Chapter 5

Forecasting
Learning Objectives (1 of 2)
After completing this chapter, students will be able to:
5.1 Understand and know when to use various families of forecasting
models.
5.2 Compare moving averages, exponential smoothing, and other
time-series models.
5.3 Calculate measures of forecast accuracy.
5.4 Apply forecast models for random variations.
5.5 Apply forecast models for trends and random variations.
Learning Objectives (2 of 2)
5.6 Manipulate data to account for seasonal variations.
5.7 Apply forecast models for trends, seasonal variations, and random
variations.
5.8 Explain how to monitor and control forecasts.
Chapter Outline
5.1 Types of Forecasting Models
5.2 Components of a Time Series
5.3 Measures of Forecast Accuracy
5.4 Forecasting Models – Random Variations Only
5.5 Forecasting Models – Trend and Random Variations
5.6 Adjusting for Seasonal Variations
5.7 Forecasting Models – Trend, Seasonal, and Random Variations
5.8 Monitoring and Controlling Forecasts
Introduction
• Main purpose of forecasting
• Reduce uncertainty and make better estimates of what will happen in the
future
• Subjective methods
• Seat-of-the pants methods, intuition, experience
• More formal quantitative and qualitative techniques
Forecasting Models
FIGURE 5.1 Forecasting Models
Qualitative Models (1 of 3)
• Incorporate judgmental or subjective factors
– Useful when subjective factors are important or accurate quantitative data is
difficult to obtain
• Common qualitative techniques
1. Delphi method
2. Jury of executive opinion
3. Sales force composite
4. Consumer market surveys
Qualitative Models (2 of 3)
• Delphi Method
• Iterative group process
• Respondents provide input to decision makers
• Repeated until consensus is reached
• Jury of Executive Opinion
• Collects opinions of a small group of high-level managers
• May use statistical models for analysis
Qualitative Models (3 of 3)
• Sales Force Composite
• Allows individual salespersons estimates
• Reviewed for reasonableness
• Data is compiled at a district or national level
• Consumer Market Survey
• Information on purchasing plans solicited from customers or potential
customers
• Used in forecasting, product design, new product planning
Time-Series Models
• Predict the future based on the past
• Uses only historical data on one variable
• Extrapolations of past values of a series
• Ignores factors such as
• Economy
• Competition
• Selling price
Components of a Time Series (1 of 3)
• Sequence of values recorded at successive intervals of time
• Four possible components
• Trend (T)
• Seasonal (S)
• Cyclical (C)
• Random (R)
Components of a Time Series (2 of 3)
FIGURE 5.2 Scatter Diagram for Four Time Series of Quarterly Data
Components of a Time Series (3 of 3)
FIGURE 5.3 Scatter Diagram of a Time Series with
Cyclical and Random Components
Time-Series Models
• Two basic forms
– Multiplicative
Demand = T × S × C × R
– Additive
Demand = T + S + C + R
– Combinations are possible
Measures of Forecast Accuracy (1 of 5)
• Compare forecasted values with actual values
– See how well one model works
– To compare models
Forecast error = Actual value − Forecast value
• Measure of accuracy
– Mean absolute deviation (MAD):

