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Introduction to Forecasting
What is forecasting?
Characteristics of Forecasts
It should be timely
It should be as accurate as possible
It should be reliable
It should be in meaningful units
It should be presented in writing
The method should be easy to use and
understand in most cases.
Customer Surveys
Jury of Executive Opinion
The Delphi Method
Y = a0 + a1X1 + . . . + an Xn
Notation Conventions
Evaluation of Forecasts
MAD = (1/n) S | e i |
MSE = (1/n) S ei 2
Evaluation of Forecasts
Moving Averages
Demand
Month
Demand
January
89
July
223
February
57
August
286
March
144
September
212
April
221
October
275
May
177
November
188
June
280
December
312
Summary of Moving
Averages
Easily understood
Easily computed
Provides stable forecasts
1.
2.
Weights in Exponential
Smoothing:
Jan 23.3
Feb 72.3
Mar 30.3
Apr 15.5
And the January Forecast was: 25
Using a = .15
Forecast for Feb: aDjan + (1- a)Fjan = .15*23.3 +
(.85)*25 = 24.745
Forecast for Mar: aDfeb + (1- a)Ffeb = .15*72.3 +
(.85)*24.745 = 31.88
Apr: aDmar + (1- a)Fmar = .15*30.3 + .85*31.88 = 31.64
May: aDapr + (1- a)Fapr = .15*15.5 + .85*31.64 = 29.22
Comparison of MA and ES
Similarities
Comparison of MA and ES
Differences
Model: Dt = a + bt + et.
If t is scaled to 1, 2, 3, . . . , -- it becomes a
number i -- then the least squares estimates for a
and b can be computed as follows: (n is the number of
observation we have)
n2 * (n + 1) * (2n + 1
n2 * ( n + 1)
S xx =
6
4
( n *(n + 1) )
S xy = niDi
2
i =1
n
* Di
i=1
( n + 1)
a = D b*
S xy
b=
S xx
# Visitors
133
183
285
Month
Apr
May
Jun
# Visitors
640
1875
2550
Sxy=6*(1*133+2*183+3*285+4*640+5*1875+6*
2550) (6*7/2)(133+183+285+640+1875+2550)]
= 52557
Sxx = [(36*7*13)/6]-[(36*49)/4)]= 105
b = (52557/105)= 500.54
a = 944.33 500.54*(6+1)/2 = -807.4
Deseasonalizing a Series
Lets do one:
Season
Cycle
Demand
Season
Cycle
Demand
Q1
2001
205
Q1
2002
225
Q2
2001
225
Q2
2002
248
Q3
2001
185
Q3
2002
203
Q4
2001
285
Q4
2002
310
215
236.5
194
298
Lets do one:
Period
A.
Demand
Period
Avg.
Period
Factor
Deseason
Demand (y)
Period in
string (x)
X*Y
X2
Q1 01
205
215
.912
224.78
224.78
Q2 01
225
236.5
1.003
224.29
448.57
Q3 01
185
194
.823
224.81
674.43
Q4 01
285
298
1.262
225.84
903.36
16
Q1 02
225
215
.912
246.72
1233.6
25
Q2 02
248
236.5
1.003
247.21
1483.26
36
Q3 02
203
194
.823
246.64
1726.48
49
Q4 02
310
298
1.262
245.66
1965.28
64
SUM:
8659.76 204
b=
( xy n * x * y )
( x n * ( x) )
2
a=
y b* x
Finally:
Q1, 03
a+bx
217.24+4.113*9
254.26 *.912
231.9
232
Q2, 03
a+bx
217.24+4.113*10
258.37*1.003
259.2
259
Q3, 03
a+bx
217.24+4.113*11
262.48*.823
216.0
216
Q4, 03
a+bx
217.24+4.113*12
266.6*1.262
336.4
336
e t is error term
The Trend:
Gt = ( St St 1 ) + (1 ) Gt 1
The Seasonal
Factors:
D
ct = t + (1 ) ct n
St
where ct n was seasonal factor
from the last cycle of data
V1 = 1
n j =
2 n +1
Dj
n+1
n j =
Dj
G0
V2 V1 )
(
=
Signal:
( n 1)
S0 = V2 + G0
Seasonal Factor
Estimates:
ct =
Dt
n +1
Vi 2 j * G0
Averaging ci:
( c2 n+1 + c n+1 )
c n+1 =
2
Normalizing:
cj
cj =
*n
0
ci
i = n +1
Obs.
Demand
1st Q (01) 72
Period
Obs.
Demand
1st Q (02) 83
3rd Q (01) 55
3rd Q (02) 63
4th Q (01) 88
V1 = 1
V2
V2 V1
G0 =
4
( 4 1)
S0 = V2 + G0
= 95.97
2
(1st season
in each cycle)
ct =
Dt
( n + 1)
Vi
2
j * G0
-7
= 72
= 83
80.5 5 1 *2.813
2
= .944
91.75 5 1 *2.813
2
.944 +.948 )
(
avg :
2 = .946
= .948
Same approach:
Seasons 2, 3 & 4
Normalizing:
n
cj =
n +1 * c j
ci
i =0
denominator is sum of factors
Here:
Making a Forecast:
Ft ,t +t = ( St + t Gt ) c(t +t )n
F0,1stQ = ( S0 + 1 * G0 ) c1stQ =
S1 = a
+ (1 a ) ( S0 + G0 ) =
c
1stQ
.2 112
G1 = ( S1 S0 ) + (1 ) G0
c1stQ
D1
=
+ (1 ) c1stQ
S1
= .1 * 112
+ .9 * .944 = .959
)
102.76
Lets Try 1:
Practical Considerations