QUANTITATIVE ANALYSIS FOR MANAGEMENT Forecasting

Barry Render / Ralph M. Stir, JR.

Summarized by - NOPPOL BEOKHAIMOOK

Learning Objectives (1)

Students will be able to:
Understand and know when to use various families of forecasting models Compare moving averages, exponential smoothing, and trend time-series models Seasonally adjust data. Understand Delphi and other qualitative decision-making approaches

Learning Objectives (2)

Students will be able to: Identify independent and dependent variables and use them in a linear regression model. Compute a variety of error measures.

Topics (1)

Importance of Forecasting

Steps of Forecasting Types of Forecasting Scatter Diagrams Time-Series Models Moving Averages Exponential Smoothing Trend Projections

Topics (2)

Seasonal Variations

Cyclical Variations Causal Forecasting Methods Regression Analysis Monitoring and Controlling Forecasts Using the Computer to Forecast Key Equations Summary

Schedule
#1 - Friday, 22/04/2011 : 18.00 -21.00 #2 Saturday, 23/04/2011 : 9.00 -12.00 #3 - Saturday, 23/04/2011 : 13.00 -16.00 #4 - Friday, 29/04/2011 : 18.00 -21.00 #5 - Friday, 06/05/2011 : 18.00 -21.00
(Work-shop)

Corporate Planning (1)

Determine organization : 5W1H - WHY it should do ? - WHERE it should be ? - WHAT it should do ? - WHEN it should do to be done ? - WHO should do ? - HOW it should do ?

Corporate Planning (2)

A deliberate and conscious attempt to anticipate and Forward Look the environment. Looking ahead systematically.

Planning Steps (1)

ASSESS - Internal and Environment Factors (SWOT) FORMULATE - Corporate Objectives, Strategies and Action Plans CASCADE - Corporate Objectives, Strategies, Action Plans down to Lower Levels (One Layer at a time)

Planning Steps (2)

QUANTIFY - Action Plans & Strategies into Budgets starting with lowest Operating Unit. CONSOLIDATE - Budgets upwards until the corporate level is reached. IMPLEMENT - Plans MONITOR - Feedback and Control

Desirable Attributes of Good Objective

ADAPTABLE - Changeable and Flexible. MEASURABLE - The results can be readily quantified and evaluated. COMMITMENT - Capable of inspiring Commitment

Objectives Perspective
FINANCIAL PERSPECTIVE CUSTOMER PERSPECTIVE INTERNAL PROCESS PERSPECTIVE LEARNING AND GROWTH PERSPECTIVE

Importance of Forecasting
Business Planning (Demands for products, Return on Investment, Sales Volume, Expense, etc.)

Analytical Tools

Mathematical Techniques

Forecasting

Steps of Forecasting (1)

1. Determine the forecast objective

2. Select the items or quantities to be forecasted 3. Determined time horizon of forecast - Short term / Medium term / Long term 4. Select Forecasting MODEL (S) 5. Gather data needed to make the forecast 6. Validate forecasting model 7. Make the forecast 8. Implement the results

Steps of Forecasting (2)

Initiating, designing, implementing forecasting system ==> Systematic way and Automatically ==> Input (Files / Records) Processing (Software / Program) Output (Files / Reports)

Computer System

No Single method is superior, whatever (quantitative, subjective, mixed) works best should be used

Types of Forecasting (1)

Figure 5.1 - Forecasting Models Discussed

Forecasting Techniques Qualitative Models Time Series Methods Causal Methods Simple Regression Multiple Regression

Delphi Methods Jury of Executive Opinion

Sales Force Composite

Moving Average
Exponential Smoothing

Trend Projections

Consumer Market Survey

Decomposition (T*S*C*I)

Types of Forecasting (2)

Time-Series Models
Use past data to make a forecast over

a period of time
Three techniques of time-series models

1. Moving Average 2. Exponential Smoothing 3. Trend Projections

Types of Forecasting (3)

Causal Models

Incorporate the variables that might influence the quantity being forecasted Include past data as time-series models do. Quantitative Models Time-series and Causal Models ==> rely on quantitative data Qualitative Models ==> rely on judgmental / subjective factors ==> opinions by experts, individuals experiences and judgment, other subjective factors may be considered

