Forecasting

Definition:
Process of predicting a future event for quantitative
or qualitative data.

I see that you will

get an A this semester.

Forecasting Time Horizons

Short-range forecast

Medium-range forecast

Up to 1 year, generally less than 3 months

Purchasing, job scheduling, workforce levels, job
assignments, production levels
3 months to 3 years
Sales and production planning, budgeting

Long-range forecast

3+ years
New product planning, facility location, research
and development

Forecasting is affected by :
Trend

Cyclical

Seasonal

Random

Quantity

Trend

Time
Historical Data Have consistently increase trend.

Quantity

Time
Historical Data have a horizontal line.

Seasonal

Quantity

Year 1

Months
Seasonal: Data consistently show peaks and valleys.

Quantity

Year 1

Year 2
|

Months
Seasonal: Data consistently show peaks and valleys.

Quantity

Cyclical

Years
Cyclical: Data reveal gradual increases and
decreases over extended periods.

FORECASTING
METHODS

QUANTITATIVE
METHODS

TIME SERIES
METHODS

CAUSAL
FORECASTING
METHODS

QUALITATIVE
METHODS

Jury of executive opinion

Delphi method
Sales force
Consumer Market Survey

QUANTITATIVE
METHODS

Naive approach
Moving averages
Weighted M.A.
Trend projection
Linear regression

TIME SERIES
METHODS

CAUSAL
FORECASTING
METHODS

Demand for product or service

Random ?

Trend
component

Seasonal peaks

Actual
demand
Average
demand over
four years
|

Year

QUANTITATIVE METHODS
1. Naive Approach
Uh, give me a minute....
We sold 250 wheels last
week.... Now, next week we should sell....

The forecast for any period equals

the previous periods actual value.

2. Moving average
Moving average =

demand in previous n periods

n

a. Compute a three-week moving average forecast for

the arrival of medical clinic patients in week 4.
The numbers of arrivals for the past 3 weeks were:
Week
1
2
3
4

Arrivals Forecast
400
380
411
397

Forecast for week 4 is

the average of the
arrivals for weeks 1,2
and 3
411 + 380 + 400
F4 =
3

b. Compute the 3 months moving average

for these data.
Month
January
February
March
April
May
June
July

Actual
Shed Sales
10
12
13
16
19
23
26

3-Month
Moving Average

(10 + 12 + 13)/3 = 11 2/3

(12 + 13 + 16)/3 = 13 2/3
(13 + 16 + 19)/3 = 16
(16 + 19 + 23)/3 = 19 1/3

c. Estimating with Simple Moving Average using the

following customer-arrival data
Month

Customer arrival

800

740

810

790

Use a three-month moving average to forecast customer

arrivals for month 5
F5 =

D4 + D3 + D2
3

790 + 810 + 740

=
= 780
3

Forecast for month 5 is 780 customer arrivals

Real data and Moving Average

450
430

6-week MA
forecast

3-week MA
forecast

Patient arrivals

410
390
370

10

15

20

25

30

Week

Copyright 2010 Pearson Education, Inc. Publishing as Prentice Hall.

3. Weighted Moving average

Weighted
=
moving average

(weight for period n)

x (demand in period n)
weights

Ft+1 = W1D1 + W2D2 + + WnDt-n+1

From the previous data, let W1 = 0.50, W2 = 0.30, and W3 =

0.20. Use the weighted moving average method to forecast
arrivals for month 5.
F5 = W1D4 + W2D3 + W3D2
= 0.50(790) + 0.30(810) + 0.20(740) = 786
Forecast for month 5 is 786 customer arrivals

Weights Applied
3
2
1
6
Month

Actual
Shed Sales

January
February
March
April
May
June
July

10
12
13
16
19
23
26

Period
Last month
Two months ago
Three months ago
Sum of weights

3-Month Weighted
Moving Average

[(3 x 13) + (2 x 12) + (10)]/6 = 121/6

[(3 x 16) + (2 x 13) + (12)]/6 = 141/3
[(3 x 19) + (2 x 16) + (13)]/6 = 17
[(3 x 23) + (2 x 19) + (16)]/6 = 201/2

