Linear Programming: Assignment Method

Another type of special purpose is the program used in linear programming. It is

concerned in allocating the jobs to each of the workers for minimum cost or maximum revenues.

1. The assignment problem is the problem of assigning n workers to n jobs, in such a way
that a worker is assigned to only one job. The workers assigned to it and the costs of
completing all of the jobs will be minimized.

2. The assignment method is the standard procedure for solving the assignment problem
on the basis of the assignment table.

There are three main steps to follow in solving an assignment problem:

1. Subtract the smallest cost from each entry in each row. If each zero can now be
assigned in a one-to-one correspondence with the “workers”, an optional solution is
obtained. If not, go to step 2.

2. Subtract the smallest cost in each column. If the zero entries can now be distributed in
each one corresponding with the “workers”, an optimal solution is obtained or reached. If
not, go to step 3.

3. Cover the zero entries by vertical or horizontal lines, using least numbers of lines
possible. (This can be done by covering first the row or column having the most numbers
of zeros.) Subtract the smallest uncovered cost from each uncovered cost but add it to
the entry found at the intersection of the lines. If an assignment is already possible, an
optional solution is reached. If not, repeat step 3. An assignment is optimum if the
numbers of lines is equal to the numbers of rows or the or the numbers of column

Example 1.

During the foundation Day, the BA Faculty Club’s four representatives participate in
different sports such as walkathon, marathon, swimming, and running. The table below shows
their performance per event (minutes). Determine who among the faculty representatives will
participate in each event.

Walkathon Marathon Swimming Running

Andrea 20 30 25 26
Annika 25 26 27 30
Jazen 35 25 27 30
Louise 30 28 28 20

Since each faculty is allowed to participate in only one event, the assignment method is
the most effective way to find an optimum solution.
Solution:

We start reducing the rows by subtracting the smallest the smallest number in each row
from all the numbers in the row.

Walkathon Marathon Swimming Running

N Andrea
o w 0, w10 e 5 r e 6d u c e
Annika 0 1 2 5
Jazen 10 0 2 5
Louise 10 8 8 0
numbers in the column.

Walkathon Marathon Swimming Running

Since
Andrea the number of lines
0 is equal to the
10numbers of rows and
3 column, then6it is already optimal.
Annika 0 1 0 5
Assigning the events to the faculty members:
Jazen 10 0 0 5
Louise 10 8 6 0
Andrea – can play walkathon
Annika – can play walkathon and swimming
Jazen – can play marathon and swimming
Louise – can play running
Final decision:
Faculty Events Time
Andrea Walkathon 20
Annika Swimming 27
Jazen Marathon 25
Louise Running 20
Total 92 minutes

Example 2.

The Gayoma Company has three jobs to be done on three machines. Each job must be
done on one and only one machine. The cost of each machine is given next page. Determine
the job assignment which will minimize the cost.

Machines
Jobs
X Y Z
A 1400 1600 1800
B 1200 1300 1400
C 1400 1800 1500
 We reduce the given numbers by deleting two zeros, then the new table.

Table 1.

Machines
Jobs
X Y Z
A 14 16 18
B 12 13 14
C 14 18 15

Select the smallest number among the given rows

Table 2.

Machines
Jobs
X Y Z
A 0 2 4
B 0 1 2
C 0 4 1

Now reduce each column by subtracting the smallest number in each column.

Table 3.

Machines
Jobs
X Y Z
A 0 1 3
B 0 0 1
C 0 3 0

Since we have three lines that correspond to the number of rows and columns, then it is already
optimal.

Final Decision:

Jobs Machines Cost

A X ₱1, 400.00
B Y ₱1,300.00
 C Z ₱1,500.00
Total ₱4,200.00

Example 3.

Former UAAP players are about to join the most prestigious league in the country, the
Philippines Basketball Association (PBA). Five teams are willing to acquire the services of the
following players: James Yap, Mark Cadona. Arwind Santos, Ronald Tubid, and Bonbon
Custodio.

TEAMS
Burger Talk N' Purefood Ginebra San
Players King Text s King Miguel
Bonbon
Custodio
200,000 250,000 175,000 210,000 180,000
Ronald
Tubid
250,000 170,000 200,000 180,000 190,000
Arwind
Santos
150,000 210,000 185,000 165,000 200,000
Mark
Cardona
160,000 150,000 175,000 180,000 190,000
James
Yap 175,000 180,000 150,000 200,000 210,000

The table shows the monthly salaries offer including the bonuses and other benefits.
Determine the optimal answer on each team to minimize their costs.

Solution:

To make the computation much easier, we temporarily remove the three zeros.

TEAMS
Burger Talk Ginebra San
Players King N' Text Purefoods King Miguel
Bonbon
Custodio 200 250 175 210 180
Ronald
250 170 200 180 190
 Tubid
Arwind
Santos 150 210 185 165 200
Mark
Cardona 160 150 175 180 190
James
Yap 175 180 150 200 210

*Results after removing three zeros in each entry is presented in the above table.

TEAMS
Burger Talk Pure Ginebra San
Players King N' Text foods King Miguel
Bonbon
Custodio 25 75 0 35 5
Ronald
Tubid 80 0 30 10 20
Arwind
Santos 0 60 35 15 50
Mark
Cardona 10 0 25 30 40
James
Yap 25 30 0 50 60

*Results after subtracting the smallest entry in each row is shown in the above table

Since the zeros cannot be assigned to each player, go on to the next step.

TEAMS
Burger Talk Ginebra San
Players King N' Text Purefoods King Miguel
Bonbon
Custodio 25 75 0 35 0
Ronald
Tubid 80 0 30 10 15
Arwind
Santos 0 60 35 15 45
Mark
Cardona 10 0 25 30 35
James
Yap 25 30 0 50 55
*Results after subtracting the smallest entry in each column (columns 5 and 6, Ginebra King
and San Miguel, respectively).

TEAMS
Burger Talk Ginebra San
Players King N' Text Purefoods King Miguel
 0
Bonbon
Custodio
25 75 25 0
Ronald
Tubid 80 0 30 0 15
Arwind
Santos 0 60 35 5 45
Mark

Cardona 10 0 25 20 35
James Yap
25 30 0 40 55

Since the number of lines used is equal to the number of rows and columns, assignment is
optimum.

