Linear Trend Equation

Ft

Ft = a + bt
0 1 2 3 4 5

F = Forecast for period t

t

t = Specified number of time periods

a = Value of F at t = 0
t

b = Slope of the line

3-1

Calculating a and b
n (ty) - t y
b =
n t 2 - ( t) 2

y - b t
a =
n

3-2

Linear Trend Equation Example

t
W eek
1
2
3
4
5
t = 15
2

( t) = 2 2 5

t
1
4
9
16
25

y
S a le s
150
157
162
166
177

ty
150
314
486
664
885

t2 = 5 5

y = 812

ty = 2 4 9 9

Forecast week 6 & 7 sales?

3-3

Linear Trend Calculation

5 (2499) - 15(812)
12495-12180
b =
=
= 6.3
5(55) - 225
275 -225

812 - 6.3(15)
a =
= 143.5
5

y = 143.5 + 6.3t
Week (t)

Sales (y)

Sales (y)

6
7

143.5 + 6.3 (6)

143.5 + 6.3 (7)

181.3
187.6

3-4

Practice book problem

Calculate Sept forecast using

linear trend method

Book Problem # 2- Solution

1) Linear Trend
t
1
2

Y
19
18

tY
19
36

15

45

20

80

5
6

18
22

90
132

20

140

28

132

542

From Table 31 with n = 7, t = 28, t2 = 140

b=

n tY t Y 7(542) 28(132)
=
= .50
2
2
7(140) 28(28)
n t ( t )

a=

Y b t 132 .50(28)
=
= 16.86
n
7

Y= a + bt

For Sept., t = 8, and Yt = 16.86 + .50(8) = 20.86 (000)

Exponential Smoothing with

Trend Adjustment Data
35

Product demand

30

Actual demand (At)

25
20
15
10

There is an upward trend pattern

5
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Time (month)

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8

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Figure 4.3
7

Exponential Smoothing with

Trend Adjustment
When a trend is present, exponential
smoothing must be modified
Forecast
including (FITt) =
trend

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Exponentially
smoothed (Ft) +
forecast

Exponentially
smoothed
trend

(Tt)

Exponential Smoothing with

Trend Adjustment
Step 1: Compute Ft
!
!

Step 2: Compute Tt
! Tt

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

Step 3: Calculate the forecast FITt = Ft + Tt

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Exponential Smoothing with

Trend Adjustment Example
Actual
Smoothed
Month(t)Demand (At)Forecast, Ft
1
12
11
2
17
3
20
4
19
5
24
6
21
7
31
8
28
9
36
10

Smoothed
Trend, Tt
2

Forecast
Including
Trend, FITt
13.00

Table 4.1

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10

Exponential Smoothing with

Trend Adjustment Example
Forecast
Including
Trend, FITt
13.00

Actual
Smoothed
Smoothed
Month(t)Demand (At)Forecast, Ft
Trend, Tt
1
12
11
2
2
17
3
20
4
19
Step 1: Forecast for Month 2
5
24
6
21
F2 = A1 + (1 - )(F1 + T1)
7
31
F2 = (.2)(12) + (1 - .2)(11 + 2)
8
28
9
36
= 2.4 + 10.4 = 12.8 units
10
Table 4.1

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11

Exponential Smoothing with

Trend Adjustment Example
Forecast
Including
Trend, FITt
13.00

Actual
Smoothed
Smoothed
Month(t)Demand (At)Forecast, Ft
Trend, Tt
1
12
11
2
2
17
12.80
3
20
4
19
Step 2: Trend for Month 2
5
24
6
21
T2 = (F2 - F1) + (1 - )T1
7
31
T2 = (.4)(12.8 - 11) + (1 - .4)(2)
8
28
9
36
= .72 + 1.2 = 1.92 units
10
Table 4.1

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12

Exponential Smoothing with

Trend Adjustment Example
Forecast
Including
Trend, FITt
13.00

Actual
Smoothed
Smoothed
Month(t)Demand (At)Forecast, Ft
Trend, Tt
1
12
11
2
2
17
12.80
1.92
3
20
4
19
Step 3: Calculate FIT for Month 2
5
24
6
21
FIT2 = F2 + T2
7
31
FIT2 = 12.8 + 1.92
8
28
9
36
= 14.72 units
10
Table 4.1

