(235 237.33) = 236.63 9.33
6 232 236.63 + 9.33 = 245.96 245.96 + .3(232 245.96) = 241.77 9.33 + .2(245.96 237.33 9.33) = 9.19
7 248 241.77 + 9.19 = 250.96 250.96 + .3(248 250.96) = 250.07 9.19 + .2(250.96 245.96 9.19) = 8.35
8 250 250.07 + 8.35 = 258.42 258.42 + .3(250 258.42) = 255.89 8.35 + .2(258.42 250.96 8.35) = 8.17
9 253 255.89 + 8.17 = 264.06 264.06 + .3(253 264.06) = 260.74 8.17 + .2(264.06 258.42 8.17) = 7.66
10 267 260.74 + 7.66 = 268.40 268.40 + .3(267 268.40) = 267.98 7.66 + .2(268.40 264.06 7.66) = 7.00
11 281 267.98 + 7.00 = 274.98 274.98 + .3(281 274.98) = 276.79 7.00 + .2(274.98 268.40 7.00) = 6.92
12 275 276.79 + 6.92 = 283.71 283.71 + .3(275 283.71) = 281.10 6.92 + .2(283.71 274.98 6.92) = 7.28
13 280 281.10 + 7.28 = 288.38 288.38 + .3(280 288.38) = 285.87 7.28 + .2(288.38 283.71 7.28) = 6.76
14 288 285.87 + 6.76 = 292.63 292.63 + .3(288 292.63) = 291.24 6.76 + .2(292.63 288.38 6.76) = 6.26
15 310 291.24 + 6.26 = 297.50 297.50 + .3(310 297.50) = 301.25 6.26 + .2(297.50 292.63 6.26) = 5.98
16 301.25 + 5.98 = 307.23
10. The initial estimate of trend is based on the net change of 30 for the three periods from 1 to 4, for
an average of +10 units. Use = .5 and = .4. Round values to two decimals.
Initial trend = (240 210)/3 = 10.00
Period Actual
1 210
Model 2 224
Development 3 229
4 240
Actual St + Tt = TAFt TAFt + .5(At TAFt) = St Tt1 + .4 (TAFt TAFt1 Tt1) = Tt

5 255 240.00 + 10.00 = 250.00 250.00 + .5(255 250.00) = 252.50 10.00
6 265 252.50 + 10.00 = 262.50 262.50 + .5(265 262.50) = 263.75 10.00 + .4(262.50 250.00 10.00) = 11.00
Model Test 7 272 263.75 + 11.00 = 274.75 274.75 + .5(272 274.75) = 272.38 11.00 + .4(274.75 262.50 11.00) = 11.50
8 285 272.38 + 11.50 = 284.88 284.88 + .5(285 284.88) = 284.94 11.50 + .4(284.88 274.75 11.50) = 10.95
9 294 284.94 + 10.95 = 295.89 295.89 + .5(294 295.89) = 294.95 10.95 + .4(295.89 284.88 10.95) = 10.97
Next 10 294.95 + 10.97 = 305.92
Forecast
3-14
Education.
11. Yt = 70 + 5t t = 0 (June of last year)

t = 1 (July of last year)
t = 7 (January of this year)
t = 8 (February of this year)
t = 9 (March of this year)
t = 19 (January of next year)
t = 20 (February of next year)
t = 21 (March of next year)
YJan. = 70 + (5)(19) = 165
YFeb. = 70 + (5)(20) = 170
YMar. = 70+ (5)(21) = 175
Forecast = Trend * Seasonal Relative (round to two decimals):
Month Trend * Seasonal Relative
January 165 * 1.10 = 181.50
February 170 * 1.02 = 173.40
March 175 * 0.95 = 166.25
12. The current quarter is Quarter 1 = t = 4. Quarter 1 from one year ago = t = 0.
Quarter 1 next year = t = 8.
Next Year, Next Year, Next Year, Next Year, Two Years,
Quarter Q1 Q2 Q3 Q4 Q1
Value of t 8 9 10 11 12
Trend component, Ft 116.00 143.50 175.00 210.50 250.00
Quarter relative x 1.1 = x 1.0 = x 0.6 = x 1.3 = x 1.1 =
Forecast 127.60 143.50 105.00 273.65 275.00
Trend component calculations: = 40 6.5 + 2 2 (round to two decimals):
8 = 40 6.5(8) + 2(82 ) = 116.00

9 = 40 6.5(9) + 2(92 ) = 143.50
10 = 40 6.5(10) + 2(102 ) = 175.00
11 = 40 6.5(11) + 2(112 ) = 210.50
12 = 40 6.5(12) + 2(122 ) = 250.00
3-15
Education.
13. Given:
Quarter Year 1 Year 2 Year 3 Year 4

1 2 3 7 4
2 6 10 18 14
3 2 6 8 8
4 5 9 15 11
SA method (round season averages to three decimals and seasonal relatives to two decimals):
Season
Quarter Year 1 Year 2 Year 3 Year 4 Average Seasonal Relative
1 2 3 7 4 4.000 0.50 (4.000/8.000)
2 6 10 18 14 12.000 1.50 (12.000/8.000)
3 2 6 8 8 6.000 0.75 (6.000/8.000)
4 5 9 15 11 10.000 1.25 (10.000/8.000)
8.000
Overall
Average
Sum of Seasonal Relatives = 0.50 + 1.50 + 0.75 + 1.25 = 4.00
3-16
Education.
14. a. Centered Moving Average Method (round CMA to two decimals & Index to four
decimals):
Centered
Moving Moving Index
Week Day Sales Total Average Sales/MA3
Fri 149
1 Sat 250 188.33 1.3275 Sat
Sun 166 565 190.00 0.8737
Fri 154 570 191.67 0.8035
2 Sat 255 575 190.33 1.3398 Sat
Sun 162 571 189.67 0.8541
Fri 152 569 191.33 0.7944
3 Sat 260 574 194.33 1.3379 Sat
Sun 171 583 193.67 0.8829
Fri 150 581 196.33 0.7640
4 Sat 268 589 197.00 1.3604 Sat
Sun 173 591 200.00 0.8650
Fri 159 600 201.67 0.7884
5 Sat 273 605 202.67 1.3470 Sat
Sun 176 608 204.00 0.8627
Fri 163 612 205.00 0.7951
6 Sat 276 615 207.33 1.3312 Sat
Sun 183 622
Seasonal relatives (round to two decimals):

