PRODUCTION PLANNING AND CONTROL

(BMM4823)

FORECASTING

Week 4
Adjusted Exponential Smoothing

When a trend is present, exponential

smoothing must be modified

Forecast Exponentially Exponentially

including (FITt) = smoothed (Ft) + smoothed (Tt)
trend forecast trend
Adjusted Exponential Smoothing

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

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

Step 1: Compute Ft
Step 2: Compute Tt
Step 3: Calculate the forecast FITt = Ft + Tt
 Adjusted Exponential Smoothing
Example
Always One Industrial Gas wants to forecast demand for a
gas tank production. A report of past sales, indicates that
an increasing trend. Smoothing constants are assigned the
values of α=0.2 and ᵦ=0.4. The conglomerate assumes the
initial forecast for month 1 was 11 units, and the trend over
that period was 2 units.
 Adjusted Exponential Smoothing

Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24
6 21
7 31
8 28
9 36
10

Table 4.1
 Exponential Smoothing with
Trend Adjustment Example

Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17
3 20
4 19
5 24 Step 1: Forecast for Month 2
6 21
F2 = aAt-1 + (1 - a)(Ft-1 + Tt-1)
7 31
8 28 F2 = (.2)(12) + (1 - .2)(11 + 2)
9 36 = 2.4 + 10.4 = 12.8 units
10

Table 4.1
 Exponential Smoothing with
Trend Adjustment Example

Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80
3 20
4 19
5 24 Step 2: Trend for Month 2
6 21
T2 = b(Ft - Ft-1) + (1 - b)Tt-1
7 31
8 28 T2 = (.4)(12.8 - 11) + (1 - .4)(2)
9 36 = .72 + 1.2 = 1.92 units
10

Table 4.1
 Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80 1.92
3 20
4 19
5 24 Step 3: Calculate FIT for Month 2
6 21
FIT2 = F2 + T2
7 31
FIT2 = 12.8 + 1.92
8 28
9 36 = 14.72 units
10

Table 4.1
 Exponential Smoothing with
Trend Adjustment Example
Forecast
Actual Smoothed Smoothed Including
Month(t) Demand (At) Forecast, Ft Trend, Tt Trend, FITt
1 12 11 2 13.00
2 17 12.80 1.92 14.72
3 20 15.18 2.10 17.28
4 19 17.82 2.32 20.14
5 24 19.91 2.23 22.14
6 21 22.51 2.38 24.89
7 31 24.11 2.07 26.18
8 28 27.14 2.45 29.59
9 36 29.28 2.32 31.60
10 32.48 2.68 35.16
 Exponential Smoothing with
Trend Adjustment Example
35 –

30 – Actual demand (At)

Product demand

25 –

20 –

15 –

10 – Forecast including trend (FITt)

with a = .2 and b = .4
5 –

0 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Figure 4.3
Time (month)
 Trend Projections
Fitting a trend line to historical data points
to project into the medium to long-range
Linear trends can be found 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
Values of Dependent Variable Least Squares Method

Actual observation Deviation7

(y-value)

Deviation5 Deviation6

Deviation3

Deviation4

Deviation1
(error) Deviation2
Trend line, y^ = a + bx

Time period Figure 4.4

Values of Dependent Variable
Least Squares Method

Actual observation Deviation7

(y-value)

Deviation5 Deviation6

Deviation3
Least squares method minimizes the
sum of the squared errors
(deviations)
Deviation4

Deviation1
(error) Deviation2
Trend line, y^ = a + bx

Time period Figure 4.4

© 2011 Pearson Education
 Least Squares Method
Equations to calculate the regression variables

^
y = a + bx

Sxy - nxy
b=
Sx2 - nx2

a = y - bx
 Least Square Example

The demand for electric power at Waja Steel over the

period of 7 years is analysed (in megawatts). Aman, the
production manager wants to forecast 2017 demand by
fitting a straight line trend.
 Least Squares Example
Time Electrical Power
Year Period (x) Demand (y)
2010 1 74
2011 2 79
2012 3 80
2013 4 90
2014 5 105
2015 6 142
2016 7 122