MAD 
 forecast error
n
Measures of Forecast Accuracy (2 of 5)
TABLE 5.1 Computing the Mean Absolute Deviation (MAD)
ACTUAL ABSOLUTE VALUE OF
SALES OF WIRELESS ERRORS (DEVIATION), (ACTUAL −
MONTH SPEAKERS FORECAST SALES FORECAST)
1 110 — —
2 100 110 |100 − 110| = 10
3 120 100 |120 − 100| = 20
4 140 120 |140 − 120| = 20
5 170 140 |170 − 140| = 30
6 150 170 |150 − 170| = 20
7 160 150 |160 − 150| = 10
8 190 160 |190 − 160| = 30
9 200 190 |200 − 190| = 10
10 190 200 |190 − 200| = 10
11 — 190 —
Blank Blank Blank Sum of |errors| = 160
Blank Blank Blank MAD = 160÷9 = 17.8
Measures of Forecast Accuracy (3 of 5)
TABLE 5.1 Computing the Mean Absolute Deviation (MAD)
ACTUAL ABSOLUTE VALUE OF
SALES OF WIRELESS ERRORS (DEVIATION), (ACTUAL −
MONTH SPEAKERS FORECAST SALES FORECAST)
1 110 —
2 100 110
3 120 100
• Forecast based on
4 140 120
naïve model
5 170 140
6 150 170
• No attempt to adjust
7 160 150 for time series
8 190 160 components
9 200 190
10 190 200
11 — 190
Blank Blank Blank
Blank Blank Blank
Measures of Forecast
 forecastAccuracy
error 160 (4 of 5)
MAD    17.8
n Absolute Deviation
TABLE 5.1 Computing the Mean 9 (MAD)
ACTUAL ABSOLUTE VALUE OF
SALES OF WIRELESS ERRORS (DEVIATION), (ACTUAL −
MONTH SPEAKERS FORECAST SALES FORECAST)
1 110 — —
2 100 110 |100 − 110| = 10
3 120 100 |120 − 100| = 20
4 140 120 |140 − 120| = 20
5 170 140 |170 − 140| = 30
6 150 170 |150 − 170| = 20
7 160 150 |160 − 150| = 10
8 190 160 |190 − 160| = 30
9 200 190 |200 − 190| = 10
10 190 200 |190 − 200| = 10
11 — 190 —
Blank Blank Blank Sum of |errors| = 160
Blank Blank Blank MAD = 160÷9 = 17.8
Measures of Forecast Accuracy (5 of 5)
• Other common measures
– Mean squared error (MSE)

MSE 
 (error) 2

n
– Mean absolute percent error (MAPE)
error
 actual
MAPE  100%
n

– Bias is the average error

Forecasting Random Variations
• No other components are present
• Averaging techniques smooth out forecasts
• Moving averages
• Weighted moving averages
• Exponential smoothing
Moving Averages (1 of 2)
• Used when demand is relatively steady over time
• The next forecast is the average of the most recent
n data values from the time series
• Smooths out short-term irregularities in the data
series

Sum of demands in previous n periods

Moving average forecast =
n
 Moving Averages (2 of 2)
• Mathematically

Yt  Yt 1  ...  Yt n 1
Ft 1 
n

where
Ft+1 = forecast for time period t + 1
Yt = actual value in time period t
n = number of periods to average
Wallace Garden Supply (1 of 4)
• Wallace Garden Supply wants to forecast demand for its Storage Shed
• Collected data for the past year
• Use a three-month moving average (n = 3)
Wallace Garden Supply (2 of 4)
TABLE 5.2 Wallace Garden Supply Shed Sales
MONTH ACTUAL SHED SALES 3-MONTH MOVING AVERAGE
January 10

February 12

March 13

April 16 (10 + 12 + 13)÷3 = 11.67

May 19 (12 + 13 + 16)÷3 = 13.67

June 23 (13 + 16 + 19)÷3 = 16.00

July 26 (16 + 19 + 23)÷3 = 19.33

August 30 (19 + 23 + 26)÷3 = 22.67

September 28 (23 + 26 + 30)÷3 = 26.33

October 18 (26 + 30 + 28)÷3 = 28.00

November 16 (30 + 28 + 18)÷3 = 25.33

December 14 (28 + 18 + 16)÷3 = 20.67

January — (18 + 16 + 14)÷3 = 16.00

 Weighted Moving Averages
• Weighted moving averages use weights to put more emphasis on previous periods
• Often used when a trend or other pattern is emerging

Ft 1 
 (Weight in period i )(Actual value in period i )
 (Weights)
• Mathematically

w1Yt  w 2Yt 1  ...  w nYt n 1

Ft 1 
w1  w 2  ...  w n
where
wi = weight for the ith observation
 Wallace Garden Supply (3 of 4)
• Use a 3-month weighted moving average model to forecast demand
• Weighting scheme

WEIGHT APPLIED Blank PERIOD

Blank 3 Last month

Blank 2 2 months ago
Blank 1 3 months ago
3 × Sales last month + 2 × Sales 2 months ago + 1 × Sales 3 months ago
Blank 6 Blank
Blank Blank Sum of the weights
Wallace Garden Supply (4 of 4)
TABLE 5.3 Weighted Moving Average Forecast for Wallace Garden Supply
MONTH ACTUAL SHED SALES 3-MONTH WEIGHTED MOVING AVERAGE
January 10