Assigning the teams to the players (giving each zero to each player)

Bonbon Custodio – can play to Purefoods and San Miguel

Ronald Tubid – can play to Talk N’ Text and Ginebra King

Arwind Santos – can play to Burger King

Mark Cardona – can play to Talk N’ Text

James Yap – can play to Purefoods

Final Decision:

Players Teams Cost

Bonbon Custodio San Miguel ₱180,000.00

Ronald Tubid Ginebra King ₱180,000.00

Arwind Santos Burger King ₱150,000.00

Mark Cardona Talk N’ Text ₱150,000.00

James Yap Purefoods ₱150,000.00

Total ₱810,000.00

*Covering zero entries with the least number in vertical and horizontal lines.

TEAMS
Burger Talk N' Ginebra
Players King Text Purefoods King San Miguel
Bonbon 25 0
Custodio 25
 75 0
Ronald
Tubid 80 0 30 0 15
Arwind
Santos 0
60 35 5 45
Mark
Cardona 10 0 25 20 35
James
Yap 25 30 0 40 55

NAME: __________________________________________DATE:_________________

SECTION/TIME/DAY:_________________________ROOM:_____________RATING________

Exercise 14
1. Five security officers are requested by the University of the East to be assigned in five
buildings. The daily cost of each officer in each building is indicated below. Determine the best
allocation of officers to various buildings so as to minimize the cost.

BUILDINGS

ACA Engineering BA Fine Arts TYK

1. 300 250 330 270 360
2. 400 350 250 280 290
3. 360 400 370 300 350
4. 280 250 270 280 310
5. 350 380 370 300 320

2. Doggy agency has three police dogs to be assigned to three different department stored. The
cost of each dog on each department s given below

Dogs Isetan Show Mart Robinsons

1 200 350 270

2 300 250 150

3 400 350 270

Determine the optimum cost of each dog per department.

3. Find the least cost of assignment

Machines A B C D
J 1 300 500 700 900
 O 2 300 700 500 700
B 3 900 600 300 300
S 4 800 900 500 500

4. Jacqueline and Vilma are business partners. They decided to hire four accountants to be
assigned to audit their business. The next table shows the cost per accountants. Determine the
best allocation for each accountant.

Accountants 1 2 3 4

B A 14,000 12,000 13,000 15,000

U B 16,000 10,000 12,000 14,000

S C 13,000 16,000 15,000 11,000

S D 12,000 13,000 14,000 11,000

5. Former PBL players are about to join the most prestigious league in the country, the
Philippines Basketball Association (PBA). Four teams are willing to acquire the services of the
following players: James Yap, Rich Alvarez, Paul Artadi, and Ronald Tubid. The table below
shows the monthly salaries they wanted excluding the bonuses and other benefits. Determine
the optimal answer for each team to minimize their cost.
 Yap Alvarez Artadi Tubid

Red Bull ₱150,000 ₱155,000 ₱145,000 ₱165,000

Purefoods ₱165,000 ₱160,000 ₱155,000 ₱175,000

FedEx ₱150,000 ₱155,000 ₱165,000 ₱160,000

Talk N’ Text ₱160,000 ₱155,000 ₱165,000 ₱150,000

6. Determine the optimal assignment of the management teams to the four projects

PROJECTS

W X Y Z
1. 3,800 2,800 2,400 3,600
2. 2,000 2,400 3,000 2,000
3. 3,200 1,800 2,200 2,800
4. 4,000 3,200 2,600 3,400

7. The Fast Food lane decided to acquire the services of four part-time students to work as
service crew. They were given a speed test. The table below indicates their performances per
lane. Determine the best allocation for each crew.

Lane 1 Lane 2 Lane 3 Lane 4

Crew 1 15 18 20 16
Crew 2 18 17 14 20
Crew 3 21 20 13 15

Crew 4 17 15 18 19

8. Five workers of Denzel Engineering Works are to be assigned, one each to five machines.
Find the cost of allocation of the variable to the five workers.

WORKERS

Machines A B C D E
1 74 52 66 64 90
2 50 44 78 68 48
3 62 70 52 56 72
4 84 36 56 80 46
5 58 38 76 54 84

9. The V. Mapa High School students are about to join the Annual Quiz Bee to be held at the
PICC. The quiz bee consists of four subjects such as Math, Science, English, and Physics. The
table below shows their errors per subject in the qualifying round. Determine who among the
students will represent in the quiz bee.

Student 1 Student 2 Student 3 Student 4

Math 5 3 5 2
 Science 1 6 3 4
English 4 2 3 1
Physics 2 3 4 1

10. Miling and Luming Contractors need three carpenters to be assigned to three projects.
Determine the best allocation of each carpenter.

Carpenters A B C
1 80 90 54
2 54 108 30
3 46 104 48

11. Three regular researchers of Mic-Mic Marketing Research are required to submit their
Estimated Project Completion (EPC) times (days) to three clients. The table below shows their
EPC. Determine the best allocation for three researchers.

Clients

Employees 1 2 3

Denzel 20 30 18

Rino 18 36 10
 Alvin 12 28 6

Transportation and Assignment Model

CASE STUDY

NHOLRAM-BONG CORPORATION

The Nholram-Bong Corporation is a manufacturer and distributor of CCTV cameras. Its

CCTV camera is distributed throughout the Philippines and has a high demand in the market for
the last seven (7) years. The Corporation operates three (3) plants that manufacture the CCTV
cameras and are distributed to five (5) warehouses.
 Last year, the Nholram-Bong Corporation experienced a big drop in the demand of the CCTV
cameras due to the high inflation. The sales supervisor of the Nholram-Bong Corporation
predicted that the demand for CCTV cameras will remain low for the next five (5) years. The
Corporation is considering to close one of its plants since at present it has an excess capacity of
68,000 units per week. The forecasted weekly demands for next year are as follows

Warehouse 1 18,000 units

Warehouse 2 26,000 units

Warehouse 3 22,000 units

Warehouse 4 30,000 units

Warehouse 5 16,000 units

Table 4.1 shows the production costs for each plant, the variable costs both during regular
time and overtime, and the fixed costs during the operation and non-operation

Table 4.1

NHOLRAM-BONG CORPORATION

Variable Costs and the Fixed Production Costs per Week

  Fixed Cost per week

Plant Variable Cost Operating Non-operating
Plant 1 Regular time ₱5,600 / unit ₱28,000 ₱12,000
Plant 1 Overtime 7,040 / unit    
Plant 2 Regular time 5,560 / unit 24,000 10,000
Plant 2 Overtime 6,960 / unit    
Plant 3 Regular time 5,440 / unit 30,000 15,000
Plant 3 Overtime 6840 / unit    

Table 4.2 shows the distribution costs from each plant to each warehouse.