Types of Forecasting (4)

Qualitative Models (cont.) Four techniques of qualitative models 1. Delphi method - experts in different places - three different types of participants (a) Decision Making Group of Experts (b) Staff Personnel (c) Respondents

Types of Forecasting (5)

Qualtatative Models (cont.) 2. Jury of Executive Opinion - small group of high-level managers - often in combination with statistical models 3. Sales Force Composite - estimate by salespersons in each region - ensured / combined at the higher levels to reach overall forecast 4. Consumer Market Survey - input from potential customers about future purchasing and products demand

Scatter Diagrams (1)

Clearly Illustrate relationship between

variables Two-dimensional graph - horizontal (X) axis and vertical (Y) axis - independent variables (X-axis) eg.time - dependent variables (Y-axis) eg. Sale volumes

Scatter Diagrams (2)

TABLE 5.1 Annual Sales of Three Products
YEAR TELEVISION SETS 1 2 3 4 5 6 7 8 9 10 250 250 250 250 250 250 250 250 250 250 RADIOS 300 310 320 330 340 350 360 370 380 390 COMPACT DISCS 110 100 120 140 170 150 160 190 200 190

Scatter Diagrams (3)

Figure 5.2 - Scatter Diagram for Sales
450 400 350 300 250 200 150 100 50 0 0 2 4 6 Time (Years) 8 10 12

An n u a l S a le s

Time - Series Models (1)

Decomposition of a Time-Series - Analyzing time-series ==> breaking down components, projecting forward - Four components of time-series 1. Trend (T) 3. Cycles (C) : Movement data over time : Fluctuation every several years 2. Seasonal (S) : Fluctuation in a year 4. Random Variations (R) : Irregular situations

Time - Series Models (2)

Figure 5.3 - Product Demand Charted over Four Years with Trend and Seasonal Indicated
650 550 D e m a nd 450 350 250 150 50 -50 -150 0 1 2 Time (Years 3 4 5

Time - Series Models (3)

Two general forms of Time-Series 1. Multiplication - most widely used Demand = T x S x C x R Unit : T is amount while S, C and R is percentage / proportion 2. Addition - provide as estimate Demand = T + S + C + R Unit : T, S, C and R is amount - Real world : R is averaged out over time

Moving Averages (1)

A technique of time-series Assume that market demands will stay fairly steady over time MA smooth out variations when forecasting demands are fairly steady Moving average = demand in previous n periods n whereas n is the number of period in the MA Wallace Garden Supply - Example

Moving Averages (2)

Moving Averages (3)

Weighted moving average - can be used to put more emphasis on recent periods - weighted moving average = of (weight for period n) (demand in period n) of weights Wallace Garden Supply decides to forecast storage shed sales by weighting the past three months as follows :

PERIOD WEIGHTS APPLIED Last mount 3 Two months ago 2 Three months ago 1 3 X Sales last month + 2 X Sales two months ago + 1 X Sales three months ago 6 Sum of the weights

Moving Averages (4)

Moving Averages (5)

Three problems of moving overages 1. Large number of periods may smooth out real change 2. They dont pick up trends 3. Lots of past data must be kept

Exponential Smoothing (1)

A type of moving averages technique but it involve

little record keeping of past data

New forecast = last periods forecast

+ a (last period actual demand - last periods forecast) ; a is a weight (smoothing constant) which has value between 0 and 1
Math Formulas : Ft = Ft-1 + a (At-1 - F
t-1)

- Ft -a - At-1

= new forecast, Ft-1 = previous forecast = smoothing constant (0 a 1) = previous periods actual demand

Exponential Smoothing (2)

The smoothing constant, , allows managers to assign

weight to recent data eg.