x : Fri = 0.79; Sat = 1.34; Sun = 0.87
Sum of Seasonal Relatives = 0.79 + 1.34 + 0.87 = 3.00
3-17
Education.
b. SA Method (round season averages to three decimals & seasonal relatives to two decimals).
Week Season Seasonal
Season 1 2 3 4 5 6 Average Relative
Friday 149 154 152 150 159 163 154.500 0.79 (154.500/196.667)
Saturday 250 255 260 268 273 276 263.667 1.34 (263.667/196.667)
Sunday 166 162 171 173 176 183 171.833 0.87 (171.833/196.667)
196.667
Overall
Average
Sum of Seasonal Relatives = 0.79 + 1.34 + 0.87 = 3.00
c. In this problem, the two methods provide similar results because there are only 3 seasons;
therefore, the two methods are essentially averaging the same data. In addition, there is no
trend in the data.
15. Given:
The restaurant is open 4 days. Thursday night accounts for 0.20 of the business. Friday night
accounts for 0.35 of the business. Saturday night accounts for 0.30 of the business.
Wednesday night: 1.00 0.20 0.35 0.30 = 0.15 (15.00%) of the business.
Seasonal relatives (round to two decimals):
Wednesday = 0.15 x 4 = 0.60 Thursday = 0.20 x 4 = 0.80
Friday = 0.35 x 4 = 1.40 Saturday = 0.30 x 4 = 1.20
Sum of Seasonal Relatives = 0.60 + 0.80 + 1.40 + 1.20 = 4.00
3-18
Education.
16. a. Centered Moving Average Method (round CMA to two decimals & Index to four decimals):
(Data)
No. Moving Centered
Day Served Total Moving Average Index
1=1 80
2=2 75
3=3 78
4=4 95 90.57 95/90.57 = 1.0489
5=5 130 90.86 130/90.86 = 1.4308
6=6 136 91.14 136/91.14 = 1.4922
7=7 40 634 91.43 40/91.43 = 0.4375
8=1 82 636 91.29 82/91.29 = 0.8982

9=2 77 638 91.43 77/91.43 = 0.8422
10 = 3 80 640 91.57 80/91.57 = 0.8736
11 = 4 94 639 91.86 94/91.86 = 1.0233
12 = 5 131 640 92.14 131/92.14 = 1.4217
13 = 6 137 641 92.29 137/92.29 = 1.4845
14 = 7 42 643 92.71 42/92.71 = 0.4530
15 = 1 84 645 93.00 84/93.00 = 0.9032

16 = 2 78 646 93.57 78/93.57 = 0.8336
17 = 3 83 649 94.00 83/94.00 = 0.8830
18 = 4 96 651 94.29 96/94.29 = 1.0181
19 = 5 135 655 94.71 135/94.71 = 1.4254
20 = 6 140 658 95.29 140/95.29 = 1.4692
21 = 7 44 660 96.00 44/96.00 = 0.4583
22 = 1 87 663 96.43 87/96.43 = 0.9022

23 = 2 82 667 97.71 82/97.71 = 0.8392
24 = 3 88 672 98.29 88/98.29 = 0.8953
25 = 4 99 675 98.86 99/98.86 = 1.0014
26 = 5 144 684
27 = 6 144 688
28 = 7 48 692
3-19
Education.
Group and Average the Indexes to Derive Seasonal Relatives
1s 2s 3s 4s 5s 6s 7s
1.0489 1.4308 1.4922 0.4375
0.8982 0.8422 0.8736 1.0233 1.4217 1.4845 0.4530
0.9032 0.8336 0.8830 1.0181 1.4254 1.4692 0.4583
0.9022 0.8392 0.8953 1.0014
2.7036 2.5150 2.6519 4.0917 4.2779 4.4459 1.3488
x : 0.90 0.84 0.88 1.02 1.43 1.48 0.45
Sum of Seasonal Relatives = 0.90 + 0.84 + 0.88 + 1.02 + 1.43 + 1.48 + 0.45 = 7.00
b. SA Method (round season averages to three decimals & seasonal relatives to two decimals):
Week Season Seasonal

Season 1 2 3 4 Average Relative
Day 1 80 82 84 87 83.250 0.89 (83.250/93.893)
Day 2 75 77 78 82 78.000 0.83 (78.000/93.893)
Day 3 78 80 83 88 82.250 0.88 (82.250/93.893)
Day 4 95 94 96 99 96.000 1.02 (96.000/93.893)
Day 5 130 131 135 144 135.000 1.44 (135.000/93.893)
Day 6 136 137 140 144 139.250 1.48 (139.250/93.893)
Day 7 40 42 44 48 43.500 0.46 (43.500/93.893)
93.893
Overall
Average
Sum of Seasonal Relatives = 0.89 + 0.83 + 0.88 + 1.02 + 1.44 + 1.48 + 0.46 = 7.00
3-20
Education.
17. Given:
Day 1 2 3 4 5 6 7 8 9
# Sold 36 38 42 44 48 49 50 49 52
Day 10 11 12 13 14 15
# Sold 48 52 55 54 56 57
a. The trend may be non-linear (although most students will view it as linear). Trend-adjusted
smoothing would have a slight edge over a linear trend line.
b. Yes. This would cause concern because you would not know the actual demand for the pain
reliever.
Sales
60
50
40
30
2 4 6 8 10 12 14
Day
50
c. TAF
9 51.7040
10 53.7030
11 53.93
12 54.78
13 56.11
14 56.76
15 57.62
16 58.45
3-21
Education.
Period Actual St-1 + Tt-1 = TAFt TAFt + .3(At TAFt) = St Tt1 + .3 (TAFt TAFt1 Tt1) = Tt ei ei2
8 49 50.00 (given) 50.00 + .3(49 50.00) = 49.70 2.00 (given) -1.00 1.00
9 52 49.70 + 2.00 = 51.70 51.70 + .3(52 51.70) = 51.79 2.00 + .3(51.70 50.00 2.00) = 1.91 0.30 0.09
10 48 51.79 + 1.91 = 53.70 53.70 + .3(48 53.70) = 51.99 1.91 + .3(53.70 51.70 1.91) = 1.94 -5.70 32.49
11 52 51.99 + 1.94 = 53.93 53.93 + .3(52 53.93) = 53.35 1.94 + .3(53.93 53.70 1.94) = 1.43 -1.93 3.72
12 55 53.35 + 1.43 = 54.78 54.78 + .3(55 54.78) = 54.85 1.43 + .3(54.78 53.93 1.43) = 1.26 0.22 0.05
13 54 54.85 + 1.26 = 56.11 56.11 + .3(54 56.11) = 55.48 1.26 + .3(56.11 54.78 1.26) = 1.28 -2.11 4.45
14 56 55.48 + 1.28 = 56.76 56.76 + .3(56 56.76) = 56.53 1.28 + .3(56.76 56.11 1.28) = 1.09 -0.76 0.58
15 57 56.53 + 1.09 = 57.62 57.62 + .3(57 57.62) = 57.43 1.09 + .3(57.62 56.76 1.09) = 1.02 -0.62 0.38
16 57.43 + 1.02 = 58.45 Sum 42.76
42.76
= 81
= 6.11 (round two decimals)
18. a. As shown in the plot of Unit Sales, there appears to be a trend in Unit Sales.
Units Units
Month Sold Index Month Sold Index
Jan 640 0.80 Jul 765 0.90
Feb 648 0.80 Aug 805 1.15
Mar 630 0.70 Sep 840 1.20
Apr 761 0.94 Oct 828 1.20
May 735 0.89 Nov 840 1.25
Jun 850 1.00 Dec 800 1.25
Unit Sales
900
800
700
600
500
400 Units
300
200
100
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
3-22
Education.
b. Deseasonalize car sales: Units Sold / Index (round to two decimals)
Units Units
Month Sold Index Deseasonalized Month Sold Index Deseasonalized
Jan 640 0.80 800.00 Jul 765 0.90 850.00
Feb 648 0.80 810.00 Aug 805 1.15 700.00
Mar 630 0.70 900.00 Sep 840 1.20 700.00
Apr 761 0.94 809.57 Oct 828 1.20 690.00
May 735 0.89 825.84 Nov 840 1.25 672.00
Jun 850 1.00 850.00 Dec 800 1.25 640.00
c. Plotting the deseasonalized data on the same graph as the Units Sold data leads us to a
different conclusion than the conclusion in part a. There appears to be a downward trend in
sales.
Unit Sales & Deseasonalized Data