Table 4.2

NHOLRAM-BONG CORPORATION

Distribution Cost per Unit

Distribution Center
 From Plant W1 W2 W3 W4 W5

1 ₱2,000 1,760 1,960 1,840 2,240

2 ₱1,600 2,080 2,000 2,240 2,280

3 ₱2,240 2,120 2,040 2,160 1,400

The Plant Capacities in Units per Week

Plant 1 Regular Time 54,000 units
Plant 1 Overtime 14000 units
Plant 2 Regular Time 40,000 units
Plant 2 Overtime 10,000 units
Plant 3 Regular Time 50,000 units
Plant 3 Overtime 12,000 units

If Nholram-Bong down any of its plants, its weekly costs will change as the fixed costs
decrease due to non-operation.

Discussion Questions

1. Evaluate the various conditions that will meet the weekly demand for both operating
and non-operating plants. Determine which condition will minimize the costs.

2. Discuss he implementation if Nholram-Bong Corporation closes any of its plants. Will

it be advantageous to the Corporation?

Chapter 5
Forecasting
Key Terms:
Forecast
Qualitative Method
Quantitative Method
Delphi Method
 Jury of Executive Opinion
Sales Force Composite
Consumer Market Survey
Time Series
Time Series Method
Trend
Seasonality
Cycles or Cyclical Components
Random Variations/Irregular Components
Smoothing Method
Smoothing Constant
Weighted Moving Averages
Exponential Smoothing
Trend Projections
Mean Absolute Deviation (MAD)
Mean Squared Error (MSE)
Mean Absolute Percent Error (MAPE)
Trend Line Forecast

Learning Objectives

At the end of the chapter, the students are expected to:

1. Define forecasting
2. Know the significance of forecasting in business community
3. Identify the different types of forecasting method

4. Differentiate qualitative forecasting method from quantitative method

5. Determine the different types/ components of forecasting
6. Describe the characteristics of judgemental forecasting
7. Forecast using simple average, weighted moving averages, and exponential
smoothing

8. Calculate errors in forecasting

 9. Graph different forecasting methods

10. Relate the background of other subjects such as Management, Marketing,

and Statistics to forecasting

11. Solve forecasting problems using the computer

Introduction

In business of any field, anticipating the needs of your clients and serving these needs,
definitely spell success. A good management team uses past and present data, analyzes the
trend of the current situation, and still relies on “gut feeling” on what is likely to happen in the
future. Decisions are made every day, and coming up with the best strategic plan of action in
the future is an essential tool. Consequently, managers try to minimize the “uncertainty” of the
future in forecasting. A forecast simply means a prediction of what is likely to happen in the
future. Converting the prediction into numbers and concrete data is the main purpose of
forecasting.

In this chapter, several types of forecasting techniques are to be discussed. It is but

worthy to mention that, managers accept the fact that regardless of the technique used, there is
no perfect forecast. There is however eight basic steps to follow in forecasting. These are:

1. Establish the objectives of the forecast being aimed for.

2. Choose the items / quantities to be forecasted.

3. Determine the period of time for the forecast.

4. Decide on the forecasting technique.

5. Gather the data needed.

6. Utilize the forecasting method.

7. Make the forecast.

8. Apply the forecasting result.

These steps summarize the general procedure in following:

What is forecasting?
It is the process of elimination in unknown situations. Prediction is similar, but in a more
general term.
Business forecasting is an estimate or prediction of future development in business such
as sales, expenditures, revenues, income, and profits. It is considered as one of the most
important aspect of corporate planning.
Demand forecasting is a forecast that projects the company’s sales.
Classification of Forecasting
There are two classifications of forecasting methods: Qualitative and Quantitative.
 FORECASTING METHODS

Forecasting

Methods

Quantitative Method Qualitative Method

Time Series Causal Method Delphi Method

Moving Jury of
Averages
Regression Executive Opinion

Analysis

Exponential Sales Force

Smoothing Multiple Regression Composite

Trend Consumer

Projections Market Survey

Qualitative Forecast
This type of forecasting method is based on judgements or opinions and is subjective in
nature. It does not rely on mathematical computations.
Types of Qualitative Methods

Delphi Method
One of the most commonly used qualitative forecasting is the Delphi Method. Here, a
group of experts separated from each other makes a forecast. In its usual application, they are
asked to answer questionnaire. These groups are called the “respondents”. The answer and
other data are gathered, collected, summarized by staff personnel and are turned over to
another group, the decision makers or the forecasters. It is important to note that Delphi
Method’s principle is that, responses from the first questionnaires are used and considered in
preparing the second set of questionnaires. Responses are gathered, and the process is
repeated until a consensus of the group is reached.

Jury of Executive Opinion

Jury of Executive Opinion is a forecasting method that is recommended when a situation
is not likely to repeat itself. This is qualitative forecast that is based on a judgement of a single
expert or a consensus of the group of expert.

Sales Force Composite

In this method, a salesperson predicts his sales in his area based on past performance
and trend. This forecast is reviewed to be sure it is realistic and attainable.

Consumer Market Survey

This method gathers information, data from customers and prospective customers
regarding their future needs and intended purchases, thereby improving forecasting details and
products design.

Quantitative Forecast (Projective Methods)

This type of forecasting method is based on quantitative models, and is objective in
nature. It relies heavily on mathematical computations.

Types of Quantitative Method

Time Series Methods
It is attempt to predict the future by means of historical data and a set of ordered
observations on a quantitative characteristic of an event at equally spaced time positions.

Components of a Time Series

The pattern or behavior of the data in a time series has several components. A time
series typically has four separate components: Trend (T), Seasonality (S), Cycles or Cyclical
Components, and Random Variations (R)/Irregular Components.