= 0.5 ==> the past three periods = 0.1 ==> the past nineteen periods

Examples : The forecast of cases

Feb. forecast Feb. actual Mar. forecast Mar. actual Apr. forecast = 142 = 153, = 0.20 = 142 + 0.20 (153 - 142) = 144.20 (144) = 136, = 0.20 = 144.2 + 0.20 (136 - 144.20) = 142.56 (143)

Exponential Smoothing (3)

Selecting the smoothing constant () can make the

difference between accurate and inaccurate forecast

Forecast error tells us how well the model performed against itself using past data Forecast error = Demand - Forecast Mean Absolute Deviation (MAD) = Port of Baltimore - Example Forecast errors n

Exponential Smoothing (4)

Exponential Smoothing (5)

Exponential Smoothing (6)

Besides MAD, there are three other measures of error

1. Mean Squared Error (MSE)

- MSE = (actual - forecast)2 n

2. Mean Absolute Percent Error (MAPE)

- MAPE = ( actual - forecast actual x 100%

)/n

3. Bias
- Bias tells whether the forecast is too high or too low and how much

Exponential Smoothing (7)

Exponential Smoothing with Trend Adjustment - Forecast including trend (FITt) (second-order smoothing) = new forecast (Ft) + trend correction (Tt) - Trend correction (Tt) = (1 - )Tt-1 + (Ft - Ft-1) where Tt Ft = smoothed trend for period t = trend smoothing constant that we select = simple exponential smoothed forecast for period t (first - order smoothing) - s responsiveness is like that of - a low gives less weight to more recent trends than high

Trend Projections (1)

Last time-series forecasting method

Fits a trend line to a series of historical data points and then projects the line into the future Trend Projections - exponential, quadratic and linear (straight line) Midwestern Manufacturing Company-Example

Trend Projections (2)

TABLE 5.6 Midwestern Manufacturings Demand
160 150 140 130 120 110 100 90 80 70 60 1993 1994 1995 1996 1997 1998 1999 2000 2001

Trend Projections (3)

Least squares method - finds a straight line that minimizes the sum of the vertical differences from the line to each of the data point A Least squares lines : = a + bx - : value of variable to be predicted (dependent variable) : The height at which it intercepts the Y-axis : The angle of line : Independent variable

- Y-intercept (a) - slope (b) -x

Trend Projections (4)

FIGURE 5.4 - Least Square Method for finding the Best-Fitting Straight Line

Trend Projections (5)

To Compute a and b - slope (b) =

XY - nXY X2 - nX2

where X = values of independent variable (time) Y = values of dependent variable (generator) X,Y = average value of X and Y respectively n = number of data points (observations) - Y-axis intercept (a) Transforming time variable = Y - bX

- direct method / short-cut method

Trend Projections (6)

TABLE 5.7 Midwestern Manufacturing s Trend Calculations

YEAR 1993 1994 1995 1996 1997 1998 1999

TIME PERIOD 1 2 3 4 5 6 7 X = 28

GENERATOR DEMAND 74 79 80 90 105 142 122 Y = 692

X2 1 4 9 16 25 36 49 X 2 = 140

XY 74 158 240 360 525 852 854 XY = 3,063

Trend Projections (7)

Form TABLE 5.7 - We can calculate b = 10.54 and a = 56.70

- The least squares trend equation is = 56.70+10.54 X - To project demand in 2000 = 56.70+10.54 (8) = 141.02 - To project demand in 2001 = 56.70+10.54 (9) = 151.56

Trend Projections (8)

Seasonal Variations (1)

Recurring variations at certain seasons of the year make seasonal adjustment in the trend line forecast necessary

Seasonal Index - Calculation of seasonal indices

Seasonal Variations (2)

TABLE 5.8 Answering Machine Sales and Seasonal Indices

SALES DEMAND AVERAGE AVERAGE TWO- MONTHLYa SEASONAL MONTH YEAR1 YEAR 2 YEAR DEMAND DEMAND INDEX b January 80 100 90 94 0.957 February 75 85 80 94 0.851 March 80 90 85 94 0.904 April 90 110 100 94 1.064 May 115 113 123 94 1.309 June 110 120 115 94 1.223 July 100 110 105 94 1.117 August 90 110 100 94 1.064 September 85 95 90 94 0.957 October 75 85 80 94 0.851 November 75 85 80 94 0.851 December 80 80 80 94 0.851 Total average demand = 1,128 Average monthly demand = 1,128 = 94 Seasonal Index = average two years demand average monthly demand 12 months

Seasonal Variations (3)

From TABLE 5.8, if we expected the third years annual demand to be 1,200, we would forecast the monthly demand as follows :

Jan. Feb. Mar. Apr. May June

1,200 12 1,200 12 1,200 12 1,200 12 1,200 12 1,200 12

x 0.957 = 96 x 0.851 = 85 x 0.904 = 90 x 1.064 = 106 x 1.309 = 131 x 1.223 = 122

July Aug. Sept. Oct. Nov. Dec.

