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Forecasting Models

TEACHING SUGGESTIONS
Teaching Suggestion 5.1: Wide Use of Forecasting. Forecasting is one of the most important tools a student can master because every rm needs to conduct forecasts. Its useful to motivate students with the idea that obscure sounding techniques such as exponential smoothing are actually widely used in business, and a good manager is expected to understand forecasting. Regression is commonly accepted as a tool in economic and legal cases. Teaching Suggestion 5.2: Forecasting as an Art and a Science. Forecasting is as much an art as a science. Students should understand that qualitative analysis (judgmental modeling) plays an important role in predicting the future since not every factor can be quantied. Sometimes the best forecast is done by seat-of-thepants methods. Teaching Suggestion 5.3: Use of Simple Models. Many managers want to know what goes on behind the forecast. They may feel uncomfortable with complex statistical models with too many variables. They also need to feel a part of the process. Teaching Suggestion 5.4: Management Input to the Exponential Smoothing Model. One of the strengths of exponential smoothing is that it allows decision makers to input constants that give weight to recent data. Most managers want to feel a part of the modeling process and appreciate the opportunity to provide input. Teaching Suggestion 5.5: Wide Use of Adaptive Models. With todays dominant use of computers in forecasting, it is possible for a program to constantly track the accuracy of a models forecast. Its important to understand that a program can automatically select the best alpha and beta weights in exponential smoothing. Even if a rm has 10,000 products, the constants can be selected very quickly and easily without human intervention.
Week 1 2 3 4 5 6 7

Actual Bicycle Sales 8 10 9 11 10 13

Three-Week Moving Average

(8 10 9)/3 (10 9 11)/3 (9 11 10)/3 (11 10 13)/3

9 10 10 11Z\c

Alternative Example 5.2: Weighted moving average ) (weight for period n)(demand in period n) weights Bowers Bikes decides to forecast bicycle sales by weighting the past 3 weeks as follows:
Weights Applied 3 2 1 6 Period Last week Two weeks ago Three weeks ago Sum of weights

A 3-week weighted moving average appears below.

Actual Bicycle Sales 8 10 9 11 10 13

Week 1 2 3 4 5 6 7

Three-Week Moving Average

[(3 9) (2 10) (1 8)]/6 [(3 11) (2 9) (1 10)]/6 [(3 10) (2 11) (1 9)]/6 [(3 13) (2 10) (1 11)]/6

9Z\n 10Z\n 10Z\n 11X\c

ALTERNATIVE EXAMPLES
Alternative Example 5.1: demand in previous n periods Moving average = n Bicycle sales at Bowers Bikes are shown in the middle column of the following table. A 3-week moving average appears on the right.

Alternative Example 5.3: A rm uses simple exponential smoothing with a 0.1 to forecast demand. The forecast for the week of January 1 was 500 units, whereas actual demand turned out to be 450 units. The demand forecasted for the week of January 8 is calculated as follows. Ft
1

Ft 500

(At 0.1(450

Ft) 500) 495 units

52

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Alternative Example 5.4: Exponential smoothing is used to forecast automobile battery sales. Two values of are examined, 0.8 and 0.5. To evaluate the accuracy of each smoothing constant, we can compute the absolute deviations and MADs. Assume that the forecast for January was 22 batteries.
Absolute Deviation with 0.8 Absolute Deviation with 0.5 2 0 6 4 3 31.5 16.5 2.75

Month January February March April May June

Actual Battery Sales 20 21 15 14 13 16

Forecast with 0.8

Forecast with 0.5 22 21 21 18 16 14.5

22 2 20.40 0.6 20.880 5.88 16.176 2.176 14.435 1.435 13.287 2.713 Sum of absolute deviations: 15 MAD: 2.46

On the basis of this analysis, a smoothing constant of preferred to 0.5 because it has a smaller MAD.

0.8 is

Alternative Example 5.6: The rated power capacity (in hours/ week) over the past 6 years has been:
Rated Capacity (hrs/wk) 115 120 118 124 123 130

Alternative Example 5.5: Use the sales data given below to determine: (a) the least squares trend line, (b) the predicted value for 2000 sales.
Year 1993 1994 1995 1996 1997 1998 1999 Sales (Units) 100 110 122 130 139 152 164

Year 1 2 3 4 5 6

Here is an alternative way to recode years which simplies the math since X 0.
Renumbered Year (x) 2.5 1.5 .5 .5 1.5 2.5 X 0 Capacity (y) 115 120 118 124 123 130 Y 730

To minimize computations, transform the value of x (time) to simpler numbers. In this case, designate 1993 as year 1, 1994 as year 2, and so on.
Time Period 1 2 3 4 5 6 17 28 Sales (Units) 100 110 122 130 139 152 164 917

