UNIVERSITY OF THE ASSUMPTION

City of San Fernando (P)

MATH 1C: Quantitative Techniques in Mathematics (Business Forecasting)

Submitted by: Cunanan, Maria Cecilia B. De Mesa, Anne Mae L. Lising, Joyce Camille Mallari, Daisy Mangila, Gian Joy Montoya, Jeremiah (3A-BSACC)

Submitted to: Armido Galivo

Forecasting Forecasting is the art and science of predicting future events. Business forecasting pertains to more than predicting demand. Forecasts are also used to predict profits, revenues, costs, productivity changes, prices and availability of energy and raw materials, interest rates, movements of economic indications and prices of stocks and bonds, as well as other variables. Features Common to All Forecasts 1. Forecasting techniques generally assume that the same underlying causal system that existed in the past that will continue to existed in the future. 2. Forecasts are rarely perfect; predicted values usually differ from actual results. 3. Forecasts for group of items tend to be more accurate than forecasts for individual items. 4. Forecast accuracy decreases as the time period covered by the forecast increases. Steps in Forecasting 1. Determine the purpose of the forecast and when it will be needed. 2. Establish the time horizon that the forecast must cover. 3. Select a forecasting technique. 4. Gather and analyze the appropriate data and then prepare the forecast. 5. Monitor the forecast. Approaches of Forecasting 1. Qualitative Forecast In some situations, forecasters rely solely on judgment and opinion to make forecasts. If management must have a forecast quickly, there may not be enough time to gather and analyze quantitative data. A. Judgmental forecasts. Rely on analysis of subjective inputs obtained from various sources, such as consumer surveys, the sales staff, managers and executives, and panels of experts. 1. Executive Opinions. A small group of upper-level managers (e.g., in marketing, operations, and finance) may meet and collectively develop a forecast. Is often used as a part of longrange planning and new product development. 2. Sales Force Composite. Members of the sales staff or the customer service staff are often good sources of information because of their direct contact with consumers. They are often aware of any plans the customers may be considering for the future. 3. Consumer Surveys. The obvious advantage of consumer surveys is that they can tap information that might not be available elsewhere.

4. Outside Opinion. This may concern advice on political or economic conditions in a foreign country or some other aspects of interest with which an organization lacks familiarity. 5. Opinions of Managers and Staff. A manager may solicit opinions from a number of other managers and staff people. Delphi method, an iterative process in which managers and staff complete a series of questionnaires, each developed from the previous one, to achieve a consensus forecast. 2. Quantitative Forecast A. Naive Methods Is the simplest forecasting technique. The advantage of a nave forecast is that it has virtually no cost, it is quick and easy to prepare because data analysis is nonexistent, and it is easy to understand. The main disadvantage is its inability to provide highly accurate forecasts. For example, Suppose the last two values were 50 and 53. The next forecast would be 56: Period 1 2 3 B. Moving Average A moving average forecast uses a number of the most recent actual data values in generating a forecast. The moving average forecast can be computed using the following equation: Moving Average = Demand in previous n periods n where: n is the number of periods in the moving average Example: Compute a three-period moving average forecast given the following demand for cars for the last five periods. Demand 1 2 3 4 5 Solution: The forecast for period 6 should be: Moving Average Forecast = 65 + 90 + 85 = 80 cars Supply 70 80 65 90 85 Actual 50 53 Change from Previous Value +3 53+3=56 Forecast

3 If actual demand in period 6 turns out to be 95, the moving average forecast for period 7 would be: Moving Average Forecast = 90 + 85 + 95 3
Note: That in Moving Average, as new actual value becomes available, the forecast is updated by adding the newest value and dropping the oldest and then recomputing the average. Consequently, the forecast moves by reflecting only the most recent values.

= 90 cars

C. Weighted Moving Average A weighted average is similar to a moving average, except that it assigns more weight to the most recent values in a time series. A Weighted Moving Average may be expressed mathematically as: Weighted Moving Average = [(weight for period n)(demand in period n)] Weights Example: Compute a three-period weighted moving average forecast given the following demand for cars for the last five periods; with an assigned weight of 1,2, and 3. Demand 1 2 3 4 5 Solution: The forecast for period 6 would be: Weighted Moving Average = 65(1 ) + 90 (2) + 85(3) = 83.33 or 83 cars 6 If actual demand in period 6 turns out to be 95, the weighted moving average forecast for period 7 would be: Moving Average Forecast = 90(1) + 85(2) + 95(3) 6 D. Exponential Smoothing. Exponential smoothing is a sophisticated weighted averaging method that is still relatively easy to use and understand. Each new forecast is based on the previous forecast plus a percentage of the difference between that forecast and the actual value of the series at that point. That is: = 90.83 or 91 cars Supply 70 80 65 90 85