1. Trend (T) – the gradual shifting (upward or downward movement) of the time series. The
shifting or trend is frequently the result of long term factors such as

changes in the community, demographic characteristics of the population, technology, and

consumer’s preferences.
 1200

1000

800
Series (100000)
600

400

200

0
0 1 2 3 4 5 6
Year

Figure 5.1
Linear Trend of DVD Sales

Figure 5.1 shows a straight line that may be a good approximation of the trend in DVD
sales. When a time series consists of random fluctuation move around a long-term trend line, a
linear equation may be used to estimate the trend. This is shown in Figure 5.2

Volume Volume Volume

Time Time Time

Figure 5.2
Examples of Some Possible Time Series Trend Patterns

2. Seasonality (S) – is a pattern of the demand fluctuation above or below the trend line that
occurs every year. This is the component of the time series that represents the variability in the
data due to seasonal influences.

3. Cycles or Cyclical Components – any recurring sequence of points above and below the
trend line lasting more than one year. These are usually tied into the business cycle.
 Trend line

Time
Figure 5.3
Trend and Cyclical Components of a Time Series
4. Random Variations (R) – “blips” in the data caused by chance and unusual situations and do not
follow discernible pattern.

In statistics, there are two general forms of time series models.

a. Multiplication Model – assumes that demand is the product of the four components.
Demand = T x S x C x R
b. Additive Model – adds the components together to provide an estimate.
Demand = T + S + C + R

If in case we do not know the value of C and R, forecast becomes:

F = T + S (Additive Model)
And F = T x S (Multiplication Model)

Seasonal peaks Trend Component

Average demand over 4 years

Actual demand

Figure 5.4
Time Series and Its components

Smoothing method
 Three more forecasting methods are to be discussed in this section. These methods are
moving averages, weighted moving averages, and exponential smoothing. These methods
“smooth out” random fluctuations caused by irregular components of the time series. They are
best used for stable time series where no movement in trend is expected.

Naïve Method

Naïve forecast is the simplest technique. It simply uses the actual demand for the past
period as the forecasted demand for the next period. This makes the theory that the past will
repeat. It also assumes that any time series components (trend, seasonality or cycles) are either
reflected in the previous period’s demand or do not exist.

An example of naïve forecasting is illustrated in Table 5.1

Table 5.1
Naïve forecasting
Period Demand Forecast
1 35
2 40 35
3 55 40
4 65 55
5 60 65

Notice the demand on Period 1 was 35, the naïve forecast for the upcoming period is 35.

Moving Averages

These use the average of the most recent n data values in the time series forecast for
the next period.

Formula

Moving Average ¿
∑ ( most recent n data values ) (Table 5.1)
n

Where n is the number of period in the moving average.

Example:
 Compute for a four-month moving average using the data given in Table 5.2

Four-Month Average Forecast

Month Actual Demand Forecast
January 21  
February 25  
March 29  
April 21  
21+ 25+29+21
=24
May 25 4
25+29+21+25
=25
June 20 4
29+21+25+20
=24
July 18 4
21+ 25+20+18
=21
August 21 4
25+20+18+21
=21
September 20 4
20+18+21+20
=20
October 19 4
18+21+20+19
=20
November 18 4
21+ 20+19+18
=20
December 15 4

Weighted Moving Averages

This is a smoothing method that uses a weighted average of the recent n data as
the forecast.

Formula:

Weighted Moving Average =

∑ ( weight for period n ) (demand∈period n) (Table
∑ weights
5.2)

Where n is the number of period in the weighted moving average.

Example 1.
Compute for a three month weighted moving average (Table 5.3)
Three-Month Weighted Moving Average Forecast
 Three-Month Weighted Moving
Month Demand Average
January 21  
February 25  
March 29  
⦋ ( 29 ×3 )+ (25 × 2 )+ 21 ⦌
  =26
April 21 6
⦋ ( 21 ×3 ) + ( 29 ×2 )+25 ⦌
=24
May 25 6
⦋ ( 25 ×3 )+ ( 21×2 )+29 ⦌
=24
June 20 6
⦋ ( 20 ×3 )+ ( 25× 2 )+ 21 ⦌
=22
July 18 6
⦋ ( 18 ×3 )+ (20 × 2 )+ 25 ⦌
=20
August 21 6
⦋ ( 21 ×3 ) + ( 18 ×2 ) +20 ⦌
=20
September 20 6
⦋ ( 20 ×3 )+ ( 21×2 )+18 ⦌
=20
October 19 6
⦋ ( 19 ×3 )+ ( 20 × 2 )+ 21 ⦌
=20
November 18 6
⦋ ( 18 ×3 )+ (19 × 2 )+ 20 ⦌
=19
December 15 6

Example 2.
Compute a four-period weighted moving average forecast from Table 5.4
Four-Period Weighted Moving Average Forecast
Period Forecast Three-Month Weighted Moving Average
1 21  
2 25  
3 29  
4 21  
⦋ ( 21 ×3 ) + ( 29 ×2 )+25 ⦌
=24
5 25 6
6 75 ⦋ ( 29 ×3 )+ (25 × 2 )+ 21 ⦌
=26
6
Exponential Smoothing

This is a forecasting method that is a combination of the last forecast and the last
observed value. It uses a weighted average of past time series value as the forecast and is
based on the idea that as data gets older it becomes less relevant and should be given less
weight.

Formula:
 New forecast = Last period’s forecast

+ ɑ (last period’s actual demand – last period’s forecast)

Mathematically:

F t= F t−1 + ɑ ( At −1- F t−1) (6.3)

Where:

F t = new forecast

F t−1 = previous forecast

ɑ = smoothing constant that has a value between 0 and 1 (the Greek letter ɑ is
pronounced ‘alpha’
At −1 = previous period’s actual demand

Example 1.

In January, a demand for 200 units of Toyota car model “Vios” for February was
predicted by a car dealer. Actual February demand was 250 cars. Forecast the March demand
using a smoothing constant of ɑ = 0.30.

New forecast (March demand) = 200 + 0.30(250 – 200)

= 200 + 0.30(50)
= 200 + 15
= 215 cars
Therefore, the demand forecast for the Toyota “Vios” in March is 215.

