Single Regression

Advanced techniques can be used when there is trend or seasonality, or when other factors
(such as price discounts) must be considered.
What is Single Regression?
EXAMPLE: 16 Months of Demand History
EXAMPLE: Building a Regression Model to Handle Trend and Seasonality
EXAMPLE: Causal Modeling

What is Single Regression?

Develops a line equation y = a + b(x) that best fits a set of historical data points (x,y)
Ideal for picking up trends in time series data
Once the line is developed, x values can be plugged in to predict y (usually demand)

For time series models, x is the time period for which we are forecasting
For causal models (described later), x is some other variable that can be used to
predict demand: o Promotions
o Price changes
o Economic conditions
o Etc.
Software packages like Excel can quickly and easily estimate the a and b values
required for the single regression model

EXAMPLE: 16 Months of Demand History

There is a clear upward trend, but also some randomness.

Forecasted demand = 188.55 + 69.43*(Time Period)

Notice how well the regression line fits the historical data,
BUT we arent interested in forecasting the past

Forecasts for May 05 and June 05:

May: 188.55 + 69.43*(17) = 1368.86
June: 188.55 + 69.43*(18) = 1438.29

The regression forecasts suggest an upward trend of about 69 units a month.

These forecasts can be used as-is, or as a starting point for more qualitative analysis.

EXAMPLE: Building a Regression Model to Handle

Trend and Seasonality
Quarter Period Demand
Winter 04
1
80
Spring
2
240
Summer
3
300
Fall
4
440
Winter 05
5
400

Spring
Summer
Fall

6
7
8

720
700
880

Regression picks up the trend, but not seasonality effects

Calculating seasonal index: Winter Quarter

(Actual / Forecast) for Winter quarters:

Winter 04: (80 / 90) = 0.89
Winter 05: (400 / 524.3) = 0.76
Average of these two = .83
Interpretation:
o For Winter quarters, actual demand has been, on average, 83% of the
unadjusted forecast

Seasonally adjusted forecast model

For Winter quarter
[ -18.57 + 108.57*Period ] * .83
Or more generally:
[ -18.57 + 108.57*Period ] * Seasonal Index

Seasonally adjusted forecasts

Comparison of adjusted regression model to historical demand

Single regression and causal forecast models

Time series assume that demand is a function of time. This is not always true.
Examples:
o Demand as a function of advertising dollars spent
o Demand as a function of population
o Demand as a function of other factors (ex. flu outbreak)
Regression analysis can be used in these situations as well; We simply need to
identify the x and y values

EXAMPLE: Causal Modeling

Month Price per unit Demand
1
$1.50
7,135
2
$1.50
6,945
3
$1.25
7,535
4
$1.40
7,260
5
$1.65
6,895
6
$1.65
7,105
7
$1.75
6,730
8
$1.80
6,650
9
$1.60
6,975

10

$1.60

6,800

Two possible x variables: Month or Price

Which would be a better predictor of demand?

Demand seems to be trending down over time, but the relationship is weak. There may be a
better model . . .

Demand shows a strong negative relationship to price. Using Excel to develop a

regression model results in the following:

Demand = 9328 1481 * (Price)

Interpretation: For every dollar the price increases, we would expect demand to fall
1481 units.