∑xy - nxy
b=
∑x2 - nx2

a = y - bx
 Least Squares Example
Time Electrical Power
Year Period (x) Demand (y) x2 xy
2010 1 74
2011 2 79
2012 3 80
2013 4 90
2014 5 105
2015 6 142
2016 7 122
 Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 2 79
2012 3 80
2013 4 90
2014 5 105
2015 6 142
2016 7 122
 Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 2 79 4 158
2012 3 80
2013 4 90
2014 5 105
2015 6 142
2016 7 122
 Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 2 79 4 158
2012 3 80 9 240
2013 4 90 16 360
2014 5 105 25 525
2015 6 142 36 852
2016 7 122 49 854

∑xy - nxy
b=
∑x2 - nx2

a = y - bx
 Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 2 79 4 158
2012 3 80 9 240
2013 4 90 16 360
2014 5 105 25 525
2015 6 142 36 852
2016 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86
 Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 2 79 4 158
2012 3 80 9 240
2013 4 90 16 360
2014 5 105 25 525
2015 6 142 36 852
2016 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86

∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(4 2)

a = y - bx = 98.86 - 10.54(4) = 56.70

 Least Squares Example
Time Electrical Power
Year Period (x) Demand x2 xy
2010 1 74 1 74
2011 The
2 trend line79 is 4 158
2012 3 80 9 240
2013 4 ^ 90 16 360
2014 5 y = 56.70
105 + 10.54x25 525
2015 6 142 36 852
2016 7 122 49 854
∑x = 28 ∑y = 692 ∑x2 = 140 ∑xy = 3,063
x=4 y = 98.86

∑xy - nxy 3,063 - (7)(4)(98.86)

b= = = 10.54
∑x - nx
2 2 140 - (7)(4 2)

a = y - bx = 98.86 - 10.54(4) = 56.70

 Least Squares Example

Trend line,
160 – ^
y = 56.70 + 10.54x
150 –
140 –
Power demand

130 –
120 –
110 –
100 –
90 –
80 –
70 –
60 –
50 –
| | | | | | | | |
2008 2009 2010 2011 2012 2013 2014 2015 2016
Year
Least Square Method
 Therefore, the electrical power for 2017 is ;

Trend line,
y = 56.70 + 10.54x
= 56.70 + 10.54(8)
= 56.70 + 84.32
= 141.02 MW
 Least Squares Requirements

1. We always plot the data to insure

a linear relationship
2. We do not predict time periods far
beyond the database
3. Deviations around the least
squares line are assumed to be
random
 Seasonal Variations In Data

The multiplicative
seasonal model
can adjust trend
data for seasonal
variations in
demand
 Seasonal Variations In Data
Steps in the process:
1. Find average historical demand for each season (normally for
the past three years)
2. Compute the average demand over all seasons
3. Compute a seasonal index for each season
4. Estimate next year’s total demand
5. Divide this estimate of total demand by the number of seasons,
then multiply it by the seasonal index for that season
 Seasonal Index Example
Demand Average Average Seasonal
Month 2014 2015 2016 2014-2016 Monthly Index
Jan 80 85 105 90 94
Feb 70 85 85 80 94
Mar 80 93 82 85 94
Apr 90 95 115 100 94
May 113 125 131 123 94
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
 Seasonal Index Example
Demand Average Average Seasonal
Month 2014 2015 2016 2014-2016 Monthly Index
Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94
Mar 80 93 Average
82 85 monthly94
2014-2016 demand
Seasonal
Apr 90index95= Average
115 100 demand 94
monthly
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
 Seasonal Index Example
Demand Average Average Seasonal
Month 2014 2015 2016 2014-2016 Monthly Index
Jan 80 85 105 90 94 0.957
Feb 70 85 85 80 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90 95 115 100 94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 115 94 1.223
Jul 100 102 113 105 94 1.117
Aug 88 102 110 100 94 1.064
Sept 85 90 95 90 94 0.957
Oct 77 78 85 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851
 Seasonal Index Example
Demand Average Average Seasonal
Month 2014 2015 2016 2014-2016 Monthly Index
Jan 80 85 105 90 94 0.957
Feb 70 85 Forecast
85 for 201780 94 0.851
Mar 80 93 82 85 94 0.904
Apr 90Expected
95 annual
115 demand 100= 1,200
94 1.064
May 113 125 131 123 94 1.309
Jun 110 115 120 1,200 115 94 1.223
Jan 12 x .957 = 96
Jul 100 102 113 105 94 1.117
Aug 88 102 110 1,200 100 94 1.064
Sept 85 90
Feb 95 12 x 90
.851 = 85 94 0.957
Oct 77 78 85 80 94 0.851
Nov 75 72 83 80 94 0.851
Dec 82 78 80 80 94 0.851
 Seasonal Index Example