Year 1 2 3 4 5 6

x2 6.25 2.25 0.25 0.25 2.25 6.25 X2 17.5

xy 287.5 180 59 62 184.5 325 XY 45

Year 1993 1994 1995 1996 1997 1998 1999

x2 1 4 9 16 25 36 149 140

xy 100 220 366 520 695 912 1,148 3,961

b=

XY X2

45 = 2.57 17.5

x2

xy

a=

x=

y 917 x 28 y= = = 131 = =4 n 7 n 7 xy nxy 3, 961 (7)( 4 )(131) 293 = = 10.464 b= = 28 140 (7)( 4 2 ) x 2 nx 2

Y 730 = = 121.67 n 6 y 121.67 2.57X

121.67 131 (2.57)(3.5)

Year 7

a = y bx = 131 10.46( 4 ) = 89.14

Therefore, the least squares trend equation is, y = a + bx = 89.14 + 10.464 x To project demand in 2000, we denote the year 2000 as x Sales in 2000 89.14 10.464(8) 172.85 8,

Alternative Example 5.7: The forecast demand and actual demand for 10-foot shing boats are shown below. We compute the tracking signal and MAD. Forecast errors 70 MAD = = = 11.7 n 6 RSFE 24 Tracking Signal = = = 2.1 MADs MAD 11.7

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Table for Alternate Example 5.7

Year 1 2 3 4 5 6 Forecast Demand 78 75 83 84 88 85 Actual Demand 71 80 101 84 60 73 Error 7 5 18 0 28 12 RSFE 7 2 16 16 12 24 Forecast Error 7 5 18 0 28 12 Cumulative Error 7 12 30 30 58 70 MAD 7.0 6.0 10.0 7.5 11.6 11.7 Tracking Signal 1.0 0.3 1.6 2.1 1.0 2.1

SOLUTIONS TO DISCUSSION QUESTIONS AND PROBLEMS

5-1. are: The steps that are used to develop any forecasting system 1. Determine the use of the forecast. 2. Select the items or quantities that are to be forecasted. 3. Determine the time horizon of the forecast. 4. Select the forecasting model. 5. Gather the necessary data. 6. Validate the forecasting model. 7. Make the forecast. 8. Implement the results. 5-2. A time-series forecasting model uses historical data to predict future trends. 5-3. The only difference between causal models and timeseries models is that causal models take into account any factors that may inuence the quantity being forecasted. Causal models use historical data as well. Time-series models use only historical data. 5-4. Qualitative models incorporate subjective factors into the forecasting model. Judgmental models are useful when subjective factors are important. When quantitative data are difcult to obtain, qualitative models are appropriate. 5-5. The disadvantages of the moving average forecasting model are that the averages always stay within past levels, and the moving averages do not consider seasonal variations. 5-6. When the smoothing value, , is high, more weight is given to recent data. When is low, more weight is given to past data. 5-7. The Delphi technique involves analyzing the predictions that a group of experts have made, then allowing the experts to review the data again. This process may be repeated several times. After the nal analysis, the forecast is developed. The group of experts may be geographically dispersed. 5-8. MAD is a technique for determining the accuracy of a forecasting model by taking the average of the absolute deviations.

MAD is important because it can be used to help increase forecasting accuracy. 5-9. If a seasonal index equals 1, that season is just an average season. If the index is less than 1, that season tends to be lower than average. If the index is greater than 1, that season tends to be higher than average. 5-10. If the smoothing constant equals 0, then Ft
1

Ft

0(At

Ft)

Ft

This means that the forecast never changes. If the smoothing constant equals 1, then Ft
1

Ft

1(At

Ft)

At

This means that the forecast is always equal to the actual value in the prior period. 5-11. A centered moving average (CMA) should be used if trend is present in data. If an overall average is used rather than a CMA, variations due to trend will be interpreted as variations due to seasonal factors. Thus, the seasonal indices will not be accurate. 5-12.
Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. Actual Shed Sales 10 12 13 16 19 23 26 30 28 18 16 14 Four-Month Moving Average

(10 (12 (13 (16 (19 (23 (26 (30

12 13 16 19 23 26 30 28

13 16 19 23 26 30 28 18

16)/4 19)/4 23)/4 26)/4 30)/4 28)/4 18)/4 16)/4

51/4 12.75 60/4 15 70/4 17.75 84/4 21 98/4 24.5 107/4 26.75 102/4 25.5 92/4 23

The MAD

7.78

See solution to 5-13 for calculations.

