FORECASTING

WHAT IS FORECASTING?
 It is the process of estimation in unknown situations.
Prediction is similar, but in a more general term.

TWO TYPES OF FORECASTING

 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 sale.
 Forecasting
Methods

Quantitative Methods Qualitative Methods

Time Series Causal

Delphi Method
Method Method

Moving Regression Jury of Execution

Opinion
Averages Analysis

Exponential Multiple Sales Force

Smoothing Regressions Composite

Trend Consumer
Projections Market Survey
MOVING AVERAGES
 Moving Average is a series of arithmetic means
 Used if little or no trend
 Used often for smoothing
 Provides overall impression of data over
time
Formula:

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

 FOUR-MONTH MOVING AVERAGE
Month Actual Demand
January 21
February 25
March 29
Compute for a
four-month
April 21
moving
May 25
average using
June 20
the data
July 18
given.
August 21
 EX. 1 FOUR-MONTH AVERAGE FORECAST
Month Actual Forecast
Demand
January 21
February 25
March 29
April 21
May 25 21 + 25 + 29 + 21 / 4 = 24
June 20 25 + 29 + 21 + 25 / 4 = 25
July 18 29 + 21 + 25 + 20 / 4 = 24
August 21 21 + 25 + 20 + 18 / 4 = 21
 THREE-MONTH MOVING AVERAGE
Month Actual Demand
January 10
February 12 Compute for a
March 13 three-month
April 16
moving
average using
May 19
the data given.
June 23
July 26
EX. 2 THREE-MONTH AVERAGE FORECAST
Month Actual Forecast
Demand
January 10
February 12
March 13
April 16 10 + 12 + 13 / 3 = 11 2/3
May 19 12 + 13 + 16 / 3 = 13 2/3
June 23 13 + 16 + 19 / 3 = 16
July 26 16 + 19 + 23 / 3 = 19 1/3
 WEIGHTED MOVING AVERAGES
 Used when some trend might be present
 Older data usually less important
 Weights based on experience and intuition
Formula:

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

THREE-MONTH MOVING AVERAGE
Month Actual Demand
January 21
February 25 Compute for a
March 29 three-month
weighted
April 21
moving average
May 25 using the data
June 20 given.
July 18
EX. 1 THREE-MONTH AVERAGE FORECAST
Weights Applied Period
Actual
Month 3 Forecast Last month
Demand
January 21 2 2-Months ago
1 3-Months ago
February 25
6 Sum of Weights
March 29
April 21 [(29 x 3) + (25 x 2) + 21] / 6 = 26
May 25 [(21 x 3) + (29 x 2) + 25] / 6 = 24
June 20 [(25 x 3) + (21 x 2) + 29] / 6 = 24
July 18 [(20 x 3) + (25 x 2) + 21] / 6 = 22
FOUR-MONTH MOVING AVERAGE

Period Supply
1 35
2 50 Compute for a
four-month
3 65
weighted
4 55 moving average
5 70 using the data
given.
6 75
EX. 2 FOUR-MONTH AVERAGE FORECAST
Period Supply Weights Applied
Forecast Period
4 Last month
1 35 3 2-Months ago
2 50 2 3-Months ago

3 65 1 4-Months ago
10 Sum of Weights
4 55
5 70 [(55 x 4) + (65 x 3) + (50 x 2) + 35] / 10 = 55

6 75 [(70 x 4) + (55 x 3) + (65 x 2) + 50] / 10 = 63

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.
EXPONENTIAL SMOOTHING
Formula:
New forecast = Last period’s forecast + α (Last period’s
actual demand – Last period’s forecast)
Mathematically:
Ft = Ft – 1 + α (At – 1 - Ft – 1)

Where: Ft = new forecast

Ft – 1 = previous forecast
α = smoothing (or weighting) constant (0 ≤ a ≤ 1)
At – 1 = previous period’s actual demand
 In January, a demand for
142 units of Mitsubishi car Given
model “Montero Sport” for
Ft – 1 142
February was predicted by a
car dealer. Actual February α 0.20
demand was 153 cars. At – 1 153
Forecast the March demand
using smoothing constant of
α = 0.20
Solution:

New forecast = Last period’s forecast + α

(Last period’s actual demand – Last period’s
forecast)