2017 Forecast
140 – 2016 Demand
130 – 2015 Demand
2014 Demand
120 –
Demand

110 –
100 –
90 –
80 –
70 –
| | | | | | | | | | | |
J F M A M J J A S O N D
Time
 Associative Forecasting

Used when changes in one or more

independent variables can be used to
predict the changes in the dependent
variable
Most common technique is linear
regression analysis

We apply this technique just as we did

in the time series example
Example
The sales of Dells Computer were depend
on

i) Promotional strategies
ii) Advertising budget
iii) Competitor price
iv)National economy
v) Number of student
 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
 Associative Forecasting Example

Sales Area Payroll

($ millions), y ($ billions), x
2.0 1
3.0 3
2.5 4 4.0 –
2.0 2
2.0 1 3.0 –
3.5 7 Sales
2.0 –

1.0 –

| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
 Associative Forecasting Example

Sales, y Payroll, x x2 xy
2.0 1 1 2.0
3.0 3 9 9.0
2.5 4 16 10.0
2.0 2 4 4.0
2.0 1 1 2.0
3.5 7 49 24.5
∑y = 15.0 ∑x = 18 ∑x2 = 80 ∑xy = 51.5

∑xy - nxy 51.5 - (6)(3)(2.5)

x = ∑x/6 = 18/6 = 3 b= = = .25
∑x - nx
2 2 80 - (6)(3 )
2

y = ∑y/6 = 15/6 = 2.5 a = y - bx = 2.5 - (.25)(3) = 1.75

 Associative Forecasting Example

^
y = 1.75 + .25x Sales = 1.75 + .25(payroll)

If payroll next year is

estimated to be $6 4.0 –
billion, then:
3.25
3.0 –
Nodel’s sales
Sales = 1.75 + .25(6) 2.0 –
Sales = $3,250,000
1.0 –

| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
 Standard Error of the Estimate

 A forecast is just a point estimate of a

future value
4.0 –
 This point is 3.25

Nodel’s sales
actually the 3.0 –

mean of a 2.0 –
probability
distribution 1.0 –
| | | | | | |
0 1 2 3 4 5 6 7

Area payroll
Figure 4.9
Standard Error of the Estimate

Computationally, this equation is

considerably easier to use

∑y2 - a∑y - b∑xy

Sy,x =
n-2

We use the standard error to set up

prediction intervals around the
point estimate
 Standard Error of the Estimate
∑y2 - a∑y - b∑xy 39.5 - 1.75(15) - .25(51.5)
Sy,x = = 6-2
n-2

4.0 –
Sy,x = .306 3.25
Nodel’s sales
3.0 –

The standard error of the 2.0 –

estimate is $306,000 in
sales 1.0 –

| | | | | | |
0 1 2 3 4 5 6 7
Area payroll
Cont’d
If ± 1 standard deviation =.6827, so
there is a 68.27% chance of sales being
± $306000.
 Correlation
 How strong is the linear relationship between
the variables?
 Correlation does not necessarily imply
causality!
 Coefficient of correlation, r, measures degree
of association
 Values range from -1 to +1
Correlation Coefficient

nSxy - SxSy
r=
[nSx2 - (Sx)2][nSy2 - (Sy)2]
y y
Correlation Coefficient
nSxy - SxSy
r=
[nSx
(a) Perfect positive x
2 - (Sx)2][nSy2 - (Sy)2]
x
(b) Positive
correlation: correlation:
r = +1 0<r<1

y y

(c) No correlation: x (d) Perfect negative x

r=0 correlation:
r = -1
Exercises 1.1
 Sales of Proton’s Pesona have grown
steadily at auto dealerships in Cukai
during the past 5 years. The sales
manager had predicted in 2011 that 2012
sales would be 410 Pesona. Using
exponential smoothing with a weight of α
=0.3 develop forecasts for 2012 through
2017.
Year Sales Forecast
2012 450 410
2013 495
2014 518
2015 563
2016 584
2017 ?
Exercises 1.2
 Using the trend projection method,
develop a forecast for the sales of Pesona
in Cukai through 2015.
Thank you