1000
900
800
700
600
500 Units
400
Deseasonalized
300
200
100
0
d. Part c indicated a downward trend in sales. We could forecast sales of the first three months
of the next year by fitting a monthly trend line to the deseasonalized values using t = 0 in
December of the previous year. Then, predict trend values for the first three months of next
year (t = 13, 14, 15). Finally, multiply each months trend value by the appropriate monthly
seasonal relative.
e. Based on the findings from the deseasonalized data, management should consider advertising
and sales promotions.
3-23
Education.
19. Deseasonalize the values, where:
Deseasonalized sales = (Actual sales) / (Seasonal relative) (round to two decimals):

Deseasonalized sales for quarter 1: 88/1.10 = 80.00
Deseasonalized sales for quarter 4: 141.4/1.01 = 140.00
There is a trend of +20 from previous quarter, hence the trend forecast would be 160 units.
Multiplying the trend forecast by the seasonal relative for quarter 1 yields a forecast for the first
quarter of next year: (140.00 + 20) * 1.10 = 176.00.
Units
20. t sold Nave e |e| e2 Trend F e | e | e2
11 147 146 1 1 1
12 148 147 1 1 1 148 0 0 0
13 151 148 3 3 9 150 1 1 1
14 145 151 6 6 36 152 7 7 49
15 155 145 10 10 100 154 1 1 1
16 152 155 3 3 9 156 4 4 16
17 155 152 3 3 9 158 3 3 9
18 157 155 2 2 4 160 3 3 9
19 160 157 3 3 9 162 2 2 4
20 165 160 5 5 25 164 1 1 1
Sum 18 36 202 16 23 91
Round MAD & MSE to two decimals:

36 23
MAD : 4.00 MAD : 2.30
9 10
202 91
MSE : 25.25 MSE : 10.11
9 1 10 1
Linear trend provides forecasts with less average error and less average squared error.
3-24
Education.
(e/Demand) (e/Demand)
21. Period Demand F1 e e e2 F2 e e e2
x 100 (%) x 100 (%)
1 68 66 2 2 4 2.94% 66 2 2 4 2.94%
2 75 68 7 7 49 9.33% 68 7 7 49 9.33%
3 70 72 2 2 4 2.86% 70 0 0 0 0.00%
4 74 71 3 3 9 4.05% 72 2 2 4 2.70%
5 69 72 3 3 9 4.35% 74 5 5 25 7.25%
6 72 70 +2 2 4 2.78% 76 4 4 16 5.56%
7 80 71 9 9 81 11.25% 78 2 2 4 2.50%
8 78 74 4 4 16 5.13% 80 2 2 4 2.56%
Sum 32 176 42.69% 24 106 32.84%
a. MAD F1: 32/8 = 4.00 (round to two decimals)
MAD F2: 24/8 = 3.00 (F2 appears to be more accurate)
b. MSE F1: 176/(8-1) = 25.14
MSE F2: 106/(8-1) = 15.14 (F2 appears to be more accurate)
c. Either measure might be in use already, familiar to users, and have past values for
comparison. If control charts are used, MSE would be natural; if tracking signals are used,
MAD would be more natural.
d. MAPE calculations (round to two decimals):
MAPE (F1): 42.69%/8 = 5.34%

MAPE (F2): 32.84%/8 = 4.11%
Because 4.11% < 5.34%, F2 appears to be more accurate.
3-25
Education.
22. a. Compute MSE & MAD for each forecast method (round to two decimals). Round % to two
decimals.
Period Demand F1 e e e2 F2 e e e2
x 100 (%) x 100 (%)
1 770 771 -1 1 1 0.13% 769 1 1 1 0.13%
2 789 785 4 4 16 0.51% 787 2 2 4 0.25%
3 794 790 4 4 16 0.50% 792 2 2 4 0.25%
4 780 784 -4 4 16 0.51% 798 -18 18 324 2.31%
5 768 770 -2 2 4 0.26% 774 -6 6 36 0.78%
6 772 768 4 4 16 0.52% 770 2 2 4 0.26%
7 760 761 -1 1 1 0.13% 759 1 1 1 0.13%
8 775 771 4 4 16 0.52% 775 0 0 0 0.00%
9 786 784 2 2 4 0.25% 788 -2 2 4 0.25%
10 790 788 2 2 4 0.25% 788 2 2 4 0.25%
Sum 12 28 94 3.58% -16 36 382 4.61%
MAD F1: 28/10 = 2.80

MAD F2: 36/10 = 3.60
MSE F1: 94/(10-1) = 10.44
MSE F2: 382/(10-1) = 42.44
F1 has both lower MAD and lower MSE so it seems better.
b. Compute MAPE for each forecast method (round to two decimals).
MAPE F1: 3.58%/10 = 0.36%

MAPE F2: 4.61%/10 = 0.46%
3-26
Education.
c. Nave Method Forecast
Nave
Month Sales Forecast e |e| e2
1 770
2 789 770 19 19 361
3 794 789 5 5 25
4 780 794 14 14 196
5 768 780 12 12 144
6 772 768 4 4 16
7 760 772 12 12 144
8 775 760 15 15 225
9 786 775 11 11 121
10 790 786 4 4 16
11 790
At end of
Week 10
20 96 1,248
Round MSE, MAD, TS, & control limits to two decimals:

1,248 96
= = 156.00 = = 10.67
91 9
20
= = +1.87
10.67
Control Limits for Nave Method: 0 2 156 = 0 24.98 [in control because + 1.87 falls
within the range of -24.98 to +24.98].
It appears that the nave forecast is in control because its tracking signal at the end of Week
10 is within the limits. However, the MAD and MSE values for the nave method are much
higher than the MAD and MSE values for the other two forecasting methods (refer to the
table below). Therefore, the nave forecasting method does not appear to be performing as
well as the other two forecasting methods.
Method MAD MSE

F1 2.80 10.44
F2 3.60 42.44
Nave 10.67 156.00
3-27
Education.
23. a.
850
Insurance
needed ($000)
0 10 20 30 40
Current Age of Head of Household (years)
b. y = 850 0.1(30) = 847. Thus, a 30-year old will need $847,000 of life insurance.
24. a. Let x1 = weight in lb.