February 12

March 13

April 16 [(3 × 13) + (2 × 12) + (10)]÷6 = 12.17

May 19 [(3 × 16) + (2 × 13) + (12)]÷6 = 14.33

June 23 [(3 × 19) + (2 × 16) + (13)]÷6 = 17.00

July 26 [(3 × 23) + (2 × 19) + (16)]÷6 = 20.5

August 30 [(3 × 26) + (2 × 23) + (19)]÷6 = 23.83

September 28 [(3 × 30) + (2 × 26) + (23)]÷6 = 27.5

October 18 [(3 × 28) + (2 × 30) + (26)]÷6 = 28.33

November 16 [(3 × 18) + (2 × 28) + (30)]÷6 = 23.33

December 14 [(3 × 16) + (2 × 18) + (28)]÷6 = 18.67

January — [(3 × 14) + (2 × 16) + (18)]÷6 = 15.33

Exponential Smoothing (1 of 2)
• Exponential smoothing
• A type of moving average
• Easy to use
• Requires little record keeping of data

New forecast = Last period’s forecast

+ α(Last period’s actual demand
−Last period’s forecast)

α is a weight (or smoothing constant) with a value 0 ≤ α ≤ 1

Exponential Smoothing (2 of 2)
• Mathematically
Ft 1  Ft   (Yt  Ft )

where
Ft+1 = new forecast (for time period t + 1)
Yt = pervious forecast (for time period t)
α = smoothing constant (0 ≤ α ≤ 1)
Yt = pervious period’s actual demand

The idea is simple – the new estimate is the old estimate plus
some fraction of the error in the last period
Exponential Smoothing Example (1 of 2)
• In January, February’s demand for a certain car model was predicted to be 142
• Actual February demand was 153 autos
• Using a smoothing constant of α = 0.20, what is the forecast for March?
New forecast (for March demand) = 142 + 0.2(153 − 142)
= 144.2 or 144 autos
• If actual March demand = 136
New forecast (for April demand) = 144.2 + 0.2(136 − 144.2)
= 142.6 or 143 autos
Exponential Smoothing Example (2 of 2)
• Selecting the appropriate value for α is key to obtaining a good
forecast
• The objective is always to generate an accurate forecast
• The general approach is to develop trial forecasts with different
values of α and select the α that results in the lowest MAD
Port of Baltimore Example (1 of 2)
TABLE 5.4 Port of Baltimore Exponential Smoothing
Forecasts for α = 0.10 and α = 0.50
ACTUAL FORECAST
TONNAGE FORECAST USING
QUARTER UNLOADED USING α = 0.10 α = 0.50
1 180 175 175
2 168 175.5 = 175.00 + 0.10(180 − 175) 177.5
3 159 174.75 = 175.50 + 0.10(168 − 175.50) 172.75
4 175 173.18 = 174.75 + 0.10(159 − 174.75) 165.88
5 190 173.36 = 173.18 + 0.10(175 − 173.18) 170.44
6 205 175.02 = 173.36 + 0.10(190 − 173.36) 180.22
7 180 178.02 = 175.02 + 0.10(205 − 175.02) 192.61
8 182 178.22 = 178.02 + 0.10(180 − 178.02) 186.30
9 ? 178.60 = 178.22 + 0.10(182 − 178.22) 184.15
Port of Baltimore Example (2 of 2)
TABLE 5.5 Absolute Deviations and MADs for the Port of Baltimore Example
ACTUAL ABSOLUTE ABSOLUTE
TONNAGE FORECAST DEVIATIONS FOR α = FORECAST DEVIATIONS FOR
QUARTER UNLOADED WITH α = 0.10 0.10 WITH α = 0.50 α = 0.50
1 180 175 5 175 5
2 168 175.5 7.5 177.5 9.5
3 159 174.75 15.75 172.75 13.75
4 175 173.18 1.82 165.88 9.12
5 190 173.36 16.64 170.44 19.56
6 205 175.02 29.98 180.22 24.78
7 180 178.02 1.98 192.61 12.61
8 182 178.22 3.78 186.30 4.3
Sum of
absolute Blank Blank 82.45 Blank 98.63
deviations
Σ deviations MAD = 12.33
MAD = = 10.31
Blank Blank n Blank