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5-13.
ThreeMonth Forecast ThreeMonth Absolute Deviation FourMonth Forecast FourMonth Absolute Deviation

Month Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.

Actual Shed Sales 10 12 13 16 19 23 26 30 28 18 16 14

11.66 13.66 16 19.33 22.66 26.33 28 25.33 20.66

4.34 5.34 7 6.67 7.34 1.67 10 9.33 56.66 58.35

12.75 15 17.75 21 24.5 26.75 25.5 23

6.25 8 8.25 9 3.5 8.75 9.5 69.25 62.25

Three-month MAD = Four-month MAD =

58.35 = 6.48 9

62.25 = 7.78 8

The 3-month moving average appears to be more accurate. However, if weighted moving averages had been used, the results might be different.

5-14.
Year 1 2 3 4 5 6 7 8 9 10 11 Demand 4 6 4 5 10 8 7 9 12 14 15 Three-Year Moving Averages Weighted Three-Year Moving Averages Three-Year Absolute Deviation Three-Year Weighted Absolute Deviation

(4 6 4)/3 (6 4 5)/3 (4 5 10)/3 (5 10 8)/3 (10 8 7)/3 (8 7 9)/3 (7 9 12)/3 (9 12 14)/3

423 5 613 723 813 8 913 1123

sum of the weights [(2 4) 6 4]/4 412 [(2 5) 4 6]/4 50 [(2 10) 5 4]/4 714 [(2 8) 10 5]/4 734 [(2 7) 8 10]/4 80 [(2 9) 7 8]/4 814 [(2 12) 9 7]/4 10 [(2 14) 12 9]/4 1214 Total absolute deviations:

0.34 5.55 1.67 0.67 0.67 4.55 4.67 3.34 20.36

0.55 5.55 0.75 0.75 1.55 3.75 4.55 2.75 18.5

MAD for 3-year average

2.54 2.32

MAD for weighted 3-year average

The weighted moving average appears to be slightly more accurate in its annual forecasts. 5-15. Using Excel or QM for Windows, the trend line is Y 2.22 1.05X time period (1, 2, . . .) Y demand Where X

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5-16. Using the forecasts in the previous problems we obtain the absolute deviations given in the table below.
3-Yr MA |deviation| 0.33 5.00 1.67 0.67 0.67 4.00 4.67 3.33 20.33 3-Yr Wt. MA |deviation| 0.50 5.00 0.75 0.75 1.00 3.75 4.00 2.75 18.50 Trend line |deviation| 0.73 1.67 1.38 1.44 2.51 0.55 2.60 1.65 0.29 1.24 1.18 15.24

5-17. 0.3. New forecast for year 2 is last periods forecast (last periods actual demand last periods forecast): new forecast for year 2 5,000 5,000 5,000 4,700 The calculations are:
Year 2 3 4 5 6 7 8 9 10 11 Demand 6,000 4,000 5,000 10,000 8,000 7,000 9,000 12,000 14,000 15,000 4,700 5,090 4,763 4,834 6,384 6,869 6,908 7,536 8,875 10,412 New Forecast 5,000 4,700 5,090 4,763 4,834 6,384 6,869 6,908 7,536 8,875 (0.3)(4,000 (0.3)(6,000 (0.3)(4,000 (0.3)(5,000 (0.3)(10,000 (0.3)(8,000 (0.3)(7,000 (0.3)(9,000 (0.3)(12,000 (0.3)(14,000 5,000) 4,700) 5,090) 4,763) 4,834) 6,384) 6,869) 6,908) 7,536) 8,875)

(0.3)(4,000 (0.3)( 300

5,000)

Year

Demand

1,000)

11 14 12 16 13 14 14 15 15 10 16 18 17 17 18 19 19 12 10 14 11 15 Total absolute deviations

MAD (3-year moving average) 2.54 MAD (3-year weighted moving average) 2.31 MAD (trend line) 1.39 The trend line is best because the MAD is lowest.

The mean absolute deviation (MAD) can be used to determine which forecasting method is more accurate.

Year 1 2 3 4 5 6 7 8 9 10 11

Demand 4,000 6,000 4,000 5,000 10,000 8,000 7,000 9,000 12,000 14,000 15,000

Weighted Moving Average

Absolute Deviation

Exp. Sm. 5,000 4,700 5,090 4,763 4,834 6,384 6,869 6,908 7,536 8,875 10,412

Absolute Deviation 1,000 1,300 1,090 237 5,166 1,616 131 2,092 4,464 5,125 14,588 26,808 2,437

4,500 5,000 7,250 7,750 8,000 8,250 10,000 12,250 Total: Mean:

500 5,000 750 750 1,000 3,750 4,000 12,750 18,500 2,312.5

Thus, the 3-year weighted moving average model appears to be more accurate.