Last Period’s
New forecast = 142 + 0.20 ( 153 – 142)
Forecast = 142
= 142 + 0.20 ( 11 )
units
= 142 + 2.2
Last Period’s
= 144. 2 ≈ 144 Cars
Actual Demand
Therefore, the demand forecast for the = 153 units
Mitsubishi “Montero” in March is 144 cars.
α = 0.20
Use exponential smoothing to compute for a series of
forecast
Period Demand
1 20
2 35
a. α = 0.20;
3 46
b. α = 0.50 and
4 40
c. plot the
5 50 actual data
6 55 and both sets
7 45 on a single
8 graph
α = 0.20
Period Actual Forecast Error
Demand
1 20 - Formulas:
Forecast error tells us
2 35 20 15
how wellNew
the forecast
methods = areLast
3 46 23 23 performed against
period’s forecast +
themselves using past
4 40 27.60 13.60 α (Last
data.
period’s
actual demand – Last
5 50 30.08 19.92 period’s forecast)
6 55 34.06 20.94 Forecast Error =
7 45 38.25 6.75 Actual Demand -
Forecast
8 39.60
α = 0.50
Period Actual Forecast Error
Demand
1 20 - Formulas:

2 35 20 15 New forecast = Last

3 46 27.50 18.50 period’s forecast + α
(Last period’s actual
4 40 36.75 3.25 demand – Last period’s
5 50 38.38 19.92 forecast)

6 55 44.19 10.81 Forecast Error =

Actual Demand -
7 45 49.59 -4.79 Forecast
8 47.30
 60

50

40
DEMAND

30 Actual Demand
α = 0.20
20 α = 0.50

10

0
1 2 3 4 5 6 7 8
PERIOD
REGRESSION ANALYSIS
 It is a statistical technique used to develop
a mathematical equation showing how
variables are related. It is a forecasting
procedure that uses the least squares
approach or more independent variables
to develop a forecasting method.
REGRESSION ANALYSIS
Formula: The dependent variable Ŷ is the item
we are trying to forecast, while the
Ŷ = a + bX
Where: independent variable (X) is an item
Ŷ = value of dependent variable
that might have a causal effect on the
a = Y-axis intercept dependent variable.
b = slope of the regression line
X = independent variable
n(∑XY) – (∑X)(∑Y)
b =
n(∑X²) – (∑X)²
Where: X = mean of X Ȳ = mean of Y
n = number of observations, or years
 Maxus Sales Corporation is in the business of
selling laptops. They realized the advantages of
forecasting very early in their business. They also
realized that in order to perform effective forecast,
they need to keep track of their current and past sales
numbers.
Currently, they are in the process of forecasting
their sales numbers of each quarter of the coming year.
In order to do this, they have pulled up their sales
numbers for the last 8 quarters. These numbers are as
follows:
 X Y
Quarter Sales
1 600
2 1550
3 1500
4 1500 n = 8 quarters
5 2400
6 3100
7 2600
8 2900
Find the X² and XY of each row.
Quarter Sales
X² XY n = 8 quarters
X Y
1 600 1 600
2 1550 4 3,100
3 1500 9 4,500
4 1500 16 6,000
5 2400 25 12,000
6 3100 36 18,600
7 2600 49 18,200
8 2900 64 23,200
∑X ∑Y ∑X² ∑XY
Find the summation of each column.
Quarter Sales
X² XY n = 8 quarters
X Y
1 600 1 600
2 1550 4 3,100
3 1500 9 4,500
4 1500 16 6,000
5 2400 25 12,000
6 3100 36 18,600
7 2600 49 18,200
8 2900 64 23,200
∑X∑X
= 36 ∑Y =∑Y 16,150 ∑X²∑X²= 204 ∑XY =
∑XY
86,200
Use the given data and formula to compute for
the mean of X and Y( and Ȳ).
Given:
∑X = 36 ∑Y = 16,150 ∑X² = 204 ∑XY = 86,200

n = 8 quarters
Formula:
36 16,150
Ȳ = ∑X
X = X =
8 𝐧
8
∑Y
Ȳ =
X = 4.5 Ȳ = 2,018.75 𝐧
Use the given data and formula to compute for
the b(slope of the regression line).
Given:
∑X = 36 ∑Y = 16,150 ∑X² = 204 ∑XY = 86,200