1,200 x 1.117 = 112 12 1,200 x 1.064 = 106 12 1,200 x 0.957 = 96 12 1,200 12 x 0.851 = 85 1,200 12 x 0.851 = 85 1,200 x 0.851 = 85 12

Seasonal Variations (4)

Trend line forecasts with seasonal adjustments
San Diego Hospital-Example - used 66 months of adult inpatient hospital days ==> = 8,091 + 21.5X ; = patient days, X= months - forecasts patient days for next month (period 67) ==> patient days = 8,091 + (21.5)(67) = 9,532

Seasonal Variations (5)

San Diego Hospital-Example (cont.)

- note that 9,532 days which come from trend only - to correct the time-series extrapolation for seasonal, the hospital multiplies the monthly forecast by appropriate seasonal index, i.e. patient days (period 67) should be (9,532)(1.0436) = 9,948 which come from trend and seasonal and vice versa for other periods forecast.

Seasonal Variations (6)

Cyclical Variations (1)

From multiplication formulas of time-series Demand = TxCxSxR

- S is average-out since the seasonal fluctuation in a year - R is average-out since the less probability of irregular events - Then Demand (Yt) = T x C ; Ct = Yt = Yt T ABC Production Company-Example

Cyclical Variations (2)

ABC Production Company (Millions $) Year (t) 1994 1995 1996 1997 1998 1999 2000 Year (Xt) Transform -3 -2 -1 0 1 2 3 Production Value (Yt) 4 3 5 7 9 5 8 Trend Proj-(Yt) 3.73 4.44 5.15 5.86 5.57 7.28 7.99 Cyclical Indices (Ct) 1.07 0.68 0.97 1.19 1.37 .69 1.00

Causal Forecasting Methods

Consider several variables that are related to the variable being predicted which can be more powerful than time-series methods that use only the historic values of the forecasted variable The dependent variable is the item we are trying to forecast e.g. sale volume The independent variable(s) is item(s) we think might have a causal effect on the dependent variable. e.g. advertising budget, price, competitors price, promotional strategies, unemployment rate and etc.

Regression Analysis (1)

Regression Analysis - the most common quantitative causal forecasting model which can calculate the best statistical relationship between dependent variable and the set of independent variables - use least squares method as trend projections but X is independent variable(s) instead of time - simple regression analysis formula : where = value of dependent var. , = a + bX a = Y-axis intercept

b = slope of the regression line, X = independent var. Triple A Construction Company-Example

Regression Analysis (2)

Regression Analysis (3)

SALES,Y 2.0 3.0 2.5 2.0 2.0 3.5 Y = 15.0 PAYROLL,X 1 3 4 2 1 7 X = 18 X2 1 9 16 4 1 49 XY 2.0 9.0 10.0 4.0 2.0 24.5

X 2 = 80 XY = 51.5

Regression Analysis (4)

From TABLE 5.10

- we calculate the estimated regression equation in the same procedure as the trend projections calculation. - = 1.75 + 0.25 X or sales = 1.75 + .25 (payroll) - if X (payroll) is $600 Million next year so sales = 1.75 +.25 (6) = 3.25 or $325,000 One weakness of regression is that we need to know the values of the independent variable

Regression Analysis (5)

Standard error of the estimate

- from example above, 3.25 is called point estimated of Y or expected value of sales which may different from the actual value - to measure the difference, we can compute the standard error of the estimate (Sy,x) or standard deviation of the regression

Regression Analysis (6)

Figure 5.6 - Distribution about the Point Estimate of $ 600 Million Payroll

Regression Analysis (7)