4. Trend Linear
= a + bx
a = y - bx

b =

xy - n(y)(x)
x

- n(x )2

b = n xy ( x) ( y )
n x2 ( x ) 2

Finding a Trend Line

Year

Time Demand
Period

x2

xy

2005

74

74

2006

79

158

2007

80

240

2008

90

16

360

2009

105

25

525

2010

142

36

852

2011

122

49

854

x=28 y=692

x2=140 xy=3.063

The Trend Line Equation

x

x
28

4
n
7

y
692

98.86
n
7

xy - n x y
3,063 (7)(4)(98. 86)
295

10.54
b
2
2
2
x n x
140 (7)(4)
28
a y - b x 98.86 - 10.54(4)

56.70

Demand

in 2012 56.70 10.54(8)

141.02 units

Demand

in 2013 56.70 10.54(9)

151.56 units

Seasonal index
Example 1.
Sales Demand
Month

Average Demand

2009

2010

2011

2009-2011

Monthly

Seasonal
Index

Jan

80

85

105

90

94

0.957

Feb

70

85

85

80

94

0.851

Mar

80

93

82

85

94

0.904

Apr

90

95

115

100

94

1.064

May

113

125

131

123

94

1.309

Jun

110

115

120

115

94

1.223

Jul

100

102

113

105

94

1.117

Aug

88

102

110

100

94

1.064

Sept

85

90

95

90

94

0.957

Oct

77

78

85

80

94

0.851

Nov

75

72

83

80

94

0.851

Example 2.
Quarter

Year 1

Year 2

Year 3

Year 4

45

70

100

100

335

370

585

725

520

590

830

1160

100

170

285

215

Total

1000

1200

1800

2200

The manager wants to forecast customer demand for each

quarter of year 5, based on an estimate of total year 5 demand
of 2,600 customers

Example 3.
Quarter

Year 3

Year 4

100

100

585

725

830

1160

285

215

Total

1800

2200

The manager wants to forecast customer demand for each

quarter of year 5, based on those datas.

5. Linear Regression
= a + bx

a = y - bx

b=

xy - n(y)(x)
x

- n(x )2
n

n x i yi x i yi
x

n
x

i
i
i
i
n

n
y

i
i
i
i
n

Regression
equation:
Y = a + bX

Dependent variable

X
Independent variable

Regression
equation:
Y = a + bX

Dependent variable

Actual
value
of Y
Value of X used
to estimate Y

X
Independent variable

Month

Sales
(000 units)

Advertising
(000 $)

1
2
3
4
5

264
116
165
101
209

2.5
1.3
1.4
1.0
2.0

Month

Sales
(000 units)

Advertising
(000 $)

1
2
3
4
5

264
116
165
101
209

2.5
1.3
1.4
1.0
2.0

a = Y bX

b=

XY nXY
X 2 nX 2

Month
1
2
3
4
5

Sales, Y Advertising, X
(000 units)
(000 $)
XY
264
116
165
101
209

a = Y bX

2.5
1.3
1.4
1.0
2.0

660.0
150.8
231.0
101.0
418.0

b=

XY nXY
X 2 nX 2

X2

Y2

6.25
1.69
1.96
1.00
4.00

69,696
13,456
27,225
10,201
43,681

Month

Sales, Y Advertising, X
(000 units)
(000 $)
XY

X2

Y2

1
2
3
4
5

264
116
165
101
209

2.5
1.3
1.4
1.0
2.0

660.0
150.8
231.0
101.0
418.0

6.25
1.69
1.96
1.00
4.00

69,696
13,456
27,225
10,201
43,681

Total

855
Y = 171

8.2
X = 1.64

1560.8

14.90

164,259

a = Y bX

b=

XY nXY
X 2 nX 2

Month

Sales, Y Advertising, X
(000 units)
(000 $)
XY

1
2
3
4
5

264
116
165
101
209

Total

855
Y = 171

a = Y bX

2.5
1.3
1.4
1.0
2.0

660.0
150.8
231.0
101.0
418.0

X2

Y2

6.25
1.69
1.96
1.00
4.00

69,696
13,456
27,225
10,201
43,681

8.2
1560.8 14.90 164,259
X = 1.64
1560.8 5(1.64)(171)