x2 = distance in miles y = $0.10x1 + $0.15x2 + $10
y = delivery charge
b. y = $0.10(40) + $0.15(26) + $10 = $17.90 (round to two decimals)
25. a.
X Y
Price Sales X*Y X2 Y2
6.00 200 1,200.00 36.00 40,000
6.50 190 1,235.00 42.25 36,100
6.75 188 1,269.00 45.56 35,344
7.00 180 1,260.00 49.00 32,400
7.25 170 1,232.50 52.56 28,900
7.50 162 1,215.00 56.25 26,244
8.00 160 1,280.00 64.00 25,600
8.25 155 1,278.75 68.06 24,025
8.50 156 1,326.00 72.25 24,336
8.75 148 1,295.00 76.56 21,904
9.00 140 1,260.00 81.00 19,600
9.25 133
1,230.25 85.56 17,689
92.75 1,982 15,081.50 729.05 332,142
n xy x y (12)(15,081.50) (92.75)(1,982)
b 19.53
n x 2 ( x) 2 (12)(729.05) (92.75) 2
y b x 1,982 (19.53)(92.75)
a 316.12
n 12
3-28
Education.
Y = 316.12 19.53X
Actual data are represented by circles.

Predicted values are represented by pluses.
200 +
190 +
+
180 +
+
170 +
sales
160 +
+
150 +
+
140 +
+
130
6 7 8 9
price
Round r to four decimals:

n( xy) ( x)( y)
r
n ( x ) ( x ) 2 n( y 2 ) ( y ) 2
2
(12)(15,081.50) (92.75)(1,982)
= = 0.9854
(12)(729.05) (92.75)2 (12)(332,142) (1,982)2
b. r = 0.9854 implies a strong, negative relationship between price and demand.

r2 = (0.9854) 2 = 0.9700. It appears that 97.00% of the variation in sales can be accounted for
by the price of our product. This indicates that price is a good predictor of sales.
3-29
Education.
26. a.
100

y

50
0
10 20 30 40 50
x
b.
t x y x*y x2 y2
1 15 74 1,110 225 5,476
2 25 80 2,000 625 6,400
3 40 84 3,360 1,600 7,056
4 32 81 2,592 1,024 6,561
5 51 96 4,896 2,601 9,216
6 47 95 4,465 2,209 9,025
7 30 83 2,490 900 6,889
8 18 78 1,404 324 6,084
9 14 70 980 196 4,900
10 15 72 1,080 225 5,184
11 22 85 1,870 484 7,225
12 24 88 2,112 576 7,744
13 33 90 2,970 1,089 8,100
366 1,076 31,329 12,078 89,860

n xy x y (13)(31,329) (366)(1,076)
b 0.58
n x 2 ( x) 2 (13)(12,078) (366) 2
y b x 1,076 (0.58)(366)
a 66.44
n 13
3-30
Education.
n( xy) ( x)( y)
c. r
n( x 2 ) ( x ) 2 n( y 2 ) ( y ) 2
(13)(31, ,329) (366)(1,076)

r 0.8691(round to 4 decimals)
(13)(12,078) (366) 2 (13)(89,860) (1,076) 2
r 2 (0.8691) 2 0.7553(round to 4 decimals)
Approximately 75.53% of the variation in the dependent variable is explained by the
independent variable.
d. y = 66.44 + 0.58 (41) = 90.22 (round to two decimals)
27. a. & b.
Period X Y X*Y X2 Y2
1 1.6 10 16.00 2.56 100
2 1.3 8 10.40 1.69 64
3 1.8 11 19.80 3.24 121
4 2.0 12 24.00 4.00 144
5 2.2 12 26.40 4.84 144
6 1.6 9 14.40 2.56 81
7 1.5 8 12.00 2.25 64
8 1.3 7 9.10 1.69 49
9 1.7 10 17.00 2.89 100
10 1.2 6 7.20 1.44 36
11 1.9 11 20.90 3.61 121
12 1.4 8 11.20 1.96 64
13 1.7 10 17.00 2.89 100
14 1.6 9 14.40 2.56 81
22.8 131 219.80 38.18 1,269
n( X iYi ) ( X i )( Yi )
r
n( X i2 ) ( X i ) 2 n( Yi 2 ) ( Yi ) 2
(14)(219.80) (22.8)(131)
r 0.9592 (round to four decimals)
(14)(38.18) (22.8) 2 (14)(1,269) (131) 2
Because the value of r is close to +1, there is a strong positive relationship between these
variables.
3-31
Education.
n xy x y (14)(219.80) (22.8)(131)
b 6.16
n x 2 ( x) 2 (14)(38.18) (22.8) 2
y b x 131 (6.16)(22.8)
a 0.67
n 14
c. Y = 0.67 + (6.16)(2) = 11.65 (round to two decimals)

Therefore, we expect about 12 mowers to be sold in the first week of August.
28. Round MAD & Tracking Signal to two decimals:
t A F e Cum. Tracking
Period Demand Predicted Error |e| Error MADt Signal
1 129 124 5 5 5
2 194 200 6 6 1
3 156 150 6 6 5
4 91 94 3 3 2
5 85 80 5 5 7 5.00* 1.40***
6 132 140 8 8 1 5.90** 0.17
7 126 128 2 2 3 4.73 0.63
8 126 124 2 2 1 3.91 0.26
9 95 100 5 5 6 4.24 1.42
10 149 150 1 1 7 3.27 2.14
11 98 94 4 4 3 3.49 0.86
12 85 80 5 5 2 3.94 0.51
13 137 140 3 3 1 3.66 0.27
14 134 128 6 6 5 4.36 1.15
*Initial MAD = Sum of Cumulative |e| [1 through 5]/5 = 25/5 = 5.00

**Updated MADs [6 through 14]: MADt = MADt1+ (| e |t MAD t1)
e.g., MAD6 = MAD5 + .1(| e |6 MAD5) = 5.00 + .3(8 5.00) = 5.90
***Tracking Signal = Cumulative Error/MADt = 7/5.00 = 1.40
3-32
Education.
4
Tracking Signal Data 4
0 0 TS
-1
-2
-3
-4 -4
-5
5 6 7 8 9 10 11 12 13 14
Because all tracking signal values are within the limits, the forecast method is not exhibiting bias.
29. Refer to data in Problem 22 (shown below).