Standard error of the estimate (cont.) - to compute Sy,x = Y

( Y-Yc)2
n-2

= Y-value of each data point equation

Yc = value of the dependent variable from regression n = number of data points

- more simple formula of Sy,x = which has the same result Sy,x =

Y2 - a Y - b XY
n-2

Regression Analysis (8)

Regression Analysis (9)

Standard error of the estimate (cont.) - from the calculation in table 5.11 Sy,x =

Y2 - a Y - b XY
n-2

= 39.5 - (1.75)(15.0) - (0.25)(51.5) 6-2 = 0.09375 = 0.306 or $ 30,600 in sales

Regression Analysis (10)

Correlation Coefficients (r) - another way to evaluate the relationship between two variables - r measures the degree or strength of the linear relationship and the value is between -1 and +1 - to compute : r = n XY -

X Y

[n x2 - (x)2] [n Y2 - (Y)2]
- using the data in table 5.11 for Triple A Construction Company we can compute r = 0.901 which can confirm the strength relationship between sales volume and local payroll

Regression Analysis (11)

Figure 5.7 - Four Values of the Correlation Coefficient

Regression Analysis (12)

Coefficient of determination (r2) - is the percent of variation in the dependent (Y) that is explained by the regression equation and the value is between 0 and 1 - to compute : r2 = b (XY n X Y)

Y2 n Y 2
-in the above example we can compute r2 = 0.81 indicating that 81% of the total variation is explained by the regression equation or 81% of sale volumes depend on the payroll

Regression Analysis (13)

Position Correlation Coefficients (r) - another way to evaluate the relationship between two variables regarding to variables position - r measures the degree or strength of the linear position relationship and the value is between -1 and +1 - to compute : r = 1 - (6d /(n(n )-1)) whereas d is difference between rank

Regression Analysis (14)

Sample of r Calculation

- Sample - 1 : Favourites of Political Parties

Party : Red Fav. Yellow Fav. d d TRT 1 3 -2 4 DM 5 2 3 9 CHT 3 1 2 4 MHC 4 4 0 0 LBR 2 5 -3 9

2 2

Total d

= 26 = 1 - (6(26) / 5(25 - 1)) = - 0.30

Regression Analysis (15)

Sample of r Calculation - Sample - 2 : Favourites of Female Characteristics Char. :

SEXY

X Fav. Y Fav. d d

2 2
r

4 3 1 1
= =

1 2 -1 1

3 5 -2 4

2 1 1 1

5 4 1 1

Total d

8 1 (6(8) / 5(25 1))

= 1 0.4 = 0.6

Regression Analysis (16)

Multiple Regression Analysis - more than one independent variable (X) turns a simple regression model into a multiple regression model - formula : = a + b 1X1 + b2X2

- from the Triple A Construction Company if we add another var. (interest rate) to be X2 and use computer calculation the regression equation is = 1.80 + 0.30X1 - 5.0 X2 and the coefficient correlation (r) increase from 0.90 to be 0.96 which implies that the inclusion of interest rate add more strength to the linear relationship

Regression Analysis (17)

Multiple Regression Analysis (cont.)

- to forecast sale if next year payroll is $600 million and interest rate is 12% (0.12), the sales will be sales = 1.80 + (0.30) (6) - (5.0) (0.12) = 3.00 or $ 300,000 - from the sales forecast for simple regression which is 3.20, if we can decrease interest rate to be 8% then the sales will also increase to be 3.20

Regression Analysis (18)

Regression Analysis Recommendations 1. The number of data should be much enough 2. If independent var. is more than one, have to us multiple regression analysis 3. The data have to be quantitative 4. The relationship between independent var. and dependent var. have to be appropriate in analysis eg. if the relationship is linear we have to use linear regression analysis (not exponential)

Regression Analysis (19)

Regression Analysis Recommendations (cont.) 5. Regression equation of one sample group cannot forecast for another sample group despite the same type of variable 6. In the forecast from regression equation, we can forecast only the dependent variable which effect from the independent variables 7. In multiple regression analysis, be careful the relationship among the independent variable 8. In the forecast from regression equation, we can not forecast if the characteristics of data is out of rules of statistical sampling

Monitoring and Controlling Forecasts (1)

Tracking Signal - is a measurement of how well the forecast is predicting actual values - to calculate Tracking Signal - Tracking signal = running sum of the forecast errors (RSFE) mean absolute deviation (MAD) - RSFE
= (actual demand in period i - forecast demand in period i)

- MAD =

forecast errors
n

Monitoring and Controlling Forecasts (2)

Figure 5.8 - Plot of Tracking Signals

Monitoring and Controlling Forecasts (3)

Tracking Signal (cont.)