Best choice
Using Software (1 of 7)
PROGRAM 5.1A Selecting the Forecasting Model in
Wallace Garden Supply Problem
Using Software (2 of 7)
PROGRAM 5.1B Initializing Excel QM Spreadsheet for
Wallace Garden Supply Problem
Using Software (3 of 7)
PROGRAM 5.1C Excel QM Output for Wallace Garden
Supply Problem
Using Software (4 of 7)
PROGRAM 5.2A Selecting Time-Series Analysis in QM
for Windows in the Forecasting Module
Using Software (5 of 7)
PROGRAM 5.2B Entering Data for Port of Baltimore
Example in QM for Windows
Using Software (6 of 7)
PROGRAM 5.2C Selecting the Model and Entering Data
for Port of Baltimore Example in QM for Windows
Using Software (7 of 7)
PROGRAM 5.2D Output for Port of Baltimore Example
in QM for Windows
Forecasting Models – Trend and Random
Variations
• Exponential smoothing does not respond to trends
• A more complex model can be used
• The basic approach
• Develop an exponential smoothing forecast
• Adjust it for the trend
Exponential Smoothing with Trend (1 of 2)
• The equation for the trend correction uses a new smoothing constant
β
• Ft and Tt must be given or estimated
• Three steps in developing FITt
Step 1: Compute smoothed forecast Ft+1
Smoothed forecast = Previous forecast including trend + a(Last
error)
Ft 1  FITt   (Yt  FITt )
 Exponential Smoothing with Trend (2 of 2)
Step 2: Update the trend (Tt +1) using
Smoothed forecast = Previous forecast including trend + b(Error or excess in
trend)

Tt 1  Tt   (Ft 1  FITt )

Step 3: Calculate the trend-adjusted exponential smoothing forecast (FITt +1) using
Forecast including trend (FITt+1) = Smoothed forecast (Ft+1) + Smoothed trend (Tt+1)

FITt 1  Ft 1  Tt 1
Selecting a Smoothing Constant
• A high value of β makes the forecast more responsive to changes in
trend
• A low value of β gives less weight to the recent trend and tends to
smooth out the trend
• Values are often selected using a trial-and-error approach based on
the value of the MAD for different values of β
Midwestern Manufacturing (1 of 6)
• Demand for electrical generators from 2007 – 2013
• Midwest assumes F1 is perfect, T1 = 0, α = 0.3, β = 0.4
FIT1 = F1 +T1 = 74 + 0 = 74
TABLE 5.6 Midwestern Manufacturing’s Demand
YEAR ELECTRICAL GENERATORS SOLD
2007 74
2008 79
2009 80
2010 90
2011 105
2012 142
2013 122
Midwestern Manufacturing (2 of 6)
For 2008 (time period 2)
Step 1: Compute Ft+1
F2 = FIT1 + α(Y1 − FIT1)
= 74 + 0.3(74 − 74) = 74
Step 2: Update the trend
T2 = T1 + β(F2 − FIT1)
= 0 + .4(74 − 74) = 0
Midwestern Manufacturing (3 of 6)
Step 3: Calculate the trend-adjusted exponential smoothing forecast
(Ft+1) using
FIT2 = F2 + T2
= 74 + 0 = 74
Midwestern Manufacturing (4 of 6)
For 2009 (time period 3)
Step 1: F3 = FIT2 + α(Y2 − FIT2)
= 74 + 0.3(79 − 74) = 75.5
Step 2: T3 = T2 + .4(F3 − FIT2)
= 0 + .4(75.5 − 74) = 0.6
Step 3: FIT3 = F3 + T3
= 75.5 + 0.6 = 76.1
Midwestern Manufacturing (5 of 6)
TABLE 5.7 Midwestern Manufacturing Exponential
Smoothing with Trend Forecasts
TIME DEMAND
(t) (Yt) Ft+1 = FITt + 0.3(Yt − FITt) Tt+1 = Tt + 0.4(Ft+1 − FITt) FITt+1 = Ft+1 + Tt+1
1 74 74 0 74
2 79 74 = 74 + 0.3(74 − 74) 0 = 0 + 0.4(74 − 74) 74 = 74 + 0
3 80 75.5 = 74 + 0.3(79 − 74) 0.6 = 0 + 0.4(75.5 − 74) 76.1 = 75.5 + 0.6
4 90 77.270 1.068 78.338 = 77.270 + 1.068
= 76.1 + 0.3(80 − 76.1) = 0.6 + 0.4(77.27 − 76.1)
5 105 81.837 2.468 84.305 = 81.837 + 2.468
= 78.338 + 0.3(90 − 78.338) = 1.068 + 0.4(81.837 − 78.338)
6 142 90.514 4.952 95.466 = 90.514 + 4.952
= 84.305 + 0.3(105 − 84.305) = 2.468 + 0.4(90.514 − 84.305)
7 122 109.426 10.536 119.962 = 109.426 + 10.536
= 95.446 + 0.3(142 − 95.466) = 4.952 + 0.4(109.426 − 95.466)
8 Blank 120.573 10.780 131.353 = 120.573 + 10.780
= 119.962 + 0.3(122 − 119.962) = 10.536 + 0.4(120.573 − 119.962)
Midwestern Manufacturing (6 of 6)
PROGRAM 5.3 Output from Excel QM in Excel 2016 for
Trend-Adjusted Exponential Smoothing Example
Trend Projections (1 of 2)
• Fits a trend line to a series of historical data points
• Projected into the future for medium- to long-range forecasts
• Trend equations can be developed based on exponential or quadratic
models
• Linear model developed using regression analysis is simplest
Trend Projections (2 of 2)
• Mathematical formula

