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FORECASTING TECHNIQUES

Raju trading company has given sales report for the past 11 years as follows:

YEAR SALES
1 23
2 40
3 25
4 27
5 32
6 48
7 33
8 37
9 37
10 50
11 40
Compute all forecasting techniques and forecast accuracy using forecast errors with =0.35, =0.55
and =0.3 and interpret them.

Solution
Given:-

YEAR SALES
1 23
2 40
3 25
4 27
5 32
6 48
7 33
8 37
9 37
10 50
11 40

1.Moving Average-3 months:

Calculation:
YEAR SALES 3-Moving Average
1 23
2 40 #N/A
3 25 #N/A
4 27 29.33333333
5 32 30.66666667
6 48 28
7 33 35.66666667
8 37 37.66666667
9 37 39.33333333
10 50 35.66666667
11 40 41.33333333
12 42.33333333

F4 = (23+30+25) /3
= 29.33

3-Moving Average
60
50
40
Value

30
Actual
20
Forecast
10
0
1 2 3 4 5 6 7 8 9 10 11
Data Point
2.Moving Average-5 months:

YEAR SALES 5-Moving Average


1 23
2 40 #N/A
3 25 #N/A
4 27 #N/A
5 32 #N/A
6 48 29.4
7 33 34.4
8 37 33
9 37 35.4
10 50 37.4
11 40 41
12 39.4
Calculation:

F6 = (23+40+25+27+32) /5
= 29.4

5-Moving Average
60
50
40
Value

30
Actual
20
Forecast
10
0
1 2 3 4 5 6 7 8 9 10 11
Data Point

Interpretation:
Moving Average
60 ACTUAL
50 EM
40
Actual
Value

30
Forecast
20
Actual
10
Forecast
0
1 2 3 4 5 6 7 8 9 10 11
Data Point

The five-months moving average smooths out fluctuations to a greater extent than the three-
months moving average. However, the three-months average more closely reflects the most recent
data available i.e., actual demand. In general, forecasts using the longer-period moving average are
slower to react to recent changes in demand than would those made using shorter-period moving
averages.

3.Three Months Weighted Moving Average:

Year Sales Weighted moving


average(3-mon)
1 23 #NA

2 40 #NA

3 25 #NA

4 27 29.61

5 32 28.55

6 48 29.16

7 33 39.15

8 37 37.78

9 37 37.55

10 50 36.32

11 40 43.5

12 42.79
Calculation:

F4 = 23(0.17) +40(0.33) +25(0.5)


= 29.61

4.Five Months Weighted Moving Average:

Year Sales Weighted Moving


Average(5) Calculation:

1 23 #NA

2 40 #NA

3 25 #NA F6 = 32(0.33)+27(0.27)+25(0.2)
4 27 #NA +40(0.13)+23(0.07)

5 32 #NA = 29.66

6 48 29.66
7 33 35.93

8 37 35.51

9 37 36.77

10 50 37.28

11 40 41.54

12 41.22

5.Exponential Smoothing:
YEAR SALES ⍺=0.35 ⍺=0.55
1 23
2 40 #N/A #N/A
3 25 23 23
4 27 34.05 30.65
5 32 28.1675 28.1075
6 48 27.408625 27.609125
7 33 30.3930188 29.5850188
8 37 41.8375566 37.8717603
9 37 36.0931448 35.6794682
10 50 36.6826007 36.2737075
11 40 36.8889102 36.6005391
12 45.4111186 42.6302965
Calculation:

Ft+1 = Dt + (1-)Ft

=0.35

F5+1 =0.35(32) + (1-0.35)(28.1675)


=27.408

=0.55
F5+1 =0.55(32)+(1-0.55)(28.1075)
=27.609

Exponential Smoothing,0.35
60
50
40
Value

30
Actual
20
Forecast
10
0
1 2 3 4 5 6 7 8 9 10 11
Data Point
Exponential Smoothing,0.55
60
50
40
Value

30
Actual
20
Forecast
10
0
1 2 3 4 5 6 7 8 9 10 11
Data Point

Exponential Smoothing
60
50
40
Actual
Value

30
Forecast
20
Actual
10
Forecast
0
1 2 3 4 5 6 7 8 9 10 11
Data Point

Interpretation:

The forecast using the higher smoothing constant, =0.35, seems to react more strongly to changes
in demand than does the forecast with =0.55, although both smooth out the random fluctuations
in the forecast. Notice that both forecasts lag behind the actual demand
Adjusted exponential smoothing:

Ft+1 AFt+1
Year Sales

23
1 #NA

40
2 #NA #NA

25
3 23 #NA

27
4 30.65 32.950

32
5 28.1075 28.957

48
6 27.609 28.054

33
7 29.585 30.489

37
8 37.871 40.989

37
9 35.679 37.204

50
10 36.273 37.518

40
11 36.6005 37.569

12 42.6302 45.117
REGRESSION:

Year Sales x*y x2 Forecast(y)

23
1 23 1 27.38

40
2 80 4 29.03

25
3 75 9 30.68

27
4 108 16 32.33

32
5 160 25 33.98

48
6 288 36 35.63

33
7 231 49 37.28

37
8 296 64 38.93

37
9 333 81 40.58

50
10 500 100 42.23

40
11 440 121 43.88
Regression
40

35

30

25

20

15

10

0
1 2 3 4 5 6 7 8

Seasonal adjustments:

Year Sales Seasonal factor

23
1 0.0586

40
2 0.102

25
3 0.063

27
4 0.068

32
5 0.081

48
6 0.122

33
7 0.084

37
8 0.094

37
9 0.094

50
10 0.127

40
11 0.102

Calculations:

Seasonal factor Si = D /

Eg: S1 =23/392 = 0.0586


9.Forecast Errors:

Years Sales 3-Moving 5-Moving Exponential Exponential Adjusted Regression


Dt Average Average =0.35 Exponentia
=0.55 l

Ft Dt-Ft Ft Dt-Ft Ft Dt-Ft Ft Dt-Ft Ft Dt Ft Dt-Ft


-
et
Ft

1 23 #N/A 0 0 #N/A 0 #N/A 0 0


#NA #NA 27.38

2 40 #N/A 0 0 #N/A 0 #N/A 0 0


#NA #NA 29.03

3 25 #N/A 0 0 23 2 23 2 0
#NA #NA 30.68

4 27 29.33 2.33 0 34.05 7.05 30.65 3.65 5.


32.950 32.33
#NA 95

5 32 30.66 1.34 0 28.16 3.84 28.10 3.9 3.


28.957 33.98
#NA 05
6 48 28 20 18.6 27.40 20.6 27.60 20.4 19
28.054 35.63
.9
29.4 5

7 33 35.66 2.66 1.4 30.39 2.61 29.58 3.42 2.


30.489 37.28
34.4 52

8 37 37.66 0.66 4 41.83 4.83 37.87 0.87 3.


40.989 38.93
33 98

9 37 39.33 2.33 1.6 36.09 0.91 35.67 1.33 0.


37.204 40.58
35.4 2

10 50 35.66 14.34 12.6 36.68 13.3 36.27 13.7 12


37.518 42.23
2 3 .4
37.4 8
11 40 41.33 1.33 1 36.88 3.12 36.6 3.4 2.
37.569 43.88
41 44