Period Demand F1 e e e2 F2 e e e2
x 100 (%) x 100 (%)
1 770 771 -1 1 1 0.13% 769 1 1 1 0.13%
2 789 785 4 4 16 0.51% 787 2 2 4 0.25%
3 794 790 4 4 16 0.50% 792 2 2 4 0.25%
4 780 784 -4 4 16 0.51% 798 -18 18 324 2.31%
5 768 770 -2 2 4 0.26% 774 -6 6 36 0.78%
6 772 768 4 4 16 0.52% 770 2 2 4 0.26%
7 760 761 -1 1 1 0.13% 759 1 1 1 0.13%
8 775 771 4 4 16 0.52% 775 0 0 0 0.00%
9 786 784 2 2 4 0.25% 788 -2 2 4 0.25%
10 790 788 2 2 4 0.25% 788 2 2 4 0.25%
Sum 12 28 94 3.58% -16 36 382 4.61%
MAD F1: 28/10 = 2.80

MAD F2: 36/10 = 3.60
MSE F1: 94/(10-1) = 10.44
MSE F2: 382/(10-1) = 42.44
3-33
Education.
a. Tracking signal using cumulative error for months 1 to 10:
F1: 12/2.80 = +4.29

F2: -16/3.60 = -4.44
Both are slightly beyond the limits of 4.

Because +4.29 > 4, the forecasting method 1 is biased. Using F1, we are underestimating
demand.
Because 4.44 < 4, the forecasting method 2 is biased. Using F2, we are overestimating
demand.
b. Compute 2s limits for errors of each forecast method (round to two decimals).
Control limits are 0 2 MSE :
#1: 0 2 10.44 0 6.46
8.00
F1: 2s Limits for Errors
6.46
6.00
4.00
2.00
0.00 0.00 e
-2.00
-4.00
-6.00
-6.46
-8.00
1 2 3 4 5 6 7 8 9 10
Because all errors are within these limits, forecast method F1 is in control.
3-34
Education.
#2 0 2 42.44 0 13.03
15.00 F2: 2s Limits for Errors

13.03
10.00
5.00
0.00 0.00 e
-5.00
-10.00
-13.03
-15.00
-20.00
1 2 3 4 5 6 7 8 9 10
Because the error for month 4 is below the lower control limit, forecast method F2 is not in
control.
3-35
Education.
30. a. Round MAD & Tracking Signal values to two decimals:
t e Cum. Tracking
Month Error | e | Error MADt Signal
1 -8 8 -8
2 -2 2 -10
3 4 4 -6
4 7 7 1
5 9 9 10
6 5 5 15
7 0 0 15
8 -3 3 12
9 -9 9 3
10 -4 4 -1
11 1 1 0 4.73* 0.00
12 6 6 6 4.86** 1.23
13 8 8 14 5.17 2.71
14 4 4 18 5.05 3.56
15 1 1 19 4.65 4.09***
16 -2 2 17 4.39 3.87
17 -4 4 13 4.35 2.99
18 -8 8 5 4.72 1.06
19 -5 5 0 4.75 0.00
20 -1 1 -1 4.38 -0.23
*Initial MAD = Sum of Cumulative |e| [1 through 11]/11 = 52/11 = 4.73

**Updated MADs [11 through 20]: MADt = MADt1+ (| e |t MAD t1)
e.g., MAD12 = MAD11 + .1(| e |12 MAD11) = 4.73 + .1(6 4.73) = 4.86
***Tracking Signal = Cumulative Error/MADt = 19/4.65 = 4.09
Assuming limits of 4, the tracking signal in month 15 is outside the limits. The forecast
method is exhibiting bias.
3-36
Education.
b. Month Error Error2

1 8 64
2 2 4
3 4 16
4 7 49
5 9 81
6 5 25
7 0 0
8 3 9
9 9 81
10 4 16
Sum 345
e2 345
MSE 38.33
n 1 10 1
Control limits = 0 238.33= 0 12.38
15.00 2s Limits for Errors for 11-20

12.38
10.00
5.00
e
0.00 0.00
-5.00
-10.00
-12.38
-15.00 11 12 13 14 15 16 17 18 19 20
The errors may be cyclical, suggesting that there may be a cyclical component in demand
that is being overlooked in the forecast.
3-37
Education.
31. a. Linear regression model:
t Y t*Y t2
1 40.2 40.20 1
2 44.5 89.00 4
3 48.0 144.00 9
4 52.3 209.20 16
5 55.8 279.00 25
6 57.1 342.60 36
7 62.4 436.80 49
8 69.0 552.00 64
9 73.7 663.30 81
45 503.0 2,756.10 285
n tY t Y 9(2,756.10) 45(503.0)
b 4.02
n t 2 ( t ) 2 9(285) (45) 2
Y b t 503.0 4.02(45)
a 35.79
n 9
Forecasts for periods 10 through 14 using Linear Trend are (round to two decimals):
Y10 = 35.79 + (4.02)(10) = 75.99
Y11 = 35.79 + (4.02)(11) = 80.01
Y12 = 35.79 + (4.02)(12) = 84.03
Y13 = 35.79 + (4.02)(13) = 88.05
Y14 = 35.79 + (4.02)(14) = 92.07
3-38
Education.
b. Prepare a control chart using 2s limits.
Year Sales
t Y t*Y t2 F e e2
1 40.2 40.20 1 39.81 -0.39 0.15
2 44.5 89.00 4 43.83 -0.67 0.45
3 48.0 144.00 9 47.85 -0.15 0.02
4 52.3 209.20 16 51.87 -0.43 0.18
5 55.8 279.00 25 55.89 0.09 0.01
6 57.1 342.60 36 59.91 2.81 7.90
7 62.4 436.80 49 63.93 1.53 2.34
8 69.0 552.00 64 67.95 -1.05 1.10
9 73.7 663.30 81 39.81 -1.73 2.99
45 503.0 2,756.10 285 15.1
4
e 2 15.14
MSE 1.89
n 1 9 1
2s control limits are 0 2 1.89 0 2.74
c. Year Sales Forecast Error

t Y F e
10 77.2 75.99 1.21
11 82.1 80.01 2.09
12 87.8 84.03 3.77
13 90.6 88.05 2.55
14 98.9 92.07 6.83
3-39
Education.
8.00 2s Limits for Errors for 10-14
6.00
4.00
2.74
e
2.00
0.00 0.00
-2.00
-2.74
10 11 12 13 14
-4.00
The forecast method is not in control. Two of the five errors are outside of the limits. In an
actual situation, the error in year 12 would have triggered an examination of forecast
performance.
3-40
Education.
32. a.
Forecast Forecast
Period Actual 1 2 e1 e2 e12 e 22 e1 e2
1 37 36 36 +1 +1 1 1 1 1
2 39 38 37 +1 +2 1 4 1 2
3 37 40 38 3 1 9 1 3 1
4 39 42 38 3 +1 9 1 3 1
5 45 46 41 1 +4 1 16 1 4
6 49 46 52 +3 3 9 9 3 3
7 47 46 47 1 0 1 0 1 0
8 49 48 48 1 +1 1 1 1 1
9 51 52 52 1 1 1 1 1 1
10 54 55 53 1 +1 1 1 1 1
2 +4 34 35 16 15
34 35
MSE 1 3.78 MSE 2 3.89
10 1 10 1
16 15
MAD 1 1.60 MAD 2 1.50
10 10
The analyst is indifferent between the two alternatives because both forecasting methods have
MADs that are approximately equal (MAD1 = 1.60, MAD2 = 1.50), and MSEs that are also
approximately equal (MSE1 = 3.78, MSE2 = 3.89).
b. The errors for Forecast 1 cycle (+1, +1, 3, 3, 1, +3, +1,+1, 1, 1), although all are within
2s control limits. The errors for Forecast 2 (+1, +2, 1, +1, +4, 3, 0, +1, 1, +1) do not
appear to cycle, but the error of +4 is just beyond the 2s control limits for Forecast 2.
Forecast 1: 2s control limits are 0 23.78 = 0 3.89