5-18. 5-19.
Year 1 2 3 4 5 6

Year Forecast

1 410.0

2 422.0

3 443.9

4 466.1

5 495.2

6 521.8

Sales 450 495 518 563 584 ?

Forecast Using 410 (0.6) (450 434 (0.6) (495 470.6 (0.6)(518 499 (0.6) (563 537.4 (0.6)(584

0.6 434 470.6 499.0 537.4 565.6

Forecast Using 410 446 490.1 515.21 558.221 (0.9)(450 (0.9)(495 (0.9)(518 (0.9)(563 (0.9)(584

0.9 410) 446) 490.1) 515.21) 558.2) 446 490.1 515.21 558.2 581.4

410) 434) 470.6) 499) 537)

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5-20.
Year 1 2 3 4 5 6 Actual Sales 0.3 Forecast Absolute Deviation 0.6 Forecast 410.0 434.0 470.6 499.0 537.4 565.8 Absolute Deviation 40.0 61.0 47.4 64.0 46.6 259.0 0.9 Forecast 410.0 446.0 490.1 515.2 558.2 581.4 Absolute Deviation 40.0 49.0 27.9 47.8 25.8 190.5

450 410.0 40.0 495 422.0 73.0 518 443.9 74.1 563 466.1 96.9 584 495.2 88.8 ? 521.8 Total absolute deviation 372.8

MAD MAD

0.3 0.6

372.8/5 259/5

74.56 51.8 0.9

MAD 0.9 190.5/5 38.1 Because it has the lowest MAD, the smoothing constant gives the most accurate forecast. 5-21.
Year 1 2 3 4 5 6 Sales 450 495 518 563 584 ? Three-Year Moving Average

(450 (495 (518

495 518 563

518)/3 563)/3 584)/3

487.667 525.333 555

5-22.
Time Period X 1 2 3 4 5 Sales Y 450 495 518 563 2,584 2,610

Year 1 2 3 4 5

X2 1 4 9 16 125 55

XY 450 990 1554 2252 2920 8166

b a

33.6 421.2

Y 421.2 33.6X Projected sales in year 6, Y 5-23.

Year 1 2 3 4 5 6 Actual Sales Three-Year Moving Average Forecast Absolute Deviation 75.3 58.7 134.0 Time-Series Forecast 454.8 488.4 522.0 555.6 589.2 622.8 Absolute Deviation 4.8 6.6 4.0 7.4 5.2 28.0

421.2 622.8

(33.6)(6)

450 495 518 563 487.7 584 525.3 ? 555.0 Total absolute deviation

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MAD

0.3

74.56 134/2

(see Problem 5-20) 67

MADmoving average

MADregression 28/5 5.6 Regression (trend line) is obviously the preferred method because of its low MAD. 5-24. To answer the discussion questions, two forecasting models are required: a three-period moving average and a three-period weighted moving average. Once the actual forecasts have been made, their accuracy can be compared using the mean average differences (MAD). a, b.
Period 4 5 6 7 8 9 10 11 12 13 14 Month Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Demand 10 15 17 11 14 17 12 14 16 11 Average 13.67 13.33 13.67 14 14.33 14 14 14.33 14.33 14 13.67 Weighted Average 14.5 12.67 13.5 15.17 13.67 13.50 15 14 13.83 14.67 13.17

c. MAD for moving average is 2.2. MAD for weighted average is 2.72. Moving average forecast for February is 13.6667. Weighted moving average forecast for February is 13.1667. Because a three-period average forecasting method is used, forecasts start for period 4. As can be seen, the MAD for the moving average is 2.2, and the MAD for the weighted moving average is 2.7. Thus, based on this analysis, the moving average appears to be more accurate. The forecast for February is about 14. d. There are many other factors to consider, including seasonality and any underlying causal variables such as advertising budget. 5-25. a.
Sum of Absolute Forecast Errors 4.00 5.20 10.16 11.19 14.02 15.76 16.37 19.88 20.69 25.04 28.56

Week 1 2 3 4 5 6 7 8 9 10 11 12

Actual Miles 17 21 19 23 18 16 20 18 22 20 15 22

Forecast (Ft) 17.00 17.00 17.80 18.04 19.03 18.83 18.26 18.61 18.49 19.19 19.35 18.48