Ŷ  b0  b1X

where
Ŷ = predicted value
b0 = intercept
b1 = slope of the line
X = time period (i.e., X = 1, 2, 3, …, n)
Midwestern Manufacturing (1 of 4)
• Based on least squares regression, the forecast equation is

Yˆ  56.71 10.54X

• Year 2014 is coded as X = 8

(sales in 2014) = 56.71 + 10.54(8)
= 141.03, or 141 generators
• For X = 9
(sales in 2015) = 56.71 + 10.54(9)
= 151.57, or 152 generators
Midwestern Manufacturing (2 of 4)
PROGRAM 5.4 Output from Excel QM in Excel 2016 for
Trend Line Example
Midwestern Manufacturing (3 of 4)
PROGRAM 5.5 Output from QM for Windows for Trend
Line Example
Midwestern Manufacturing (4 of 4)
FIGURE 5.4 Generator Demand and Projections for
Next Three Years Based on Trend Line
Seasonal Variations
• Recurring variations over time may indicate the need for seasonal
adjustments in the trend line
• A seasonal index indicates how a particular season compares with an
average season
• An index of 1 indicates an average season
• An index > 1 indicates the season is higher than average
• An index < 1 indicates a season lower than average
Seasonal Indices
• Deseasonalized data is created by dividing each observation by the
appropriate seasonal index
• Once deseasonalized forecasts have been developed, values are
multiplied by the seasonal indices
• Computed in two ways
• Overall average
• Centered-moving-average approach
Seasonal Indices with No Trend (1 of 3)
• Divide average value for each season by the average of all data
– Telephone answering machines at Eichler Supplies
– Sales data for the past two years for one model
– Create a forecast that includes seasonality
Seasonal Indices with No Trend (2 of 3)
TABLE 5.8 Answering Machine Sales and Seasonal Indices
Blank SALES DEMAND Blank Blank Blank Blank
AVERAGE 2-YEAR MONTHLY AVERAGE SEASONAL
MONTH YEAR 1 YEAR 2
DEMAND DEMANDa INDEXb
January 80 100 90 94 0.957
February 85 75 80 94 0.851
March 80 90 85 94 0.904
April 110 90 100 94 1.064
May 115 131 123 94 1.309
June 120 110 115 94 1.223
July 100 110 105 94 1.117
August 110 90 100 94 1.064
September 85 95 90 94 0.957
October 75 85 80 94 0.851
November 85 75 80 94 0.851
December 80 80 80 94 0.851
Blank Blank Total average demand = 1,128 Blank Blank

a 1,128 b Average 2-year demand

Average monthly demand = = 94 Seasonal index =
12 months Average monthly demand
Seasonal Indices with No Trend (3 of 3)
• Calculations for the seasonal indices
Jan. 1,200 July 1,200
´ 0.957 = 96 ´ 1.117 = 112
12 12
Feb. 1,200 Aug. 1,200
´ 0.851 = 85 ´ 1.064 = 106
12 12
Mar. 1,200 Sept. 1,200
´ 0.904 = 90 ´ 0.957 = 96
12 12
Apr. 1,200 Oct. 1,200
´ 1.064 = 106 ´ 0.851 = 85
12 12
May 1,200 Nov. 1,200
´ 1.309 = 131 ´ 0.851 = 85
12 12
June 1,200 Dec. 1,200
´ 1.223 = 122 ´ 0.851 = 85
12 12
Seasonal Indices with Trend (1 of 2)
• Changes could be due to trend, seasonal, or random
• Centered moving average (CMA) approach prevents trend being
interpreted as seasonal
• Turner Industries sales contain both trend and seasonal components
Seasonal Indices with Trend (2 of 2)
• Steps in CMA
1. Compute the CMA for each observation (where possible)
2. Compute the seasonal ratio = Observation÷CMA for that observation
3. Average seasonal ratios to get seasonal indices
4. If seasonal indices do not add to the number of seasons, multiply each
index by (Number of seasons)÷(Sum of indices)
Turner Industries (1 of 7)
TABLE 5.9 Quarterly Sales ($1,000,000s) for Turner
Industries