Forecast 2: 2s control limits are 0 23.89 = 0 3.94
While Forecast 1 has a small negative bias (slight overestimation), Forecast 2 has a small
positive bias (slight underestimation).
MFE1 = -2/10 = 0.20. MFE2 = +4/10 = +0.40. MFE = the Mean Forecast Error.
3-41
Education.
33.
t A F AF Cumulative
Period (Sales) (Forecast) (Error) Error Error Error Error2 MAD TS
1 15 15 0 0 0 0 0 0.00 0.00
2 21 20 1 1 1 1 1 0.05 2.00
3 23 25 2 1 2 3 4 1.00 1.00
4 30 30 0 1 0 3 0 0.75 1.33
5 32 35 3 4 3 6 9 1.20 3.33
6 38 40 2 6 2 8 4 1.33 4.51
7 42 45 3 9 3 11 9 1.57 5.73
8 47 50 3 12 3 14 9 1.75 6.86
Note: MAD is not updated and smoothed.
e2 36
MSE 5.14
n 1 8 1
2s control limits are 0 25.14 = 0 4.53
All errors fall within the 2s control limits; however, there is a bias in the forecast method as seen
in the tracking signal measures that keep getting more negative. In addition, if we set the tracking
signal limits at 4, then the tracking signals in periods 6 8 would fall outside the limits. In
conclusion, the forecast method is not performing adequatelyit is exhibiting bias.
3-42
Education.
34.
t A T = 10 + 5t F = T * S Cumulative
Period (sales) T Forecast Error Error Error Error Error2 MAD TS
1 14 15 13.50 0.50 0.50 0.50 0.50 0.25 0.50 1.00
2 20 20 19.00 1.00 1.50 1.00 1.50 1.00 0.75 2.00
3 24 25 26.25 -2.25 -0.75 2.25 3.75 5.06 1.25 -0.60
4 31 30 33.00 -2.00 -2.75 2.00 5.75 4.00 1.44 -1.91
5 31 35 31.50 -0.50 -3.25 0.50 6.25 0.25 1.25 -2.60
6 37 40 38.00 -1.00 -4.25 1.00 7.25 1.00 1.21 -3.51
7 43 45 47.25 -4.25 -8.50 4.25 11.50 18.06 1.64 -5.18
8 48 50 55.00 -7.00 -15.50 7.00 18.50 49.00 2.31 -6.71
9 52 55 49.50 2.50 -13.00 2.50 21.00 6.25 2.33 -5.58
Note: MAD is not updated and smoothed.
e 2 84.87
MSE 10.61
n 1 9 1
2s control limits are 0 210.61 = 0 6.51
The error in Period 8 is outside the 2s control limits. In addition, there is a bias in the forecast
method as seen in the tracking signal measures that keep getting more negative (except in
Period 9). In addition, if we set the tracking signal limits at 4, then the tracking signals in
periods 7 9 would fall outside the limits. In conclusion, the forecast method is not
performing adequately. It is not in control and is exhibiting bias.
3-43
Education.
Case: M & L Manufacturing
1. The potential benefit of using a formalized approach to forecasting is that it will be easier to
utilize the computer and easier to quantify the information. A less formalized approach is more
likely to utilize personal intuition. For small forecasting problems, intuition may involve personal
bias, which may be reflected in the forecast. As the forecasting problem gets larger, it will be
impossible to rely solely on a less formalized approach because a persons intuition will be
unable to process the large quantity of information.
2. Product 1
Plotting the data for Product 1 reveals a linear pattern with the exception of demand in week 7.
Demand in week 7 is unusually high and does not fit the linear trend pattern of the remaining
data. Thus, the demand for the 7th week is considered an outlier. There are different ways of
dealing with outliers. A simple and intuitive way is to replace the demand for the week in
question with the average demand from the previous week and the next week in the time-series.
Therefore in this case, the demand of 90 in week 7 will be replaced with 71.5 = [(67 + 76)/2].
t Y t*Y t2
1 50 50.00 1
2 54 108.00 4
3 57 171.00 9
4 60 240.00 16
5 64 320.00 25
6 67 402.00 36
7 71.5 500.50 49
8 76 608.00 64
9 79 711.00 81
10 82 820.00 100
11 85 935.00 121
12 87 1,044.00 144
13 92 1,196.00 169
14 96 1,344.00 196
105 1,020.5 8,449.50 1,015
n tY t Y 14(8,449.50) 105(1,020.5)
b 3.50
n t 2 ( t ) 2 14(1,015) (105) 2
Y b t 1,020.5 3.50(105)
a 46.64
n 14
Y = 46.64 + 3.50t
3-44
Education.
The next four forecasts (t = 15, 16, 17, 18) are:

Period Forecast (T = 46.64 + 3.50t)
15 T = 46.64 + 3.50(15) = 99.14
16 T = 46.64 + 3.50(16) = 102.64
17 T = 46.64 + 3.50(17) = 106.14
18 T = 46.64 + 3.50(18) = 109.64
Product 2
Plotting the data for Product 2 yields a more complex pattern: There is a spike once every four weeks; the
values between the spikes are fairly close to each other. In addition, the data appear to be increasing at the
rate of about one unit per week. An intuitive approach would be to use the average of the three nonspike
periods plus 1.0 to predict the next three nonspike periods. Doing so for the data up to period 15 yields a
very small average forecast error (MAD = 0.54). Given the fact that we have only two data points
following the last spike, a reasonable forecast might be to use the last three period average plus 1.0 (i.e.,
43.33 to predict orders for period 15, and use the average of the values for periods 13 and 14 plus 1.0 (i.e.,
43.5 + 1.0 = 44.5) as a forecast for periods 17 and 18.
The values of the spikes also seem to be increasing. The initial increase was 1.0 and the second increase
was 2.0. A naive forecast here would be 49 + 2 = 51. However, the average increase was 1.5. Using that
would yield a value of 50.50. One might even be tempted to project an increase of 3.0, although either of
the others seems more justifiable. Still, the fact that there is a limited amount of data makes this forecast
more risky.
Hence, the forecasts are:
Period Forecast
15 43.33
16 50.50
17 44.50
18 44.50
3-45
Education.
Case: Highline Financial Services, Ltd.
Aligning data by quarters, we can see (in the tables and in the figures) that demand for service A is
increasing, demand for service B is decreasing, and demand for service C is mixed. Note, though, that
total annual demand for service C has changed only slightly.
A Quarter B Quarter C Quarter