Example 2.

Use exponential smoothing to compute for a series of forecast with smoothing constant
of:

a. ɑ = 0.20;
b. ɑ = 0.50; and
c. plot the actual data and both sets on a single graph

Table 5.5
Period Demand
1 20
2 35
3 46
 4 40
5 50
6 55
7 45
8

 Forecast Error = Actual Demand – Forecast

 The forecast error tells us how well the methods are performed against themselves
using past data.

Solution:

a. ɑ = 0.20
Table 5.6
Period Actual Demand Forecast Error
1 20 -
2 35 20 15
3 46 23 23
4 40 27.60 13.60
5 50 30.08 19.92
6 55 34.06 20.94
7 45 38.35 6.75
8 39.60

F 3 = 20 = 0.20(35 - 20)
F 3 = 23

F 4 = 23 + 0.20(46 – 23); F 5 = 27.60 + 0.20(40 - 27.60)

F 4 = 27.60 F 5 = 30.08

F 6 = 30.08 + 0.20(50 – 30.08) F 7 = 34.06 + 0.20(55 – 34.06)

F 6 = 34.06 F 7 = 38.25

F 8 = 38.25 + 0.20(45 – 38.25)

F 8 = 39.60
b. ɑ = 0.50
Table 5.7
Period Actual Demand Forecast Error
1 20 -
2 35 20 15
 3 46 23 23
4 40 27.50 13.60
5 50 30.08 19.92
6 55 34.06 20.94
7 45 38.35 6.75
8 39.60

F 3 = 20 + 0.50(35 – 20); F 4 = 27.50 + 0.50(46 – 27.50)

F 3 = 20 + 7.5 F 4 = 27.50 + 9.25
F 3 = 27.50 F 4 = 36.75

F 5 = 36.75 + 0.50(40 – 36.75); F 6 = 38.38 + 0.50(50 – 38.38)

F 5 = 36.75 + 1.625 F 6 = 38.38 + 5.81
F 5 = 38.38 F 6 = 44.19

F 7 = 44.19 + 0.50(55 – 44.19) F 8 = 49.59 + 0.50(45 – 49.59)

F 7 = 44.19 + 5.405 F 8 = 49.59 – 2.295
F 7 = 49.59 F 8 = 47.30

c. Graph of ɑ = 0.20 and ɑ = 0.50

Graph of 0.20
60

50

40

30

20

10

0
1 2 3 4 5 6

Actual Demand ɑ = 0.020

Actual Demand ɑ = 0.50 Graph of 0.50
 60

50

40

30

20

10

0
1 2 3 4 5 6

 Others methods for determining or measuring the accuracy of forecast error are MAD,
MSE, MAPE, and BIAS.

Mean Absolute Deviation (MAD) is a technique for determining the accuracy of a

forecasting model by taking the average of the absolute value.

(Forecast errors)
MAD = (6.4)
n

Example 1.

Compute the MAD from Tables 5.6 and 5.7.

Table 5.8
Period Demand Error at ɑ = 0.20 Error at ɑ = 0.50
1 20
2 35 15 15
3 46 23 18.50
4 40 13.60 3.25
5 50 19.92 11.62
6 55 20.94 10.81
7 45 6.75 -4.59
8
99.21 63.77
MAD = (16.54) MAD = (10.63)
6 6

 Based on the computation, the MAD of ɑ = 0.20 is greater than the MAD of ɑ = 0.50.
Thus, the ɑ = 0.50 is preferred because its MAD is smaller.
 Mean Squared Error (MSE) is a technique for determining the accuracy of a forecasting
model by taking the average of the squared error terms for a forecasting method.

( Forecasting Error )2
MSE = (6.5)
n
Example 2.

Use Table 5.8 to solve for MSE at ɑ = 0.20 and ɑ = 0.50

Solution:
a) ɑ = 0.20
Table 5.9
Period Demand Forecast Error Squared Forecast Error
at ɑ = 0.50
1 20
2 35 15 225
3 46 23 342.25
4 40 13.60 10.56
5 50 19.92 135.02
6 55 20.94 116.86
7 45 6.75 21.07
8
850
MSE = = 141.79
6

b) ɑ = 0.50
Table 5.10
Period Demand Forecast Error Squared Forecast Error
at ɑ = 0.20
1 20
2 35 15 225
3 46 23 529
4 40 13.60 184.96
5 50 19.92 396.81
6 55 20.94 438.48
7 45 6.75 45.56
8
1819.81
MSE = = 303.30
6

Based on the computation, the MSE of ɑ = 0.20 is greater than the MSE of ɑ = 0.50.
Thus, the ɑ = 0.50 is preferred because its MSE is smaller.
 Mean Absolute Percent Error (MAPE) is a technique for determining the accuracy of a
forecasting method by taking the average of the absolute errors as a percentage of the
observed value

BIAS is a component of total calculated forecast error. It tells whether the forecast is too
low or too high, and by how much. In effect, it provides the total error and its direction.

 Error (%) = I[(Actual Demand – Forecast)I / Actual Demand]

*100% absolute value must be considered for the reason that the magnitude of the error
is important than the direction.
 The forecast error can be greater than the actual or forecast but not both.
 Error above 100% implies a zero forecast accuracy or a very inaccurate forecast.
 Accuracy (%) = 1 – Error (%)

MAPE =
∑ of Absolute Error (6.6)
∑ of Actual
Mathematically;

MAPE =
∑ ∑ of Absolute Error (6.7)
∑ ( Actual)
Absolute Accuracy = Maximum (0, 1 – MAPE) (6.8)

Example 1.

Solve for MAPE, Absolute Accuracy and Arithmetic Accuracy.