Error 4.00 1.20 4.96 1.03 2.83 1.74 0.61 3.51 0.81 4.35 3.52

RSFE 4.00 5.20 10.16 9.13 6.30 8.04 7.43 10.94 11.75 7.40 10.92

MAD 4.00 2.60 3.39 2.80 2.80 2.63 2.34 2.49 2.30 2.50 2.60

Track Signal 1 2 3 3.3 2.25 3.05 3.17 4.21 5.11 2.96 4.20

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b. The total MAD is 2.60. c. RSFE is consistently positive. Tracking signal exceeds 5 MADs at week 10. This could indicate a problem. 5-26. a, b. See the accompanying table for a comparison of the calculations for the exponentially smoothed forecasts using constants of 0.1 and 0.6. c. Students should note how stable the smoothed values for the 0.1 smoothing constant are. When compared to actual week 25 calls of 85, the 0.6 smoothing constant appears to do a better job. On the basis of the forecast error, the 0.6 constant is better also. However, other smoothing constants need to be examined.
Actual Value, At 50 35 25 40 45 35 20 30 35 20 15 40 55 35 25 55 55 40 35 60 75 50 40 65 Smoothed Value, Ft ( 0.1) 50 50 48 46 45 45 44 42 41 40 38 36 36 38 38 37 38 40 40 40 42 45 45 45 47 Smoothed Value, Ft ( 0.6) 50 41 31 37 42 38 27 29 32 25 19 32 46 39 31 45 51 44 39 51 66 56 46 58

Week, t 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Forecast Error 15 23 6 0 10 24 12 6 20 23 4 19 3 13 18 16 0 5 20 33 5 5 20

Forecast Error 15 16 8 9 7 18 3 6 12 10 21 23 11 14 24 10 12 10 21 23 16 16 18

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5-27.

Using data from Problem 5-26, with

Actual Value At 50 35 25 40 45 35 20 30 35 20 15 40 55 35 25 55 55 40 35 60 75 50 40 65 Smoothed Value Ft 50 50 36 26 39 44 36 22 29 34 21 16 38 53 37 26 52 55 41 36 58 73 52 41 62 MAD

0.9

Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Forecast Error 15 11 14 6 9 16 8 6 14 6 24 17 18 12 29 3 15 6 24 17 23 12 24 14.48

Note that in this problem, the initial forecast (for the rst period) was not used in computing the MAD. Either approach is considered valid. 5-28.
Month Feb. March April May June July Aug.

Exponential smoothing with

Income 70.0 68.5 64.8 71.7 71.3 72.8 65.0 65.0 65.5 65.8 65.7 66.3 66.8 Forecast 0.1 (70 0.1(68.5 0.1(64.8 0.1(71.7 0.1(71.3 0.1(72.8

0.1
Error 65.5 65.8 65.7 66.3 66.8 67.4 MAD 3.0 1.0 6.0 5.0 6.0 4.20

5-30. Using QM for Windows, we select Forecasting - Time Series and multiplicative decomposition. Then specify Centered Moving Average and we have the following results: a. Quarter 1 index 0.8825; Quarter 2 index 0.9816; Quarter 3 index 0.9712; Quarter 4 index 1.1569 b. The trendline is Y 237.7478 3.6658X c. Quarter 1: Y 237.7478 3.6658(17) 300.0662 Quarter 2: Y 237.7478 3.6658(18) 303.7320 Quarter 3: Y 237.7478 3.6658(19) 307.3978 Quarter 4: Y 237.7478 3.6658(20) 311.0636 d. Quarter 1: 300.0662(0.8825) 264.7938 Quarter 2: 303.7320(0.9816) 298.1579 Quarter 3: 307.3978(0.9712) 298.5336 Quarter 4: 311.0636(1.1569) 359.8719 5-31. Letting t time period (1, 2, 3, . . . , 16) Q1 1 if quarter 1, 0 otherwise Q2 1 if quarter 2, 0 otherwise Q3 1 if quarter 3, 0 otherwise Note: if Q1 Q2 Q3 0, then it is quarter 4. Using computer software we get Y 281.6 3.7t 75.7Q1 48.9Q2 52.1Q3 The forecasts for the next 4 quarters are: Y 281.6 3.7(17) 75.7(1) 48.9(0) 52.1(0) 268.7 Y 281.6 3.7(18) 75.7(0) 48.9(1) 52.1(0) 299.2 Y 281.6 3.7(19) 75.7(0) 48.9(0) 52.1(1) 299.7 Y 281.6 3.7(20) 75.7(0) 48.9(0) 52.1(0) 355.4 5-32. For a smoothing constant of 0.2, the forecast for year 11 is 6.489.
Year 1 2 3 4 5 6 7 8 9 10 11 Rate 7.2 7 6.2 5.5 5.3 5.5 6.7 7.4 6.8 6.1 Forecast 7.2 7.2 7.16 6.968 6.674 6.400 6.220 6.316 6.533 6.586 6.489 |Error| 0 0.2 0.96 1.468 1.374 0.900 0.480 1.084 0.267 0.486

65) 65.5) 65.8) 65.7) 66.3) 66.8)

Note that in this problem, the initial forecast (for the rst period) was not used in computing the MAD. Either approach is considered valid. 5-29.
Month Feb. March April May June July Aug.

