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Forecasting Models
Forecasting
Techniques
MAD =
∑ forecast _ errors
n
Measures of Forecast Accuracy
Mean Square Error (MSE) - a technique for determining the accuracy of
a forecasting model by taking the average of the squared errors.
MSE =
∑ ( forecast _ errors) 2
n
Mean Absolute Percent Error (MAPE) - a technique for determining the
accuracy of a forecasting model by taking the average of the squared
errors.
1 actual − forecast
MAPE = ∑ x100
n actual
1 forecast _ errors
MAPE = ∑ x100
n actual
Decomposition of a Time Series
•Trend – is the gradual upward or downward movement of the data over
time. Population shifts, changing incomes, and cultural changes often
account for such movement.
•Cycle – are wavelike variations or patterns in the data that occur every
several years. They are usually tied into the business cycle, political and
economic conditions.
January 10
February 12
March 13
Where:
Ft = New Forecast
Ft-1 = Previous Forecast
At-1 = Actual of Previous Period
α = smoothing constant (value between 0 and 1)
Trend Projections
General Regression Equation: Ŷ=a + bX
where:
a = Y – axis intercept
X = Independent Variable
b=
∑XY − n XY
∑X
2
2
−n X
b = slope of the line
X = values of the independent variable
Y = values of the dependent variable
X = average of the values of X’s
Y = average of the values of Y’s
n = number of data points or observations
a = Y −bX
Trend Projections – Time Series
Let us consider the case of Midwestern Manufacturing Company; that firm’s
demand for electrical generators over the period 1996 – 2002 is shown below:
b=
∑ XY − n XY 3,063 − (7)(4)(98.86) 295
= = = 10.54
∑ X − nX 140 − (7)(4) 2
2 2 28
Y = a + bX = 56.70 + 10.54X
160
140
120
Generator Demand
100
Actu
80
F ore
60
40
20
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Trend Projections – Seasonal Variations
Ave _ Monthly _ Demand =
∑ Ave _ Demand Seasonal _ Index =
Ave _ Sales _ Demand
n Ave _ Monthly _ Demand
Month Sales Sales Ave Sales Ave Monthly Seasonal Next Year Forecast
Year 1 Year 2 Demand Index
Jan 80 100 90 94 0.9571,200 / 12 x 0.957 = 96
Feb 85 75 80 94 0.8511,200 / 12 x 0.851 = 85
Mar 80 90 85 94 0.9041,200 / 12 x 0.904 = 90
Apr 110 90 100 94 1.0641,200 / 12 x 1.064 = 106
May 115 131 123 94 1.3091,200 / 12 x 1.309 = 131
June 120 110 115 94 1.2231,200 / 12 x 1.223 = 122
July 100 110 105 94 1.1171,200 / 12 x 1.117 = 112
Aug 110 90 100 94 1.0641,200 / 12 x 1.064 = 106
Sep 85 95 90 94 0.9571,200 / 12 x 0.957 = 96
Oct 75 85 80 94 0.8511,200 / 12 x 0.851 = 85
Nov 85 75 80 94 0.8511,200 / 12 x 0.851 = 85
Dec 80 80 80 94 0.8511,200 / 12 x 0.851 = 85
1,128
Causal Forecasting Method
General Regression Equation: Ŷ=a + bX
where:
a = Y – axis intercept
X = Independent Variable
b=
∑XY − n XY
∑X
2
2
−n X
b = slope of the line
X = values of the independent variable
Y = values of the dependent variable
X = average of the values of X’s
Y = average of the values of Y’s
n = number of data points or observations
a = Y −bX
Causal Forecasting Method
Y
Triple A’s Sales
X
Local PayrollX =
∑ X 18
=
X2
=3
XY
($100,000) (100,000,000) n 6
2.0
3.0
1
3
1
9
2.0
9.0 Y=
∑Y =
15
= 2. 5
n 6
∑
2.5 4 16 10.0
XY − n XY
2.0 2 4 4.0 b=
∑ X − nX
2 2
2.0 1 1 2.0
3.5 7 49 24.5
51.5 − (6)(3)(2.5)
Σ Y = 15.0 Σ X = 18 Σ X2 = 80 Σ XY = 51.5
80 − (6)(9)
a = Y − b X = 2.5 − (0.25)(3) = 1.75 b = 0.25
4
3 .5
3
2 .5
Sales ($100,000)
A
2
R
1 .5
1
0 .5
0
0 1 2 3 4 5 6 7 8
Standard Error of the Estimate
Standard Deviation of the Regression (SY,X ) is used to measure the
accuracy of the regression estimates.
SY , X =
∑ (Y − Yˆ ) 2
=
∑ Error 2
n−2 n−2
SY , X =
∑ − a∑ Y − b∑ XY
Y 2
n−2
0.375 0.375
SY , X = = = 0.09375 = 0.306
6−2 4
n∑ XY − ∑ X ∑ Y
r=
[n∑ X 2 − (∑ X ) 2 ][ n∑ Y 2 − (∑ Y ) 2 ]
Correlation of Coefficient
Monitoring & Controlling Forecast
Tracking Signal – is a measurement of how well the forecast is predicting
actual values. The intent is to detect any bias in errors over time – values can
be positive or negative. A value of zero would be ideal; control limits of ± 4 or
± 5 are often used for a range of acceptable values.
Control Chart
3.0
2.5
2.0
1.5
1.0
0.5
MAD
0.0
-0.5 1 2 3 4 5 6
-1.0
-1.5
-2.0
-2.5