n = 8 quarters X = 4.5 Ȳ = 2,018.75

8(86,200) – (36)(16,150) Formula:
b =
8(204) – (36) ² n(∑XY) – (∑X)(∑Y)
b=
n(∑X²) – (∑X)²
b= 322.02
Use the given data and formula to compute for
the a(Y-axis intercept).
Given:
∑X = 36 ∑Y = 16,150 ∑X² = 204 ∑XY = 86,200

n = 8 quarters X = 4.5 Ȳ = 2,018.75 Formula:

b = 322.02 a = Ȳ – bX
a = 2,018.75 – (322.02)(4.5)

a = 569.66
Form the estimated regression equation.
Given:
n(∑XY) – (∑X)(∑Y)
b= a = Ȳ – bX
n(∑X²) – (∑X)²
8(86,200) – (36)(16,150)
a = 2,018.75 – (322.02)(4.5)
b =
8(204) – (36) ²
Formula:
b= 322.02 a = 569.66
Ŷ = a + bX

Sales =Ŷ 569.66 + 322.02(Quarter)

= 569.66 + 322.02X
What is the sales forecast for the
next 4 quarters?

Sales9 = 569.66 + 322.02(9) = 3,467.84

Sales10 = 569.66 + 322.02(10) = 3,789.86 Estimated

Regression Equation:

Sales11 = 569.66 + 322.02(11) = 4,111.88 Ŷ = 569.66 + 322.02X

Sales12 = 569.66 + 322.02(12) = 4,433.90

 Healthy Hamburgers has a chain of 5
stores in Metro Manila. Sales figures and
profits for the stores are given in the
following table. Predict profit for a store
assuming sales of ₱30 million.
 X Y
Sales Profits
(₱ 1,000,000) (₱ 1,000,000)

15 8
17 9 n = 5 stores
21 13
18 10
19 11
Find the X² and XY of each row.
Sales Profit
X² XY
X Y
15 8 225 120
17 9 289 153
21 13 441 273
18 10 324 180
19 11 361 209
∑X ∑Y ∑X² ∑XY
n = 5 stores
Find the summation of each column.
Sales Profit
X² XY
X Y
15 8 225 120
17 9 289 153
21 13 441 273
18 10 324 180
19 11 361 209
∑X∑X
= 90 ∑Y∑Y
= 51 ∑X² ∑X²
= 1,640 ∑XY∑XY
= 935
n = 5 stores
Use the given data and formula to compute for
the mean of X and Y( and Ȳ).
Given:
∑X = 90 ∑Y = 51 ∑X² = 1,640 ∑XY = 935

n = 5 stores
51 Formula:
90
X = Ȳ = ∑X
5 5 X =
𝐧

∑Y
X = 18 Ȳ = 10.20 Ȳ =
𝐧
Use the given data and formula to compute for
the b(slope of the regression line).
Given:
∑X = 90 ∑Y = 51 ∑X² = 1,640 ∑XY = 935

n = 5 stores X = 18 Ȳ = 10.20

5(935) – (90)(51) Formula:

b =
5(1,640) – (90) ² n(∑XY) – (∑X)(∑Y)
b=
n(∑X²) – (∑X)²
b= 0.85
Use the given data and formula to compute for
the a(Y-axis intercept).
Given:
∑X = 90 ∑Y = 51 ∑X² = 1,640 ∑XY = 935

n = 5 stores X = 18 Ȳ = 10.20 Formula:

b = 0.85 a = Ȳ – bX
a = 10.20 – (0.85)(18)

a = -5.10
Form the estimated regression equation.
Given:
n(∑XY) – (∑X)(∑Y)
b= a = Ȳ – bX
n(∑X²) – (∑X)²

5(935) – (90)(51)
b = a = 10.20 – (0.85)(18)
5(1,640) – (90) ²
Formula:
b= 0.85 a = -5.10
Ŷ = a + bX

Profit Ŷ==-5.10
-5.10++0.85(Sales)
0.85X
 Predict profit for a store assuming
sales of ₱30 million.

Profit (₱ 1,000,000) = -5.10 + 0.85(Sales)

= -5.10 + 0.85(30)
Estimated
= -5.10 + 25.5 Regression Equation:
= -5.10 + 20.4
Ŷ = -5.10 + 0.85X

Estimated Profit = ₱ 20,400,000