Exponential smoothing with

Income 70.0 68.5 64.8 71.7 71.3 72.8 Forecast 65.0 66.5 67.1 66.4 68.0 69.0 70.1 MAD Error 2.0 2.3 5.3 3.3 3.8 3.34

0.3
Year 1 2 3 4 5 6 7 8 9 10 11 Rate 7.2 7 6.2 5.5 5.3 5.5 6.7 7.4 6.8 6.1

MAD = 0.722

For a smoothing constant of 0.4, the forecast for year 11 is 6.458.

Forecast 7.2 7.2 7.12 6.752 6.251 5.871 5.722 6.113 6.628 6.697 6.458 |Error| 0 0.2 0.92 1.252 0.951 0.371 0.978 1.287 0.172 0.597

Based on MAD, 0.3 produces a better forecast than 0.1 (of Problem 5-28). Note that in this problem, the initial forecast (for the rst period) was not used in computing the MAD. Either approach is considered valid.

MAD = 0.673

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For a smoothing constant of 0.6, the forecast for year 11 is 6.401.

Year 1 2 3 4 5 6 7 8 9 10 11 Rate 7.2 7 6.2 5.5 5.3 5.5 6.7 7.4 6.8 6.1 Forecast 7.2 7.2 7.08 6.552 5.921 5.548 5.519 6.228 6.931 6.852 6.401 |Error| 0 0.2 0.88 1.052 0.621 0.048 1.181 1.172 0.131 0.752 MAD = 0.604

5-33. To compute a seasonalized or adjusted sales forecast, we just multiply each seasonal index by the appropriate trend forecast. Y seasonal index Y
trend forecast

Hence for: Quarter I: YI Quarter II: Y

II

(1.30)($100,000) (0.90)($120,000) (0.70)($140,000) (1.10)($160,000)

$130,000 $108,000 $98,000 $176,000

Quarter III: YIII Quarter IV: YIV 5-34. (Average demand for season)

(year 1 demand) + (year 2 demand) 2

For a smoothing constant of 0.8, the forecast for year 11 is 6.256.

Year 1 2 3 4 5 6 7 8 9 10 11 Rate 7.2 7 6.2 5.5 5.3 5.5 6.7 7.4 6.8 6.1 Forecast 7.2 7.2 7.04 6.368 5.674 5.375 5.475 6.455 7.211 6.882 6.256 |Error| 0 0.2 0.84 0.868 0.374 0.125 1.225 0.945 0.411 0.782 MAD = 0.577

Overall average (sum of all values) = demand 8

Season index = (average for season) overall average demand

Year 3 demand =

new annual demand 4 1, 200 = season index 4

The lowest MAD is 0.577 for a smoothing constant of 0.8. Solution Table for Problem 5-34
Year 1 Demand 200 350 150 300 Year 2 Demand 250 300 165 285 (Average Year 1Year 2 Demand) 225.0 325.0 157.5 292.5 Average Season Demand 250 250 250 250 Season Index 0.90 1.30 0.63 1.17 Year 3 Demand 270 390 189 351

Season Fall Winter Spring Summer

5-35. Using Excel, the trend equation is Y For 2008, X For 2009, X For 2010, X 19; Y 20; Y 21; Y 1582.61 1582.61 1582.61

1582.61

612.37X.

SOLUTIONS TO INTERNET HOMEWORK PROBLEMS

5-39. With a 0.4, forecast for 2004 10,339 and MAD 837. With a 0.6, forecast for 2004 10,698 and MAD 612. 5-40. Using Excel, the trend line is: GDP 6142.7 441.4(time). For 2004 (time 12) the forecast is GDP 6142.7 441.4(12) 11,439.5. 5-41. The trend line found using Excel is: Patients 29.73 3.28(time). Note these coefcients are rounded. For the next 11, 12, and 13) the forecasts for the number of 3 years (time patients are: Patients 29.73 3.28(11) 65.8 Patients 29.73 3.28(12) 69.1 Patients 29.73 3.28(13) 72.4 The coefcient of determination is 0.85, so the model is a fair model.