b=

14.90 5(1.64)2

Month

Sales, Y Advertising, X
(000 units)
(000 $)
XY

X2

Y2

1
2
3
4
5

264
116
165
101
209

2.5
1.3
1.4
1.0
2.0

660.0
150.8
231.0
101.0
418.0

6.25
1.69
1.96
1.00
4.00

69,696
13,456
27,225
10,201
43,681

Total

855
Y = 171

8.2
X = 1.64

1560.8

14.90

164,259

a = Y bX

b = 109.229

Month

Sales, Y Advertising, X
(000 units)
(000 $)
XY

X2

Y2

1
2
3
4
5

264
116
165
101
209

2.5
1.3
1.4
1.0
2.0

660.0
150.8
231.0
101.0
418.0

6.25
1.69
1.96
1.00
4.00

69,696
13,456
27,225
10,201
43,681

Total

855
Y = 171

8.2
X = 1.64

1560.8

14.90

164,259

a = 171 109.229(1.64) b = 109.229

Month

Sales, Y Advertising, X
(000 units)
(000 $)
XY

X2

Y2

1
2
3
4
5

264
116
165
101
209

2.5
1.3
1.4
1.0
2.0

660.0
150.8
231.0
101.0
418.0

6.25
1.69
1.96
1.00
4.00

69,696
13,456
27,225
10,201
43,681

Total

855
Y = 171

8.2
X = 1.64

1560.8

14.90

164,259

a = 8.136

b = 109.229

Month

Sales, Y Advertising, X
(000 units)
(000 $)
XY

X2

Y2

1
2
3
4
5

264
116
165
101
209

2.5
1.3
1.4
1.0
2.0

660.0
150.8
231.0
101.0
418.0

6.25
1.69
1.96
1.00
4.00

69,696
13,456
27,225
10,201
43,681

Total

855
Y = 171

8.2
X = 1.64

1560.8

14.90

164,259

a = 8.136

b = 109.229
Y = 8.136 + 109.229(X)

Month

Sales, Y Advertising, X
(000 units)
(000 $)
XY

X2

Y2

1
2
3
4
5

264
116
165
101
209

2.5
1.3
1.4
1.0
2.0

660.0
150.8
231.0
101.0
418.0

6.25
1.69
1.96
1.00
4.00

69,696
13,456
27,225
10,201
43,681

Total

855
Y = 171

8.2
X = 1.64

1560.8

14.90

164,259

r=

n XY X Y
[n X 2 ( X) 2][n Y 2 ( Y) 2]

Month

Sales
(000 units)

Advertising
(000 $)

1
2
3
4
5

264
116
165
101
209

2.5
1.3
1.4
1.0
2.0

a = 8.136
b = 109.229X
r = 0.98

Sales (thousands of units)

300
250

200
Month

Sales
(000 units)

1
150
2
100
3
4
505

264
116
165
101
209
Y=

Advertising
(000 $)

8.136

2.5
1.3
1.4
1.0
+2.0109.229X

|
|
|
|
Forecast
6
1.0
1.5for Month
2.0
2.5
Advertising (thousands of dollars)

a = 8.136
b = 109.229X
r = 0.98

X = $1750, Y = 8.136 + 109.229(1.75)

Sales (thousands of units)

300
250

200
Month

Sales
(000 units)

1
150
2
100
3
4
505

264
116
165
101
209
Y=

Advertising
(000 $)

8.136

2.5
1.3
1.4
1.0
+2.0109.229X

|
|
|
|
If 1.0
current
= 62,500
1.5 inventory
2.0
2.5
Advertising (thousands of dollars)

a = 8.136
b = 109.229X
r = 0.98

units,

Production = 183,015 62,500 = 120,015 units

Assignment
Chicken Palace periodically offers carryout five-piece chicken dinners
at special prices. Let Y be the number of dinners sold and X be the price.
Based on the historical observations and calculations in the following
table, determine the regression equation, correlation coefficient, and
coefficient of determination. How many dinners can Chicken Palace
expect to sell at $3.00 each?
Price (X)

Dinners Sold (Y)

$2.70

760

$3.50

510

$2.00

980

$4.20

250

$3.10

320

$4.05

480

A playland center records the visitors from Monday to

Sunday for the last two weeks, with datas as follow.
Week 2

Week 3

Monday

82

93

Tuesday

71

77

Wednesday

89

83

Thursday

94

103

Friday

144

135

Saturday

135

140

Sunday

48

37

Week
Day

Find how many visitors for week 4 using seasonal index for
Monday-Wednesday/Friday-Sunday.