QUARTER YEAR 1 YEAR 2 YEAR 3 AVERAGE

1 108 116 123 115.67
2 125 134 142 133.67
3 150 159 168 159.00
4 141 152 165 152.67
Average 131.00 140.25 149.50 140.25
Turner Industries (2 of 7)
TABLE 5.9 Quarterly Sales ($1,000,000s) for Turner Industries

QUARTER YEAR 1 YEAR 2 YEAR 3 AVERAGE

1 108 116 123 115.67
2 125 134 142 133.67
3 150 159 168 159.00
4 141 152 165 152.67
Average 131.00 140.25 149.50 140.25

Definite trend Seasonal pattern

Turner Industries (3 of 7)
• To calculate the CMA for quarter 3 of year 1, compare
the actual sales with an average quarter centered on
that time period
• Use 1.5 quarters before quarter 3 and 1.5 quarters
after quarter 3
• Take quarters 2, 3, and 4 and one half of quarters 1, year 1
and quarter 1, year 2

0.5(108) + 125 + 150 + 141 + 0.5(116)

CMA(q3, y1) = = 132.0
4
Turner Industries (4 of 7)
• Compare the actual sales in quarter 3 to the CMA to
find the seasonal ratio

Sales in quarter 3 150

Seasonal ratio = = = 1.136
CMA 132.0
Turner Industries (5 of 7)
TABLE 5.10 Centered Moving Averages and Seasonal
Ratios for Turner Industries
YEAR QUARTER SALES ($1,000,000s) CMA SEASONAL RATIO
1 1 108 Blank Blank
Blank 2 125 Blank Blank
Blank 3 150 132.000 1.136
Blank 4 141 134.125 1.051
2 1 116 136.375 0.851
Blank 2 134 138.875 0.965
Blank 3 159 141.125 1.127
Blank 4 152 143.000 1.063
3 1 123 145.125 0.848
Blank 2 142 147.875 0.960
Blank 3 168 Blank Blank
Blank 4 165 Blank Blank
Turner Industries (6 of 7)
• The two seasonal ratios for each quarter are averaged to get the
seasonal index

Index for quarter 1 = I1 = (0.851 + 0.848)÷2 = 0.85

Index for quarter 2 = I2 = (0.965 + 0.960)÷2 = 0.96
Index for quarter 3 = I3 = (1.136 + 1.127)÷2 = 1.13
Index for quarter 4 = I4 = (1.051 + 1.063)÷2 = 1.06
Turner Industries (7 of 7)
• Scatterplot of Turner Industries Sales Data and
Centered Moving Average
Trend, Seasonal, and Random Variations
• Decomposition – isolating linear trend and seasonal factors to
develop more accurate forecasts
• Five steps to decomposition
1. Compute seasonal indices using CMAs.
2. Deseasonalize the data by dividing each number by its seasonal index
3. Find the equation of a trend line using the deseasonalized data
4. Forecast for future periods using the trend line
5. Multiply the trend line forecast by the appropriate seasonal index
Deseasonalized Data (1 of 4)
TABLE 5.11 Deseasonalized Data for Turner Industries
SALES ($1,000,000s) SEASONAL INDEX DESEASONALIZED SALES
($1,000,000s)
108 0.85 127.059
125 0.96 130.208
150 1.13 132.743
141 1.06 133.019
116 0.85 136.471
134 0.96 139.583
159 1.13 140.708
152 1.06 143.396
123 0.85 144.706
142 0.96 147.917
168 1.13 148.673
165 1.06 155.660
Deseasonalized Data (2 of 4)
• Find a trend line using the deseasonalized data where X = time
b1 = 2.34 b0 = 124.78

Ŷ =124.78 + 2.34X

• Develop a forecast for quarter 1, year 4 (X = 13) using this

trend and multiply the forecast by the appropriate seasonal
index

Ŷ = 124.78 + 2.34(13)
= 155.2 (before seasonality adjustment)
Deseasonalized Data (3 of 4)