New Forecast = Last Periods Forecast + Last Periods actual demand - = Last Periods Forecast

Where represents the value of weighing factor which is referred to as smoothing factor that has a value between 0 and 1, inclusive. This represents percentage forecast error. Example 1: A car dealer predicted a January demand for 550 Honda V-tech cars. Actual January demand was 680 Honda V-tech cars and 0.10. Forecast the demand for February, using the exponential smoothing model. Solution: New forecast (February) = 550 + 0.10 [680-550] = 563 Example 2: Use exponential smoothing model to develop a series of forecast for the following data and compute [Actual - Forecast] = Error for each period a. use a smoothing factor of 0.10 b. use a smoothing factor of 0.40 PERIOD 1 2 3 4 5 6 7 8 9 10 11 ACTUAL DEMAND 50 52 48 51 50 54 52 50 55 53

Solution: A. 0.10 PERIOD 1 2 3 4 5 6 7 8 9 10 11 ACTUAL DEMAND 50 52 48 51 50 54 52 50 55 53 FORECAST 50.00 50.20 49.98 50.08 50.07 50.46 50.61 50.55 51.00 51.20 ERROR 2 -2.2 1.02 -0.08 3.93 1.54 -0.61 4.45 2 B. 0.40 FORECAST 50.00 50.80 49.68 50.21 50.13 51.68 51.81 51.09 52.65 52.79 ERROR 2 -2.8 1.32 -0.21 3.87 0.32 -1.81 3.91 0.35

E. Trend Line Forecast Trend Equation. A linear trend equation has the form:

Yt = a + bt
Where t = specified number of time periods from t = 0 Yt = forecast for period t a = value of Yt at t=0 b = slope of the line The coefficient of line a and b can be computed using the two equations: b = nty - ty nt2 - (t)2 a = y - bt n where: n = number of periods y = value of the time series

Example: The total sales of television sets of a Manila-based firm over the last 10 weeks is shown in the following table. Plot the data, and visually check if linear trend line would be appropriate. Then determine the equation of the line and predict the sales for weeks 11 and 12. WEEK 1 2 3 4 5 6 7 8 9 10 UNIT SALES 800 810 830 820 850 810 825 840 805 830

Solution: a. Plot. x axis = week y axis = unit sales b. WEEK (t) 1 2 3 4 5 6 7 8 9 10 t = 55 b = 10(45,340) - (55)(8,220) 10(385) - (55)2 b= 1,300 = 1.60 825 a = 8,220 88 10 a = 813.20 UNIT SALES (y) 800 810 830 820 850 810 825 840 805 830 y = 8,220 Ty 800 1,620 2,490 3,280 4,250 4,860 5,775 6,720 7,245 8,300 ty = 45,340 t2 1 4 9 16 25 36 49 64 81 100 t2 = 385

c. Yt = 813.20 + 1.6t When t = 11 Y11 = 813.20 + 1.6(11) = 830.8 When t = 12 Y12 = 813.20 + 1.6(12) = 832.40 F. Simple Linear Regression The objective of linear regression is to obtain an equation of a straight line that minimizes the sum of equation vertical deviations of points around the line. This squares line has the equation: Yt = a + bX Where:Yt = Predicted (dependent) variable X = Predictor (independent) variable b = slope of the line a = value of Yt at X=0 (Note that it is conventional to represent values of the predicted variable on the y axis and values of the predictor on the x axis). The coefficients a and b of the line are computed using these two equations: b = n(xy) (x)( y) n(x2) - (x)2 a = y - bx n where: n = number of periods observations

Example: JR Hamburgers has a chain of 10 stores in Metro Manila. Sales figures and profiles for stores are given in the following table. Obtain the regression line for the data, and predict profits for a store assuming sales of 30 million. Sales, x (Millions) 15 17 21 18 19 22 16 17 25 20 Solutions: Sales, x (Millions) 15 17 21 18 19 22 16 17 25 20 x = 190 b = 10(2,184) (190)(111.5) 10(3,694) (190)2 b = 0.78 a= 111.5 - 0.78 (3,694) 10 a= -3.67 when x = P30million Yt = a + bX Y30 = -3.67 + 0.78 (30) = 19.73 million Profits, y (Millions) 8 9 13 10 11 14 8.5 10 15 13 y = 111.5 xy 120 153 273 180 209 308 136 170 375 260 xy =2,184 x2 225 289 441 324 361 484 256 289 625 400 x = 3,694 Profits, y (Millions) 8 9 13 10 11 14 8.5 10 15 13