Year 1 2 3 4 1 2 3 4 1 2 3 4
1 60 45 100 75 95 85 92 65 93 90 110 90
2 72 51 112 85 85 75 85 50 102 75 110 100
Change +12 +6 +12 +10 -10 -10 -7 -15 +9 -15 0 +10
Forecast 84 57 124 95 75 65 72 35 121 60 110 110
Freddie should be concerned about service B, because that has declined for every quarter.
Forecasts were made using a simple nave (additive) approach. An argument could be made for using a
multiplicative approach (i.e., basing the forecast on the percentage change from one year to the next
instead of the actual change).
Service A Service B
120
100
100
90
80 80
Demand
Demand
Series1 70
60 60 Year 1
Series2 50
40 40 Year 2
20
30
20
0 10
0
1 2 3 4
1 2 3 4
Quarter
Quarter
Service C
120
100
Demand
80
Series1
60
Series2
40
20
0
1 2 3 4
Quarter
3-46
Education.
Enrichment Module: Additional Methods for Evaluating Forecast Accuracy
The major problem in determining which forecast accuracy measure to use is that there is no universally
accepted accuracy measure. In Chapter 3, several different accuracy measures are covered. To develop a
better understanding of the forecast accuracy measures, first we must understand the nature of the forecast
errors. There are two types of forecast errors.
The first type of error is called the forecast bias, where the direction of the error is the primary
consideration. If the value of the error is negative, then we can conclude that the forecasting method
overestimated sales or demand. If the value of the error is positive, then we can conclude that the
forecasting method underestimated sales or demand because in calculating the error term, we always
subtract the forecasted value from the actual value. Below are three forecast accuracy measures to assess
forecast bias:
1. Mean Forecast Error (MFE)
2. Tracking Signal
3. Control Charts
When we sum the error terms, if there is no bias, positive and negative error terms will cancel each other
out, and the MFE will be zero. As was pointed out above, negative MFE is an indication of
overestimation, and positive MFE is an indication of underestimation. However, if the positive and
negative error values tend to cancel each other out and the MFE or Tracking Signal value is zero or near
zero, then we can conclude that the forecasting method does not result in bias (underestimation or
overestimation). Even if there is no significant bias, it is possible that the forecasting method results in too
much overall variation from the actual values. We call measurement of this type of variation overall
forecast accuracy.
In measuring forecast bias, we cannot measure the overall accuracy of the forecasting method because the
positive and negative errors will cancel each other out. In measuring the overall accuracy, there is never
an error value with a negative sign. There are different overall accuracy measures. In general, in
determining the overall forecast accuracy, we either square the error terms or take the absolute value of
the error terms. The goal of the overall accuracy is to determine how well the forecasting method
estimates the actual values without evaluating forecast bias. In Chapter 3, we covered numerous ways of
evaluating the overall accuracy of forecasts including:
1. Mean Absolute Deviation (MAD)
2. Mean Squared Error (MSE)
3. Standard Error of Estimate
To be able to assess both the overall accuracy and forecast bias, an analyst probably should utilize at least
one method from each category. In the next section, we will discuss two additional methods for
evaluating forecast accuracy.
3-47
Education.
Warning on MSE: The utilization of MSE as a criterion in determining the accuracy of forecasts has
some drawbacks. One of the drawbacks is that in many cases it is not appropriate to compare MSE values
obtained from different forecasting models because different methods use different ways of obtaining the
forecasted values. Thus, comparison of methods using a single criterion such as MSE becomes
questionable. Relative measures use percentages in determining the accuracy of forecasts. Because of the
limitation of MSE mentioned above, analysts may want to use multiple measures to evaluate the accuracy
of forecasting methods. In addition, multiple accuracy measures may be needed to evaluate both forecast
bias and the overall forecast accuracy. Relative measures are generally considered desirable because
percentages are easy to interpret.
The relative forecast accuracy measures that we will discuss in the remaining portion of this section are:
1. Mean Percentage Error (MPE)
2. Mean Absolute Percentage Error (MAPE)
MPE measures the forecast bias while MAPE measures overall forecast accuracy. As with any other
forecast bias measure, when calculating MPE, negative and positive error terms offset each other.
Therefore, for a given time-series data, MPE MAPE.
Before stating the equations for MPE and MAPE, first we need to define Percentage Error. The
Percentage Error (PE) for a given time-series data measures the percentage points deviation of the
forecasted value from the actual value. The equations for PE in period i, MPE, and MAPE are given
below in equations 1, 2, and 3 respectively.
A Fi
PEi i (100)
(1)
Ai
n
PE i
MPE i 1
( 2)
n
n
PE i
MAPE i 1
(3)
n
where:
Ai is the actual value from period i.
Fi is the forecasted (estimated) value from period i.
Both MPE and MAPE are more intuitive and easier to understand and interpret than most of the other
measures because 4.00% has far more meaning to the user than MSE of 224.00 or Tracking Signal value
of 3.50.
3-48
Education.
Problems for the Enrichment Module

Problem 1
An analyst must decide between two different forecasting techniques for weekly sales of bicycles: a linear
trend equation and the nave approach. The linear trend equation is: Yi 12 2 X i , and it was developed
using data from periods 1 through 10. Based on the data from periods 11 through 20, calculate the MPE
and MAPE. Based on the values of MPE and MAPE, comment on which of the two methods has the
greater overall accuracy. Compare the two methods in terms of the forecast bias.
t Units Sold t Units Sold

11 25 16 39
12 28 17 48
13 34 18 50
14 40 19 47
15 44 20 54
Problem 2
In solving problem 20 in the textbook, we calculated both MAD and MSE values. In this exercise, we are
going to use the same data and information and calculate MPE and MAPE values. The revised problem is
stated as follows:
Two different forecasting techniques (F1 and F2) were used to forecast demand for cases of bottled water.
Actual demand and the two sets of forecasts are as follows:
Forecasted demand 1 Forecasted demand 2

t Actual Demand (F1) (F2)
1 68 66 66
2 75 68 68
3 70 72 70
4 74 71 72
5 69 72 74
6 72 70 76
7 80 71 78
8 78 74 80
a. Compute MPE for both sets of forecasts. Which of the two forecasting methods has a higher forecast
bias? Explain.
b. Compute the MAPE for the two sets of forecasts. Which of the two forecasting methods provides
higher overall accuracy with this data set?
3-49
Education.
Solutions to Enrichment Module Problems

Solution to Problem 1 (round % to two decimals)
Percentage Error Calculations using the Nave Method
Period Actual Forecast Error PE i PE i

11 25
12 28 25 3 10.71%* 10.71%
13 34 28 6 17.65% 17.65%
14 40 34 6 15.00% 15.00%
15 44 40 4 9.09% 9.09%
16 39 44 5 -12.82% 12.82%
17 48 39 9 18.75% 18.75%
18 50 48 2 4.00% 4.00%
19 47 50 3 -6.38% 6.38%
20 54 47 7 12.96% 12.96%
Sum 68.96% 107.36%