612.37(19) 612.37(20) 612.37(21)

13217.6 13830.0 14442.4

The MSE from the Excel output is 1654334.7. 5-36. a. With a smoothing constant of 0.3, the forecast for 2008 is 11211.2 with MSE 3246841. b. Using QM for Windows, the best smoothing constant is 1.0. This gives the lowest MSE of 1443842. 5-37. Using Excel, the trend equation is Y 13; Y 14; Y 1.1940 1.1940 1.1940 0.0095(13) 0.0095(14) 0.0095X. 1.318. 1.327. For January of 2007, X For February of 2007, X 5-38.

The forecast for January 2007 would be 1.286.

The MSE with the trend equation is 0.0003. The MSE with this exponential smoothing model is 0.0010.

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5-42. The trend line found using Excel is: Crime Rate 51.98 6.09(time). Note these coefcients are rounded. For the next 3 years (time 11, 12, and 13) the forecasts for the crime rates are: Crime Rate 51.98 6.09(11) 118.97 Crime Rate 51.98 6.09(12) 125.06 Crime Rate 51.98 6.09(13) 131.15 The coefcient of determination is 0.96, so this is a very good model. 5-43. The regression equation (from Excel) is: Patients 1.23 0.54(crime rate). Note these coefcients are rounded. If the crime rate is 131.2, the forecast number of patients is: Patients Patients 1.23 1.23 0.54(131.2) 0.54(90.6) 72.1 50.2 If the crime rate is 90.6, the forecast number of patients is: The coefcient of determination is 0.90, so this is a good model. 5-44. With a 0.6, forecast for 2003 86.2 and MAD 3.42. With a 0.2, forecast for 2003 63.87 and MAD 7.23. The model with a 0.6 is better since it has a lower MAD. 5-45. With a 0.6, forecast for 2003 4.86 and MAD 0.23. With a 0.2, forecast for 2003 4.52 and MAD 0.48. The model with a 0.6 is better since it has a lower MAD.

5-46. The trend line (coefcients from Excel are rounded) for deposits is: Deposits 18.968 1.638(time) For 2003, 2004, and 2005, time 45, 46, and 47 respectively. The forecasts are: Deposits 18.968 1.638(45) 54.7 Deposits 18.968 1.638(46) 56.4 Deposits 18.968 1.638(47) 58.0 The trend line (coefcients from Excel are rounded) for GSP is: GSP 0.090 0.112(time). The forecasts are: GSP 0.090 0.112(45) 5.1 GSP 0.090 0.112(46) 5.2 GSP 0.090 0.112(47) 5.4 5-47. The regression equation from Excel is Deposits 17.64 13.59(GSP) In the scatterplot of this data that follows, the pattern appears to change around 1985. There are denitely different relationships before 1985 and after 1985, so perhaps the model should be developed with 1985 as the rst year of data.

Deposits and GSP over Time 100 80 60 40 20 0 1950 DEPOSITS GSP

1960

1970

1980 Time

1990

2000

2010

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FORECASTING ATTENDANCE AT SWU FOOTBALL GAMES

1. Because we are interested in annual attendance and there are six years of data, we nd the average attendance in each year shown in the table below. A graph of this indicates a linear trend in the data. Using Trend Analysis in the forecasting module of QM for Windows we nd the equation: Y 31,660 2,305.714X Where Y is attendance and X is the time period (X 1 for 2002, 2 for 2003, etc.). For this model, r2 0.98 which indicates this model is very accurate.

3. The school might consider another expansion of the stadium, or raise the ticket prices more than 5% per year. Another possibility is to raise the prices of the best seats while leaving the end zone prices more reasonable.

SOLUTION TO INTERNET CASES SOLUTION TO AKRON ZOOLOGICAL PARK CASE

1. The instructor can use this question to have the student calculate a simple linear regression, using real-world data. The idea is that attendance is a linear function of expected admission fees. Also, the instructor can broaden this question to include several other forecast techniques. For example, exponential smoothing, last-period demand, or n-period moving averages can be assigned. It can be explained that mean absolute deviation (MAD) is one of but a few methods by which analysts can select the more appropriate forecast technique and outcome. First, we perform a linear regression with time as the independent variable. The model that results is admissions 44,352 9,197 year (where year is coded as 1 1989, 2 1990, etc.) r 0.88 MAD 9,662 MSE 201,655,824 So the forecasts for 1999 and 2000 are 145,519 and 154,716, respectively. Using a weighted average of $2.875 to represent gate receipts per person, revenues for 1999 and 2000 are $418,367 and $444,808, respectively. To complicate the situation further, students may legitimately use a regression model to forecast admission fees for each of the three categories, or for the weighted average fee. This number would then replace $2.875. Here is the result of a linear regression using weighted average admission fees as the predicting (independent) variable. Weights are obtained each year by taking 35% of adult fees, plus 50% of childrens fees, plus 15% of group fees. The weighted fees each year (19891998) are $0.975, $0.975, $0.975, $0.975, $1.275, $1.775, $1.775, $2.275, $2.20, $2.875. Gate admissions r MAD MSE 31,451 39,614 given year) 0.847 13,212 254,434,912 (average fee in