Including the seasonal index

Ŷ ´I1 = 155.2´ 0.85 = 131.92

Deseasonalized Data (4 of 4)
FIGURE 5.5 Scatterplot of Turner Industries Original
Sales Data and Deseasonalized Data
Turner Industries (1 of 2)
TABLE 5.12 Turner Industry Forecasts for Four Quarters
of Year 4

YEAR QUARTER TIME TREND FORECAST SEASONAL FINAL

PERIOD (X) Ŷ = 124.78 + 2.34X INDEX (ADJUSTED)
FORECAST
4 1 13 155.20 0.85 131.92

Blank 2 14 157.54 0.96 151.24

Blank 3 15 159.88 1.13 180.66

Blank 4 16 162.22 1.06 171.95

Turner Industries (2 of 2)
FIGURE 5.6 Scatterplot of Turner Industries’ Original
Sales Data and Deseasonalized Data with Unadjusted
and Adjusted Forecasts
Using Software (1 of 2)
PROGRAM 5.6A QM for Windows Input Screen for
Turner Industries Example
Using Software (2 of 2)
PROGRAM 5.6B QM for Windows Output Screen for
Turner Industries Example
 Using Regression with Trend and Seasonal (1 of 5)
• Multiple regression can be used to forecast both trend and seasonal components
• One independent variable is time
• Dummy independent variables are used to represent the seasons
• An additive decomposition model

Ŷ = a + b1 X1 + b2 X 2 + b3 X 3 + b4 X 4
where
X1 = time period
X2 = 1 if quarter 2, 0 otherwise
X3 = 1 if quarter 3, 0 otherwise
X4 = 1 if quarter 4, 0 otherwise
Using Regression with Trend and Seasonal (2 of 5)
PROGRAM 5.7A Excel QM Multiple Regression
Initialization Screen for Turner Industries
Using Regression with Trend and Seasonal (3 of 5)
PROGRAM 5.7B Excel QM Multiple Regression Output
Screen for Turner Industries
Using Regression with Trend and Seasonal (4 of 5)
• Regression equation

Ŷ = 104.1 + 2.3X1 + 15.7X 2 + 38.7X 3 + 30.1X 4

• Forecasts for first two quarters next year

Yˆ = 104.1 + 2.3(13) + 15.7(0) + 38.7(0) + 30.1(0) = 134

Yˆ = 104.1 + 2.3(14) + 15.7(1) + 38.7(0) + 30.1(0) = 152
Using Regression with Trend and Seasonal (5 of 5)

• Different from the results using the

multiplicative decomposition method
• Use MAD or MSE to determine the best
model
Monitoring and Controlling Forecasts (1 of 3)
• Tracking signal measures how well a forecast predicts
actual values
• Running sum of forecast errors (RSFE) divided by the MAD

RSFE
Tracking signal =
MAD

=
å (forecast error)
MAD

MAD =
å forecast error
n
Monitoring and Controlling Forecasts (2 of 3)
• Positive tracking signals indicate demand is greater than forecast
• Negative tracking signals indicate demand is less than forecast
• A good forecast will have about as much positive error as negative
error
• Problems are indicated when the signal trips either the upper or
lower predetermined limits
• Choose reasonable values for the limits
Monitoring and Controlling Forecasts (3 of 3)
FIGURE 5.7 Plot of Tracking Signals
Kimball’s Bakery Example
• Quarterly sales of croissants (in thousands)
TIME FORECAST ACTUAL |FORECAST| CUMULATIVE TRACKING
PERIOD DEMAND DEMAND ERROR RSFE | ERROR | ERROR MAD SIGNAL
1 100 90 −10 −10 10 10 10.0 −1
2 100 95 −5 −15 5 15 7.5 −2
3 100 115 +15 0 15 30 10.0 0
4 110 100 −10 −10 10 40 10.0 −1
5 110 125 +15 +5 15 55 11.0 +0.5
6 110 140 +30 +35 35 85 14.2 +2.5

For Period 6:
MAD =
å forecast error
=
85
= 14.2
n 6
RSFE 35
Tracking signal = = = 2.5 MADs
MAD 14.2
Adaptive Smoothing
• Computer monitoring of tracking signals and self-adjustment if a limit
is tripped
• In exponential smoothing, the values of α and β are adjusted when
the computer detects an excessive amount of variation