= ( ) 100

28 25
12 = ( ) 100 = 10.71%
28
68.96%
MPE 7.66%
9
107.36%
MAPE 11.93%
9
3-50
Education.
Percentage Error Calculations using the Linear Trend Equation
Period Actual Forecast Error PE i PE i

11 25 34 9 -36.00%* 36.00%
12 28 36 8 -28.57% 28.57%
13 34 38 4 -11.76% 11.76%
14 40 40 0 0.00% 0.00%
15 44 42 2 4.55% 4.55%
16 39 44 5 -12.82% 12.82%
17 48 46 2 4.17% 4.17%
18 50 48 2 4.00% 4.00%
19 47 50 3 -6.38% 6.38%
20 54 52 2 3.70% 3.70%
Sum -79.11% 111.95%

= ( ) 100

25 34
11 = ( ) 100 = 36.00%
25
79.11%
MPE 7.91%
10
111.95%
MAPE 11.20%
10
Note: We had 10 periods for which we had both actual demand and forecasts.
a. MPE & Forecast Bias:

Nave method: Because the MPE is positive for the nave forecasting method (7.66%), it is
underestimating sales by 7.66%.
Linear trend method: Because the MPE is negative (7.91%) for the linear trend method, the
trend equation is overestimating sales by 7.91%.
Conclusion: The linear trend method has higher bias.
b. MAPE & Overall Accuracy
Nave method: The MAPE 11.93%

Linear trend method: The MAPE is 11.20%.
Conclusion: The linear trend method has higher overall accuracy.
3-51
Education.
To decide between the two methods, we have to compare the consequences and the cost of
overestimation with the consequences and the cost of underestimation. The cost of overestimation
involves the cost of carrying excess inventories, while the cost of underestimation includes the
cost of shortages, backordering, and lost sales.
If the cost of underestimation is less than the cost of overestimation, then the nave method
should be selected.
If the cost of overestimation is less than the cost of underestimation, then the linear trend method
should be used.
Solution to Problem 2 (round % to two decimals)

a. Forecast Errors and Percentage Errors Using the First Forecasting Method
Period ei PE i PE i
1 2 2.94% 2.94%
2 7 9.33% 9.33%
3 2 -2.86% 2.86%
4 3 4.05% 4.05%
5 3 -4.35% 4.35%
6 2 2.78% 2.78%
7 9 11.25% 11.25%
8 4 5.13% 5.13%
Sum 28.27% 42.69%
28.27%
MPE 3.53%
8
42.69%
MAPE 5.34%
8
3-52
Education.
b. Forecast Errors and Percentage Errors Using the Second Forecasting Method
Period ei PE i PE i
1 2 2.94% 2.94%
2 7 9.33% 9.33%
3 2 0.00% 0.00%
4 3 2.70% 2.70%
5 3 -7.25% 7.25%
6 2 -5.56% 5.56%
7 9 2.50% 2.50%
8 4 -2.56% 2.56%
Sum 2.10% 32.84%
2.10%
MPE 0.26%
8
32.84%
MAPE 4.11%
8
We recommend the second forecasting method for two reasons:

1. The second forecasting method has less forecast bias because (MPE2 = 0.26%) < (MPE1 =
3.53%).
2. The second forecasting method results in higher overall forecast accuracy because (MAPE2 =
4.11%) < (MAPE1 = 5.34%).
3-53
Education.

Chapter 3 Forecasting PDF

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Chapter 3 Forecasting PDF

Загружено:

Авторское право:

Доступные форматы

Chapter 03 - Forecasting

Answers to Discussion and Review Questions

Minutes of daytime calls

Critical Thinking Exercises

6. Student answers will vary. Some possibilities follow:

c. If a company used a committee of executives to forecast and one executives views

e. If a salesperson intentionally understated future demand to be able to earn a bonus more

2) A five-month moving average is shown below:

0.10(18) + 0.30(22) + 0.60(20) = 20.40 (round to two decimals)

Month Forecast = F(old) + .20[Actual F(old)]

5) A linear trend forecast is shown below (round b & a to two decimals):

For Sept., t = 8, and Yt = 16.86 + 0.50(8) = 20.86 = 20,860

3. a. Exponential smoothing forecast for September with alpha = 0.10:

a. Nave approach forecast for Week 6 = Demand in Week 5 = 22

c. Set the trend equation = 800 and solve for t:

Round b & a to two decimals:

b. Round values to two decimals.

Actual St + Tt = TAFt TAFt + .5(At TAFt) = St Tt1 + .4 (TAFt TAFt1 Tt1) = Tt

11. Yt = 70 + 5t t = 0 (June of last year)

Trend component calculations: = 40 6.5 + 2 2 (round to two decimals):

8 = 40 6.5(8) + 2(82 ) = 116.00

Quarter Year 1 Year 2 Year 3 Year 4

Sum of Seasonal Relatives = 0.50 + 1.50 + 0.75 + 1.25 = 4.00

Seasonal relatives (round to two decimals):

Sum of Seasonal Relatives = 0.79 + 1.34 + 0.87 = 3.00

8=1 82 636 91.29 82/91.29 = 0.8982

15 = 1 84 645 93.00 84/93.00 = 0.9032

22 = 1 87 663 96.43 87/96.43 = 0.9022

Group and Average the Indexes to Derive Seasonal Relatives

Week Season Seasonal

b. Deseasonalize car sales: Units Sold / Index (round to two decimals)

Unit Sales & Deseasonalized Data

19. Deseasonalize the values, where:

Deseasonalized sales = (Actual sales) / (Seasonal relative) (round to two decimals):

Round MAD & MSE to two decimals:

d. MAPE calculations (round to two decimals):

MAPE (F1): 42.69%/8 = 5.34%

MAD F1: 28/10 = 2.80

b. Compute MAPE for each forecast method (round to two decimals).

MAPE F1: 3.58%/10 = 0.36%

c. Nave Method Forecast

Round MSE, MAD, TS, & control limits to two decimals:

Method MAD MSE

24. a. Let x1 = weight in lb.

Round b & a to two decimals:

Actual data are represented by circles.

Round r to four decimals:

b. r = 0.9854 implies a strong, negative relationship between price and demand.

Round b & a to two decimals:

(13)(31, ,329) (366)(1,076)

d. y = 66.44 + 0.58 (41) = 90.22 (round to two decimals)

Round b & a to two decimals:

c. Y = 0.67 + (6.16)(2) = 11.65 (round to two decimals)

28. Round MAD & Tracking Signal to two decimals:

*Initial MAD = Sum of Cumulative |e| [1 through 5]/5 = 25/5 = 5.00

29. Refer to data in Problem 22 (shown below).

MAD F1: 28/10 = 2.80

a. Tracking signal using cumulative error for months 1 to 10:

F1: 12/2.80 = +4.29

Both are slightly beyond the limits of 4.

Control limits are 0 2 MSE :

#1: 0 2 10.44 0 6.46

15.00 F2: 2s Limits for Errors