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13

Exponential Smoothing with

Trend Adjustment Example
Actual
Smoothed
Month(t)Demand (At)Forecast, Ft
1
12
11
17
12.80
! 2
3
20
15.18
4
19
17.82
5
24
19.91
6
21
22.51
7
31
24.11
8
28
27.14
9
36
29.28
10
32.48

Smoothed
Trend, Tt
2
1.92
2.10
2.32
2.23
2.38
2.07
2.45
2.32
2.68

Forecast
Including
Trend, FITt
13.00
14.72
17.28
20.14
22.14
24.89
26.18
29.59
31.60
35.16

Table 4.1

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14

Exponential Smoothing with

Trend Adjustment Example
35

Product demand

30

Actual demand (At)

25
20
15
10

Forecast including trend (FITt)

with = .2 and = .4

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6

Time (month)

|
7

|
8

|
9
Figure 4.3
15

Seasonal Variations In Data

The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand

2011 Pearson Education, Inc. publishing as Prentice Hall

16

Seasonal Index Example

2010 Forecast
2009 Demand
2008 Demand
2007 Demand

140
130

Demand

120
110
100
90
80
70
|
J

|
F

|
M

|
A

|
M

|
J

|
J

|
A

|
S

|
O

|
N

|
D

Time
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17

Seasonal Variations In Data

Steps in the process:
1. Find average historical demand for each season
2. Compute the average demand over all seasons
3. Compute a seasonal index for each season
4. Estimate next years total demand
5. Divide this estimate of total demand by the
number of seasons, then multiply it by the
seasonal index for that season

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18

Seasonal Index Example

Demand
Month 2007 2008 2009
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
TOTAL

80
70
80
90
113
110
100
88
85
77
75
82

85
85
93
95
125
115
102
102
90
78
72
78

105
85
82
115
131
120
113
110
95
85
83
80

1050

1120

1204

Average
2007-2009

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90
80
85
100
123
115
105
100
90
80
80
80

Average
Monthly

Seasonal
Index

94
94
94
94
94
94
94
94
94
94
94
94
AVE - 93.72
19

Seasonal Index Example

Demand
Month2007 2008 2009

Average
2007-2009

Average Seasonal
Monthly
Index

Jan
80
85 105
90
94
Feb
70
85
85
80
94
2007-2009
demand
Mar
80
93 Average
82
85 monthly 94
Seasonal90index95= Average
monthly
Apr
115
100demand 94
May
113 125 131
123
94
= 90/94 = .957
Jun
110 115 120
115
94
Jul
100 102 113
105
94
Aug
88 102 110
100
94
Sept
85
90
95
90
94
Oct
77
78
85
80
94
Nov
75
72
83
80
94
Dec
82
78
80
80
94
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0.957

20

Seasonal Index Example

Demand
Month2007 2008 2009
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec

80
70
80
90
113
110
100
88
85
77
75
82

85
85
93
95
125
115
102
102
90
78
72
78

Average
2007-2009

105
85
82
115
131
120
113
110
95
85
83
80

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90
80
85
100
123
115
105
100
90
80
80
80

Average Seasonal
Monthly
Index
94
94
94
94
94
94
94
94
94
94
94
94

0.957
0.851
0.904
1.064
1.309
1.223
1.117
1.064
0.957
0.851
0.851
0.851
21

Seasonal Index Example

Demand
Month2007 2008 2009
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec

Average
2007-2009

Average Seasonal
Monthly
Index

80
85 105
90
for 2010
70
85 Forecast
85
80
80
93
82
85
= 1,200
90Expected
95 annual
115 demand100
113 125 131
123
110 115 120 1,200
115
Jan 113 12
x
.957 =
100 102
105
88 102 110 1,200
100
85
90
Feb 95 12
x90
.851 =
77
78
85
80
75
72
83
80
82
78
80
80

