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McGraw-Hill/Irwin
The simple moving average model assumes an average is a good estimator of future behavior The formula for the simple moving average is:
McGraw-Hill/Irwin
Week 1 2 3 4 5 6 7 8 9 10 11 12
McGraw-Hill/Irwin
Demand 650 678 720 785 859 920 850 758 892 920 789 844
Week 1 2 3 4 5 6 7 8 9 10 11 12
Demand 3-Week 6-Week 650 F4=(650+678+720)/3 678 =682.67 720 F7=(650+678+720 +785+859+920)/6 785 682.67 859 727.67 =768.67 920 788.00 850 854.67 768.67 758 876.33 802.00 892 842.67 815.33 920 833.33 844.00 789 856.67 866.50 844 867.00 854.83
The McGraw-Hill Companies, Inc., 2004
Plotting the moving averages and comparing them shows how the lines smooth out to reveal the overall upward trend in this example
1000 900
Demand
Note how the 3-Week is smoother than the Demand, and 6-Week is even smoother
McGraw-Hill/Irwin
Simple Moving Average Problem (2) Data Question: What is the 3 week moving average forecast for this data? Assume you only have 3 weeks and 5 weeks of actual demand data for the respective forecasts
Week 1 2 3 4 5 6 7
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3-Week
=758.33
5-Week
F4=(820+775+680)/3
710.00 666.00
w
i=1
=1
Note that the weights place more emphasis on the most recent data, that is time period t-1
McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Week 1 2 3 4
F4 = 0.5(720)+0.3(678)+0.2(650)=693.4
McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Week 1 2 3 4
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F5 = (0.1)(755)+(0.2)(680)+(0.7)(655)= 672
McGraw-Hill/Irwin 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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Premise: The most recent observations might have the highest predictive value Therefore, we should give more weight to the more recent time periods when forecasting
2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
McGraw-Hill/Irwin
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Exponential Smoothing Problem (1) Data Question: Given the weekly demand data, what are Week Demand the exponential 1 820 smoothing forecasts for 2 775 periods 2-10 using a=0.10 3 680 and a=0.60? 4 655 Assume F =D 1 1 5 750
6 7 8 9 10
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Answer: The respective alphas columns denote the forecast values. Note that you can only forecast one time period into the future.
Week 1 2 3 4 5 6 7 8 9 10
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Demand 820 775 680 655 750 802 798 689 775
0.1 820.00 820.00 815.50 801.95 787.26 783.53 785.38 786.64 776.88 776.69
0.6 820.00 820.00 793.00 725.20 683.08 723.23 770.49 787.00 728.20 756.28
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900
Deman d
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Week 1 2 3 4 5
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A
MAD =
t=1
- Ft
The ideal MAD is zero which would mean there is no forecasting error
The larger the MAD, the less the accurate the resulting model
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Sales Forecast 220 n/a 250 255 210 205 300 320 325 315
2006 The McGraw-Hill Companies, Inc., All Rights Reserved.
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40
A
MAD =
t=1
- Ft
40 = = 10 4
Note that by itself, the MAD only lets us know the mean error in a set of forecasts
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a
0 1 2 3 4 5 x (Time)
Yt = a + bx
Yt is the regressed forecast value or dependent variable in the model, a is the intercept value of the the regression line, and b is similar to the slope of the regression line. However, since it is calculated with the variability of the data in mind, its formulation is not as straight forward as our usual notion of slope.
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a = y - bx
xy - n(y)(x) x - n(x )
2 2
b=
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Week 1 2 3 4 5
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Answer: First, using the linear regression formulas, we can compute a and b
Week Week*Week Sales Week*Sales 1 1 150 150 2 4 157 314 3 9 162 486 4 16 166 664 5 25 177 885 3 55 162.4 2499 Average Sum Average Sum xy - n( y)(x) 2499 - 5(162.4)(3) 63 b= = = 6.3 2 2 55 5(9 ) 10 x - n(x )
a = y - bx = 162.4 - (6.3)(3) = 143.5
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Yt = 143.5 + 6.3x
Now if we plot the regression generated forecasts against the actual sales we obtain the following chart: 180 175 170 165 Sales 160 155 Forecast 150 145 140 135 1 2 3 4 5 Perio d Sales