Table 5.11
Absolu Arithme
Foreca Absolu te tic
Perio Actu Foreca st te Percenta Accura Accurac
d al st Error Error ge Error cy y
a b c d e f g h
               
Formula b-c abs(d) e/b 1-f
b/c
1 50 45 5 5 10% 90% 111%
2 55 70 -15 15 27% 73% 79%
3 60 60 0 0 0% 100%
4 50 75 -25 25 50% 50% 67%
5 60 80 -20 20 33% 67% 75%
Total 275 330 -55 65 24% 76% 83%
Percentage Error =
∑ ( Absolute Error)
∑ ( Actual)
65
= x 100%
275

= 24%

MAPE =
∑ ( Absolute Error)
∑ Actual x 100 %
65
= x 100%
275

= 24%

Absolute Accuracy = Maximum (0, 1 – MAPE)

= (100 – 24) X 100%

= 76%

Trend Line Forecast

This technique fits a trend line to a series of historical data points and then projects the
line in the future for medium to long range forecast (we focused on straight line trends only).
The common statistical method to be used is known as the Least Squares Method.

The Least Squares Method finds a straight line that minimizes the sum of the vertical
differences from the line to each of the data points.

The Linear Trend Equation:

T 1 = a + bt x (6.9)

Where:
T t = computed value of the variable to be predicted (dependent variable)
a = intercept of the trend line (Y-axis intercept)
b = slope of the trend line
t x = independent variable
The formula in computing a and b is:

b=
∑ ty−nty (6.10)
∑ t2−nt2
∑ = Summation sign for n data points
t = Values of the independent variables
Y = Values of the dependent variables
T = Average of the values of the X’s
Ῡ = Average of the values of the Y’s
 n = number of data points or observations
a = Ῡ - bt (6.11)

Example:

Given DVD Sales of BETGAR Marketing

a. Determine the forecast sales for 2010 and 2011

b. Plot a time series and comment on the appropriateness of a linear trend.

Table 5.12
DVD Sales Time Series
Sales (Unit)
Year (1,000)
2001 3
2002 4.5
2003 4.8
2004 3.7
2005 4.6
2006 5
2007 4
2008 5
2009 6

 We can minimize the computations by transforming the value of X time to simpler

numbers. Therefore, we can designate 2001 as year 1, 2002 as year 2, 2003 as year 3,
and so forth. This is shown in Table 5.13
Table 5.13 t2
Sales (1,000)
Period Y
Year t Ty
2001 1 3 1 3
2002 2 4.5 4 9
2003 3 4.8 9 14.4
2004 4 3.7 16 14.8
2005 5 4.6 25 23
2006 6 5 36 30
2007 7 4 49 28
2008 8 5 64 40
2009 9 6 81 54
2
   ∑t = 45  ∑Y = 40.6  ∑t = 285  ∑ty = 216.20
 ∑ t 45 ∑ Y 40.60
t= = = 5; Y= = = 4.51
n 9 n 9

From formula (6.10), we can now solve b.

[ ( 216.20 )−9 ( 5 )( 4.51 ) ]

b=
[ ( 285−9 ( 5 )2 ) ]

13.25
b= = 0.22
60

From Formula (6.11)

a = 4.51 – 0.22(5) = 3.41

Since we have already solved the corresponding variables for trend equation, the new equation
is T 1 = 3.41 + 0.22t.
We can now estimate the demand for2009 at t = 10
Sales forecast for 2010

T x = 10
T t = 3.41 + 022(10)
T 10 = 3.41 + 2.2
T 10 = 5.61

Thus, the trend components yield a sales forecast of 5.61 since the units are by 1,000.
Thus, the estimated demand for 2009 is 5, 610 units of DVD.

Sales forecast for 2011:

t = 11
T 11 = 3.41 + 0.22(11)

T 11 = 3.41 + 2.42
T 11 = 5.83
Hence, the estimate sales forecast for 2010 is 5,830 units of DVD.
 8

Sales 5

0
1 2 3 4 5 6 7 8 9
Period

DVD SALES

Casual Forecasting Methods

These forecasting methods are based on the assumption that the variable we are trying
to forecast exhibits a cause-effect relationship with one or more variable(s).

Regression Analysis

It is statistical technique used to develop a mathematical equation showing how

variables are related. It is forecasting procedure that uses the least squares approach on one or
more independent variables to develop a forecasting method.

Formula:

Ŷ = value of dependent variable

a = Y-axis intercept

b = scope of the regression line

X = the independent variable

The dependent variable Ŷ is the item we are trying to forecast, while the independent
variable (X) is an item that might have a casual effect on the dependent variable.

∑ XY −nXY
b= ; a = Ŷ – bX
∑ X 2 −n X 2

Example:
 Dumlao Construction Firm renovates homes in Marilao, Bulacan. Over time, the
business has found that its Peso volume renovation work is dependent work is dependent in the
Marilao / Bulacan area payroll. The data for Dumlao’s revenue and the amount of money earned
by wage earners in Marilao, Bulacan for the past 5 years are shown below:

Dumlao Construction Sales:

Y X
Dumlao’s Sales Payroll
(₱100,000) (₱1,000,000)

3.0 2
2.0 3
3.5 2
2.0 5
3.0 4

Use least squares regression analysis to establish the statistical method.

Sales Payroll X2 XY
Y X

3.0 2 4 6.0
2.0 3 9 6.0
3.5 6 36 21.0
3.5 5 25 17.5
3.0 4 16 12.0
∑Y = 15 ∑X = 20 ∑X2 ∑XY = 62.5

∑ X 20
X= = =4
5 5

∑ Y 15
Y= = =3
5 5
 ∑ XY −nXY 62.5−5( 4)(3) 2.5
b= = = = 0.25
∑ X 2 −n X 2 90−5 (4)2 10

a = Y = bX = 3 – 0.25(4) = 2

The estimated regression equation thus:

Ŷ =2 + 0.25X

or

Sales = 2 + 0.25(Payroll)

If Dumlao Construction wishes to have a payroll of five point five million (₱5.5M) next
year, an estimated sales for Dumlao Construction is:

Sales (₱100,000) = 2 + 0.25(Payroll)

= 2 + 0.25(5.5)

= 2 + 1.375

= 3.375

Sales = ₱337, 500.00

NAME: __________________________________________DATE:_________________

SECTION/TIME/DAY:_________________________ROOM:_____________RATING________

Exercise 15

1. Use quantitative methods for the data shown below:

Period 1 2 3 4 5 6 7
Observation 24 34 36 37 41 44 45

a. Compute for:

i. Naïve Method

ii. Three-period Moving Average

iii. Three-period Weighted Moving Average

 iv. Four-period Moving Average

v. Four-period Weighted Moving Average

b. Plot the original time series and comment on the appropriateness of a linear trend.