- positive TS indicate that demand is greater than forecast and vice versa for negative TS - good TS : small deviation, positive and negative deviations should be balance and closely around zero - signal tripped is a point that tracking signal exceeds an upper or lower limit which means that there is problems with the forecasting method and the management should reevaluate the forecasting method

Monitoring and Controlling Forecasts (4)

Tracking Signal (cont.)

- how do firms decide what the upper and lower tracking limits should be? - setting tracking limits is a matter of setting reasonable values for upper and lower limits - Kimballs Bakery - Example

Monitoring and Controlling Forecasts (5)

Tracking Signal (cont.)

Monitoring and Controlling Forecasts (6)

Tracking Signal (cont.) - from the example, we can calculate tracking signal in each quarter and accumulate every quarter - then MAD =

forecast errors
n

85 6

= 14.2 - then tracking signal = RSFE = 35 MAD 14.2 = 2.5 MADs - the limits of tracking signal are between -2.0 to +2.5

which is in acceptable limits

Monitoring and Controlling Forecasts (7)

Adaptive Smoothing

- computer can control the tracking signal limit and automatic adjustment if a signal is over or under limit (signal tripped) - to minimize eror forecast, some smoothing constant eg. and in exponential smoothing have to be adjusted if the computer notes an errant tracking signal. This is called Adaptive Smoothing

Using the Computer to Forecast

Forecasted by Computer

- forecast calculation are seldom performed by hand in this day of computers - there are many computer program or software package for forecasting eg. SPSS, SAS, BIOMED, SYSTAB and Mini tab, EXCEL QM (Spreadsheet) which we should learn how to use some of these software with efficiency - the most important is how to interpret and analyze the output from our computer to be the most meaningful for our business

Key Equations (1)

5.1 Moving average =

demand in previous n periods

n

An equation for computing a moving average forecast

5.2 Weighted moving average =

(weight for period n) (demand in period n) weights

last periods forecast +

An equation for computing a weighted moving average forecast

5.3 New forecast =

(last periods

actual demand - last periods forecast)

An equation for computing an exponential smoothing forecast

5.4 Ft

= Ft-1 +

(At-1 - Ft-1)

Equation 5.3 rewritten mathematically

Key Equations (2)

5.5 MAD =

forecast errors
n

A measure of overall forecast error called mean absolute deviation

5.6 Tt = (1 -

)Tt-1 + (Ft - Ft-1)

Trend component of an exponential smoothing model 5.7 = a + bX A least squares straight line used in trend projection and regression analysis forecasting 5.8 b =

XY nX Y X2 - nX2

An equation used to compute the slope, b, of a regression line

Key Equations (3)

5.9 a = Y - bX
An equation used to compute the Y-intercept, a, of a regression line

5.10 SYX =

(Y Yc)2
n - 2

Standard error of the estimate 5.11 SYX =

Y2 - a Y - b XY
n-2

Another way to express Equation 5.10 5.12 r = n

XY - X Y

[nX2 - (X)2] [nY2 - (Y)2] Correlation coefficient, Coefficient of Determination (R2 = r2)

Key Equations (4)

5.13 = a + b1X1 + b2X2 The least squares line used in multiple regression 5.14 Tracking signal = RSFE MAD
=

(actual demand in period i - forecast demand in period i) MAD

An equation for monitoring forecasts

Summary (1)
Importance of Forecasting

Steps of Forecasting Types of Forecasting Scatter Diagrams Time-Series Models Moving Averages Exponential Smoothing Trend Projections Seasonal Variations Cyclical Variations