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96
85

94
94
94
94
94
94
94
94
94
94
94
94

0.957
0.851
0.904
1.064
1.309
1.223
1.117
1.064
0.957
0.851
0.851
0.851
22

Seasonal Index Example

2010 Forecast
2009 Demand
2008 Demand
2007 Demand

140
130

Demand

120
110
100
90
80
70
|
J

|
F

|
M

|
A

|
M

|
J

|
J

|
A

|
S

|
O

|
N

|
D

Time
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23

Associative Forecasting
Used when changes in one or more independent
variables can be used to predict the changes in the
dependent variable. Some examples
!
-Sales of mountain bikes may be related to the
percentage of the young population living in that area.
-Ice cream sales can be related to temperature
- Increase in fuel cost leads to price increases in
products and services
!
!
! Most common technique is linear regression
! analysis same technique just as we did in the
time series example
2011 Pearson

24

Associative Forecasting
Forecasting an outcome based on predictor
variables using the least squares technique
^

y = a + bx
^

where y = computed value of the variable to be

predicted (dependent variable)
a = y-axis intercept
b = slope of the regression line
x = the independent variable though to
predict the value of the dependent
variable
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25

Associative Forecasting
Example

Forecast sales amount

for $ 6B???

4.0
3.0
Sales

Sales
Area Payroll
($ millions), y($ billions), x
2.0
1
3.0
3
2.5
4
2.0
2
2.0
1
3.5
7

2.0
1.0

0
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2

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4
5
6
Area payroll

|
7
26

Associative Forecasting
Example
Sales, y
Payroll, x
2.0
1
3.0
3
2.5
4
2.0
2
2.0
1
3.5
7
y = 15.0
x = 18
x = x/6 = 18/6 = 3

x2
1
9
16
4
1
49
x2 = 80

xy
2.0
9.0
10.0
4.0
2.0
24.5
xy = 51.5

51.5 - (6)(3)(2.5)
xy - nxy
b=
= 80 - (6)(32)
= .25
2
2
x - nx

y = y/6 = 15/6 = 2.5

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a = y - bx = 2.5 - (.25)(3) = 1.75

27

Associative Forecasting
Example
^

y = 1.75 + .25x

Sales = 1.75 + .25(payroll)

4.0

If payroll next year is

estimated to be $6 billion,
then:
Nodels sales

Sales = 1.75 + .25(6)

Sales = $3,250,000

3.0
3.25
2.0
1.0

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Area payroll

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28

Forecast Accuracy
Error: difference between actual value and
predicted value
Mean Absolute Deviation (MAD)

Average absolute error

Mean Squared Error (MSE)

Average of squared error

Mean Absolute Percent Error (MAPE)

Average absolute percent error

3-29

MAD, MSE, and MAPE

MAD

Actual

forecast
n

MSE

( Actual

forecast) 2
n -1

MAPE =

( Actual forecast / Actual*100)

n

3-30

MAD, MSE, and MAPE

MAD

Easy to compute
Weights errors linearly

MSE

Squares error
More weight to large errors

MAPE

Puts errors in perspective

3-31

Example 10
Period
1
2
3
4
5
6
7
8

MAD=
MSE=
MAPE=

Actual
217
213
216
210
213
219
216
212

Forecast
215
216
215
214
211
214
217
216

(A-F)
2
-3
1
-4
2
5
-1
-4
-2

|A-F|
2
3
1
4
2
5
1
4
22

(A-F)^2 (|A-F|/Actual)*100
4
0.92
9
1.41
1
0.46
16
1.90
4
0.94
25
2.28
1
0.46
16
1.89
76
10.26

2.75 (22 / 8 )
10.86 ( 76 / 7 )
1.28 (10.26 / 8)

3-32

Tracking Signal
Tracking signal
Ratio of cumulative error to MAD

Tracking signal =

(Actual-forecast)
MAD

Bias: Persistent tendency for forecasts to be

greater or less than actual values.

3-33

Choosing a
Forecasting Technique
No single technique works in every situation
Two most important factors

Cost
Accuracy

Other factors include the availability of:

Historical data
Computers
Time needed to gather and analyze the data
Forecast horizon

3-34