2. Suppose that the University of the West had the following data of its growth of enrollment
from 2016-2014.

Year Enrollment
2006 3000
2007 3200
2008 3600
2009 3650
2010 4000
2011 4200
2012 4300
2013 4410
2014 4520
a. Forecast the 2015 enrollment using three-year weighted moving average forecast.

b. Using smooth ɑ = 0.30, forecast the 2015 enrollment.

c. Using MAD, solve for the forecasting error at ɑ = 0.10

 d. Use four-year weighted moving average from 2006-2015

3. For the Philippines Basketball Association (PBA) 2013-2014 season, San Mig James Yap
was the scoring leader with an average of 33 points per game. The following data shows the
average of points per game for the scoring leader from the 2008-2009 season to the 2013-2014
season.

Season Average
2008-2009 25
2009-2010 35
2010-2011 29
2011-2012 34
2012-2013 35
2013-2014 33

a. Use exponential smoothing to forecast this time series. Consider smoothing constant of ɑ =
0.20 and ɑ = 0.30. What value of the smoothing constant provides the best forecast/

b. What is the forecast of the leading scoring average for the 2014-2015 season?

c. Graph the forecast at ɑ = 0.30.

4. Fill out the vacant portion in the table. Some data are already given as follows:

Sales Four-Week Four-Week Weighted

Week (₱1,000) Moving Average Moving Average
1 23    
2 36    
3 45    
4 46 - -
5 55  -  -
6 64  -  -
7 55  -  -
8 58  -  -
9 66  -  -
10 65  -  -
11 48  -  -
12 67  -  -
13 58    
14 68    
5. Use exponential smoothing with ɑ between 0.10 and 0.30 to get the forecast one period
ahead for the following time series.

Use initial value for F 1 = 200 and identify which value of ɑ is the best.

Period Demand Forecast

1 250 200
2 265 -
3 300  -
4 350  -
5 250  -
6 350  -
7 265  -
8 390  -
9 350  -
10 400  -
11 470  -
6. ANVICOROSE building contracts for a 12-month period are (in million pesos) shown below:

1 2 3 4 5 6 7 8 9 10 11 12

35M 27M 37M 41M 45M 38M 44M 42M 39M 43M 39M 40M

a. Compare a four-month moving average forecast with an exponential smoothing forecast

using ɑ = 0.30. Which of the two provides better forecasts?
b. What is the forecast for the next month?
c. Plot the original data and the four-month moving average on the same graph.
d. Plot the original data and the smoothing forecast on the same graph.
e. Compute the MAD and MSE.
7. The ALCOR Department Store has recorded the following numbers of customers’ complaints
each month.

Month Complaints
January 60
February 48
March 55
April 50
May 55
a. Compute a three-month weighted moving average.
b. Prepare forecast for June, July and August.
8. Given: Gasoline Sales (time series) of PETRON (weekly)

Week Sales (Gallons)

1 13,000
2 18,000
3 19,000
4 16,000
5 17,000
6 15,000
7 14,000
8 19,000
9 20,000
10 16,500
11 17,500
12 20,000

a. Compute the three-week and four-week moving average for the time series.
b. Compute the MAD for three-week and four-week moving average forecasts.
c. What appears to be the best number of weeks of past data to be used in the moving
average computation?
 d. Compute the percentage error and MAPE.

9. Use the exponential smoothing with ɑ = 0.40 and an initial value of F 1 = 50 for the following
time series.

Month Demand
January 60
February 70
March 55
April 60
May 45
June 60
July 65
Compute the following:

a. Percentage error
b. MAPE
c. Absolute accuracy percentage
d. Arithmetic accuracy
10. The JAVILL Department Store has been an authorized dealer for flat TV for the past five
years. The numbers of flat TV sold each year is shown in the table.

Year Number of Flat TV

Sold
1 40

2 25

3 35

4 39

5 43

a. Graph this time series. Does linear trend appear?

b. Develop an equation for the linear trend component of the time series.
c. Use the developed trend equation from (b) to prepare for the sales in a year 5 and year
6.
11. The ABAN Siomai House has six branches in Caloocan City. The profit and sales are shown
in table. Develop the regression equation from the data and predict profit for a store if the sale is
₱25,000.

Branches 1 2 3 4 5 6
Sales (1,000) 12 15 16 18 14 17
Profits (1,000) 7 9 10 12 10 13
Forecasting

CASE STUDY

RC ANIMAL PARK CORPORATION

The poor economy of 2009 resulted in the verging permanent closure of Manila Zoo. The
administration of the City of Manila decided to hire the RC Animal Park Corporation to operate
the Manila Zoo.

The RC Animal Park Corporation realized that it is a must to maintain the image of the Zoo
as a good place for visitors to relax and spend time together with their families. to accomplish
their goal, they have to assure that the place is clean. The corporation also added more
animals, birds, and reptiles to attract more visitors. They also introduced new activities and
games. The efforts of the Corporation seem to be working because the attendance increased
from 70,000 in 2009 to an all-time high of 165,000 in 2013 as shown in the following table.

Attendance in Manila Zoo as of 2009-2014

Year Attendance
2014 157,800
2013 165,000
 2012 120,250
2011 87,600
2010 75,800
2009 70,000

Discussion Questions

1. Based on the data above, can you forecast the attendance for 2015 to 2020?

2. What forecasting technique will be most suitable to forecast the attendance from 2015 to
2020? Why?

MS EXCEL APPLICATIONS
IN FORECASTING
Example 1.

Given below are the unemployment rates and corresponding sales experienced by the Vi-An
Merchandise in the past 10 years. For numbers 1 to 4, forecast the unemployment rate next year using
the techniques indicated below and for Number 6, forecast the sales for the next three years.