Summary (2)
Causal Forecasting Methods

Regression Analysis - Standard Error of the Estimate - Correlation Coefficient - Coefficient of Determination - Multiple Regression Analysis - Regression Analysis Recommendations Monitoring and Controlling Forecasts - Tracking Signal Using the Computer to Forecast Key Equations

Exercise (1)
The demand for coal seems to be tied to an index of weather
severity over the past five years and the experts proposes that the forecast for next year coal demand could be made by developing a trend projections and the relation between coal demand and weather index could be made by developing a regression equation
YEAR 1996 1997 1998 1999 2000 WEATHER INDEX 2 1 4 5 3 COAL SALES (MILLION TONS) 4 1 4 6 5

Exercise (2)
A) What is trend projections equation? How many coal sales in Year 2001? B) What is regression analysis equation? How many coal sales in Year 2001 if the weather index is 2? C) Compute the coefficient correlation. What does it mean? D) Compute the standard error of the estimate

Exercise (3)

Sales of Cool-Man air conditioners have grown steadily during the past five years
YEAR SALES

1 2 3 4 5 6

450 495 518 563 584 ?

Exercise (4)
A) The sales manager had predicted, before the business started, that year 1s sales would be 410 air conditioners. Using exponential smoothing with smoothing constants of 0.3 and 0.6 to develop forecasts for year 2 through 6 B) What effect did the smoothing constants have on this forecasts? Which smoothing constant gives the most accurate forecast? C) Use a three-year moving average forecasting model to forecast the sales of Cool-Man air conditioners D) Use a trend projection method, develop a forecasting model for the sales of Cool-Man air conditioners. How many sales forecasts in year 6 and 7? E) Compare to method of exponential smoothing with smoothing constant = 0.3, method of a three-year moving average and method of trend projections above, which method which you should use?

Exercise (5)
Solutions of Coal sales forecasting
YEAR Tt -2 -1 0 1 2 Weather Index (X) 2 1 4 5 3 Coal Sales (Y) 4 1 4 6 5 Tt2 4 1 0 1 4 TtY -8 -1 0 6 10 X2 XY Y2

1996 1997 1998 1999 2000

4 1 16 25 9

8 1 16 30 15

16 1 16 36 25

Tt = 0 X = 15
Tt = 0 X=3

Y = 20
Y=4

Tt2
= 10

TtY
=7

X2
= 55

XY
= 70

Y2
= 94

Exercise (6)
Solutions of Coal sales forecasting (cont.) A) Trend projections t = a + bX ; X = Tt b = TtY nTtY = 7 - (5)(0)(4) 10 - (5)(0) = 4 - (0.7)(0) = 7 10 = 4 = 6.1 = 0.7

Tt2- nTt2
a = Y bTt

t = 4 + 0.7Tt , 2001 = 4 + 0.7 (3) B) Regression Analysis = a + bX b = XY nXY

= 70 - (5)(3)(4) = 10 55 - (5)(3)2 = 4 - (1)(3) 10 = 1

= 1

X2 - nX2
a = Y bX

= 1 + 1X , = 1 + (1)(2) = 3 if X = 2

Exercise (7)
Solutions of Coal sales forecasting (cont.) C) Coefficient Correlation (r) = n XY - XY

[ nX2 - (X)2 ] [ nY2 - (Y)2 ]

= (5)(70) - (15)(20)

[ (5)(55) - (15)2] [ (5)(94) - (20)2]

= 350 - 300

[ 275 - 225 ] [ 470 - 400 ]

= 350 - 300 = 50 = 0.85

[ 50 ] [ 70 ] 3500

Exercise (8)
Solutions of Coal sales forecasting (cont.)
D) Standard error of the estimate (SY,X) = =

Y2 - a Y - b XY
n-2 94 - (1)(20) - (1)(70) 5-2

1.33

3 = 1.1547

Exercise (9)
Solutions of Cool-Man air conditioners A) Year Sales Forecasts

1 2 3 4 5 6 450 495 518 563 584 ? 410.00

= 0.3

= 0.6 410.00 434.00 470.60 499.04

410.00 + (0.3)(450.00 -410.00) = 422.00 422.00 + (0.3)(495.00-422.00) = 443.90 443.90 + (0.3)(518.00-443.90) = 466.13 466.13 + (0.3)(563.00-466.13) = 495.19 495.19 + (0.3)(584.00-495.19) = 521.83

537.42 565.37

Exercise (10)
Solutions of Cool-Man air conditioners (cont.)