SWU Football Attendance 50000

Attendance

40000 30000 20000 10000 0 2001 2003 2005 Year 2007

Attendance in 2008 is projected to be Y 31,660 2,305.714(7) 47,800 Attendance in 2009 is projected to be Y 31,660 2,305.714(8) 50,105 At this rate, the stadium, with a capacity of 54,000, will be maxed out (lled to capacity) in 2011.
Year 2002 2003 2004 2005 40500 2006 43320 2007 45820

Attendance 34840

35380 38520

2. Based upon the projected attendance and tickets prices of $20 in 2008 and $21 (a 5% increase) in 2009, the projected revenues are: 47,800(20) $958,000 in 2008 and 50,105(21) $1,052,205 in 2009.

If we assume that admission fees are not raised in 1999 and 2000, expected gate admissions 145,341 in each year and

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revenues $417,856. Comparing the earlier time-series model to this second regression, we note that the r is higher and MAD and MSE are lower in the time-series approach. 2. The student should respond that the other factors are the variability of the weather, the special events, the competition, and the role of advertising.

Kwik Lube
1. The relationship between Kwik Lube sales (y), average industry sales (x), and year (t with t 1 corresponding to 1972) is shown in the table below. The x and y values are in thousands of dollars. One could try a multiple regression analysis but the correlation of y with just x is 0.998, leading one to use the simple linear regression equation: y 2.99x 1.42.
t 1 2 3 4 5 6 7 8 x 22 25 24 26 33 35 39 44 y 68 75 75 78 99 104 120 133

The estimated lost sales is the difference between the forecasted and actual sales: (141,950 $156,900) ($111,000 $111,000) $76,850. A 95% prediction interval for 1980 is 141.95 5.20 and for 1981 is 156.90 5.80. Thus, despite the danger of extrapolation, the results of a regression outside the range of the data, one can be reasonably certain that the lost sales were at least $65,850. 2. Without the questionnaire study, the best estimate of lost sales would be from the regression of y on t: y 9.38t 51.8 with a somewhat lower correlation. The estimated lost sales would be $59,820, about $20,000 less than the estimate based on average industry sales. Even recovering as little as 10 percent of this difference would pay for the study. 3. The lawsuit led by Dick Johnson should discuss two basic areas which will build a sound case for damages being awarded in his favor. The rst factor involves the concept behind setting up a franchise. Franchises are designed so that independent owners can start a business with a well-known name (and consequently, with an already-captured market). This, coupled with proven strategies and expertise given to a franchise purchaser by the franchise seller, reduces the usually high probability of a new business going under in its infancy stage. The franchise fee is the cost paid for the reduced risk of a new enterprise. Naturally, the franchising rm will protect itself against competition in a franchise contract. A franchise holder who violates such clauses has, in essence, gained free proven strategies and has capitalized on them. Thus, the franchising rm has been damaged by the fact that a competitor has gained information without paying for it. This is the case with Kwik Lube. A franchise owner, T. A. Williams, has beneted from Johnsons expertise more than is justied by the monetary gains earned from franchise fees. This is not simply an economic issue, however, for such a situation was

The year 1971 was excluded since the Kwik Lube revenues were not for an entire year. 1979 (t 8) was the last year of Kwik Lube operation without the competition from Speedy Lube. The forecasted sales for 1980 would be estimated using the average industry sales of $47,000 for x: y 2.99(47) 1.42 141.95 and the forecasted sales for 1981 would use the industry sales of $52,000: y 2.99(52) 1.42 156.90

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thought of before by Johnson. He had sought to protect himself with a noncompetition clause in his franchised contract. Thus, Williams is legally in the wrong for his breach of contract. What this rst area of discussion in the lawsuit does is to determine that there, in fact, has been damage done to the plaintiff, Johnson. The second area to be discussed in the lawsuit should deal with how those damages can be mitigated by the defendant, Williams.

Usually in lawsuits, there is a problem with measuring the damage done. Johnson, however, can measure his loss by forecasting sales and then comparing actual sales to predicted sales. In summary, the lawsuit should discuss how damage was incurred to plaintiff, Johnson, and how said damage should and/or could be mitigated. A well-presented lawsuit or petition to the court should result in a favorable judgment for the owner of Kwik Lube.