Sales
Year Time Rate (%) (₱) 1. Naïve Mehod
2000 1 7.2 20,000 2.Six Years moving average
2001 2 4 41,000 3. Three years moving average with weights 1,4,3
2002 3 7.3 17,000 4. Simple exponential smoothing, ꚙ = 40%
5. Linear trend forecast unemployement rate (apply for the
2003 4 5.5 35,000 next three years)
6. Forecast the sales for the next three years using the liner
regression based on the forecasted unemployment rates in
2004 5 6.8 35,000 number 5.
7. Draw the two scatter diagrams with trend line and
2005 6 6 31,000 regression line.
2006 7 5.4 38,000
 2007 8 3.6 50,000
2008 9 8.4 15,000
2009 10 7 19,000

In the spreadsheet, encode the time (periods) in column B, the rate (%) in column C and the sales (P)
in column F. Construct the table for F, in column D and error or ( F t – Rate) in column E, which will be
used in forecasting the inflation rate by simple exponential smoothing method. The following Excel
formula is used to suggest calculations of the forecast rate:

1. Naïve method, D15 F t = C13 7%, since the last column entry of actual inflation rates is in
C13.
2. Six periods moving average, D16 Ft = average (C8:C13) 6.2% where the highlighted C8 to
C13 are the entries of the six most recent inflation rates.
3. Moving average with weights 1, 4, 3 assigned to the inflation rates in the three most recent
periods, in cell D17 type =, type (1* click C11, the 3 rd most recent period + 4* click C12, the 2nd
most recent period + 3* click C13, the most recent period, then type), then type /(Divided by) 8
Ft = (1*C11 + 4*C12 + 7.275% where the denominator 8 is the sum of the weights. (See Pictures
1, 2, 3).

Picture 1
Picture 2

4. For simple exponential smoothing method, we complete the columns D and E by the following steps:

D4 and E4 are empty since there is no basis of forecasting the first period’s available actual data

a. D5 Ft = C4 since the basis of forecasting is the first period’s available actual rate in cell C4.
b. E5 Error = C5 – D5 from the 2 nd period’s available actual rate in C5 minus the corresponding
forecast value in D5.
c. Drag down this entry from cell references E5 to E13 to complete the column entries.
d. D6 Ft = D5 + 0.4*E5 from the previous forecast rate in D5 plus alpha, 40% times the previous
error in forecasting in cell E5.
e. Drag down this entry from cell references D6 to D14 to complete the column entries. The entry
in cell D14 6.62% represents the forecast value in year 2010 (See picture 2).

5. For linear trend projection, we can obtain the equation of the trend line by computing the slope and
y-intercept with the following Excel formula,

D20 is slope, b = SLOPE (C4:C13, B4:B13) where the inflation rate, R, is the array Y from C4 to C13
and the time is the array X from cells B4 to B13.

D21 is y-intercept, a = INTERCEPT (C4:C13, B4:B13)

To forecast the inflation rates, R, for the years 2010 to 2012, we use the equation of linear trend in
cell D22 Ft = R = 5.806667 + 0.05698*(t) and substitute, t = 11, 12, and 13 for the time in cell B25
Ft = R = 5.80667+0.05698(11) 6.43% B26 Ft = R = 5.806667 + 0.05698(12) 6.43% B27 Ft = R
= 5.806667 + 5.806667(13) 6.43% or use the Excel formula forecast, fixing the positions of the
rates in cell C4 to C13 for array Y and the time in cells B4 to B13 for array X, but replacing only the
first requirement X which is the time 11, 12, and 13 as shown in Picture 3 and 4.

E25 Ft = R = FORECAST (11, $C$4: $C$13, $B$4:$B$13)

E26 Ft =R = FORECAST (12, $C$4: $C$13, $B$4:$B$13)

E27 Ft =R = FORECAST (12, $C$4: $C$13, $B$4:$B$13)

Picture 1
Picture 2
 For linear regression method, first, we obtain the equation of the regression line by calculating the
slope and y-intercept using the Excel formulas SLOPE (array y, array x) and INTERCEPT (array y, array x)
where the sales in column F are the array Y and the rates in column C are the array X as shown in
Pictures 5 and 6. Hence, the linear regression equation is Sales = ₱74,127.67 - ₱7,194.06 (Rate) and the
sales for the next three years based on the forecasted inflation rates in cells E27 to E29 are the
following:

a. For 2010, E34 = FORECAST (E27, $F$4:$F$13, $C$4:$C$13)

b. For 2011, E35 = FORECAST (E28, $F$4:$F$13, $C$4:$C$13)

c. For 2012, E36 = FORECAST (E36, $F$4:$F$13, $C$4:$C$13)

₱27,025.21

Picture 5
Picture 6

6. a. Scatter diagram for time vs. unemployment rate with trend line

To do: Highlight the arrays for Time and Rate. Click Chart Wizard. Select Scatter graph.
Right click any of the plotted points. Select Add Trend Line + Linear.

Rate (Y-axis)
9
8.4
8
7 7.2 7.3 7
6.8
6
5.5 5.4
5
4 4
3.6
3
2
1
0
0 2 4 6 8 10 12
Year (X-axis)

b. Scatter diagram for unemployment rate vs. sales with regression line
To do: Highlight the arrays for Rate and Sales. Click Chart Wizard. Select scatter graph. Right click any of
the plotted points. Select Add Trend Line + Linear.

(Sales)
60,000

50,000

40,000

30,000

20,000

10,000

0
0.05 1.05 2.05 3.05 4.05 5.05 6.05 7.05 8.05 9.05
(Unemployment Rates)

Forecasting
 CASE STUDY

RC ANIMAL PARK CORPORATION

The poor economy of 2009 resulted in the verging permanent closure of Manila Zoo. The
administration of the City of Manila decided to hire the RC Animal Park Corporation to operate the
Manila Zoo.

The RC Animal Park Corporation realized that it is a must to maintain the image of the Zoo as a
good place for visitors to relax and spend time together with their families. To accomplish their goal,
they have to assure that the place is clean. The Corporation also added more animals, birds, and reptiles
to attract more visitors. They also introduced new activities and games. The efforts of the Corporation
seems to be working because the attendance increased from 70,000 in 2009 to an all-time high of
165,000 in 2013 as shown in the following table:

Table 5.1

Attendance in Manila Zoo as of 2009-2014

Year Attendance
2014 157,800
2013 165,00
2012 120,250
2011 87,600
2010 75,800
2009 70,000

Discussion Questions

1. Based on the data above, can you forecast the attendance for 2015 to 2020?

2. What forecasting technique will be most suitable to forecast the attendance from 2015 to 2020?
Why?