B) Year Sales Rounded Forecast 410 422 444 466 495

= 0.3 Absolute Deviation 40 73 74 97 89 Rounded Forecast 410 434 471 499 537

= 0.6
Absolute Deviation 40 61 47 64 47 256

1 2 3 4 5

450 495 518 563 584

Sum = 373 MAD =

Sum =

deviation
n

= 373 = 74.60 5

MAD = 256 = 51.20 5

Exercise (11)
Solutions of Cool-Man air conditioners (cont.) C) Year Sales 1 2 3 4 5 6 450 495 518 563 584 ? (450 + 495 + 518)/3 (495 + 518 + 563)/3 (518 + 563 + 584)/3 = = = 487.67 525.33 555.00 Three-Year Moving Average

Exercise (12)
Solutions of Cool-Man air conditioners (cont.) D) Year 1 2 3 4 5 X -2 -1 0 1 2 Sales (Y) 450 495 518 563 584 X2 4 1 0 1 4 XY -900 -495 0 563 1168

X=0
X=0 t = a + bX b=

Y = 2610
Y = 522

X2
= 10

XY
= 336

XY nXY X2 - nX2

= 336 - (5)(0)(522) = 33.6 10 - (5)(0)2 = 522 - (33.6)(0) = 522 = 622.80 = 656.40

a = Y bX

t = 522 + 33.6X ; Y6 = 522 + (33.6)(3) Y7 = 522 + (33.6)(4)

Exercise (13)
Jerilyn Ross, a New York City psychologist, specializes in treating patients who are phobic and afraid to leave their homes. The following table indicates how many patients Dr. Ross has seen each year for the past ten years. It also indicates what the robbery rate was in New York City during the same year. Year 1 2 3 4 5 6 7 8 9 10 Patients 36 33 40 41 40 55 60 54 58 61 Crime Rate (Robberies per 1,000 population) 58.3 61.6 73.4 75.7 81.1 89.0 101.1 94.8 103.3 116.2

Exercise (14)

Using trend analysis, how many patients do you think Dr. Ross will see in years 11, 12 and 13? How well does the model fit the data?

Apply linear regression to study the relationship between the crime rate and Dr. Rosss patient load. If the robbery rate increases to 131.2 in year 11, how many phobic patients will Dr. Ross treat? If the crime rate drops to 90.6, what is the patient projection?

Exercise (15)
Case Study

North-South Airline
North-South Airline Data for Boeing 727-300 Jets Northern Airline Data Year 1992 1993 1994 1995 1996 1997 1998 Airframe Cost Per Aircraft $51.80 54.92 69.70 68.90 63.72 84.73 78.74 Engine Cost Per Aircraft $43.49 38.58 51.48 58.72 45.47 50.26 79.60 Average Age (Hours) 6,512 8,404 11,077 11,717 13,275 15,215 18,390

Exercise (16)
Case Study

North-South Airline (Cont.)

North-South Airline Data for Boeing 727-300 Jets Southeast Airline Data Year 1992 1993 1994 1995 1996 1997 1998 Airframe Cost Per Aircraft $13.29 25.15 32.18 31.78 25.34 32.78 35.56 Engine Cost Per Aircraft $18.86 31.55 40.43 22.10 19.69 32.58 38.07 Average Age (Hours) 5,107 8,145 7,360 5,773 7,150 9,364 8,259

Exercise (17)
Case Study

Akron Zoological Park

Admission Fee ($) Year 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 Attendance 117,874 125,363 126,853 108,363 133,762 95,504 63,034 63,853 61,417 53,353 Adult 4.00 3.00 3.00 2.50 2.50 2.00 1.50 1.50 1.50 1.50 Child 2.50 2.00 2.00 1.50 1.50 1.00 0.75 0.75 0.75 0.75 Group 1.50 1.00 1.50 1.00 1.00 0.50 0.50 0.50 0.50 0.50