Forecasting Time Series

WHAT IS A TIME SERIES?
• Set of evenly spaced numerical data

– Obtained by observing response variable at
regular time periods
• Forecast based only on past values
– Assumes that factors influencing past and
present will continue influence in future
• Example
Year: 2012 2013 2014 2015 2016
Sales: 78.7 63.5 89.7 93.2 92.1
ADM 3301 ~ Rim Jaber 1

EXAMPLE 2
(Gasoline sales)
WEEK SALES
(1000'S OF GALLONS)
1 17
2 21
3 19
4 23
5 18
6 16
7 20
8 18
9 22
10 20
11 15
12 22
2
ADM 3301 ~ Rim Jaber
Diagram for Gasoline Sales
GASOLINE SALES
25
20
SALES
15
10
0
0 1 2 3 4 5 6 7 8 9 10 11 12
Time (W EEK) 3
Time Series Components
Trend Cyclical
Seasonal Random

Copyright © 2014 Pearson Canada Inc.
Components of Demand
Trend
component
Seasonal peaks
Demand for product or service
Actual demand
line
Average demand
over 4 years
Random variation
| | | |
1 2 3 4
Time (years) Figure 4.1
5
Copyright © 2014 Pearson Canada Inc.
Trend Component (Tt)
• Persistent, overall upward or

downward pattern
• Changes due to population,
technology, age, culture, etc.
• Typically several years duration
6
Copyright © 2014 Pearson Canada Inc. ADM 3301 ~ Rim Jaber
Seasonal Component (St)
• Regular pattern of up and down
fluctuations
• Due to weather, customs, etc.
• Occurs within a single year
Number of
Period Length Seasons
Week Day 7
Month Week 4-4.5
Month Day 28-31
Year Quarter 4
Year Month 12
Year Week 52
7
Cyclical Component (Ct)
• Repeating up and down movements
• Affected by business cycle, political, and
economic factors
• Multiple years duration
• Often causal or
associative
relationships
0 5 10 15 20
8
Random Component (Rt)
• Erratic, unsystematic, ‘residual’ fluctuations
• Due to random variation or unforeseen events
• Short duration
and nonrepeating
M T W T F9
Forecasts Based on Time Series
Data
• Techniques for Averaging
• Techniques for Trend
• Techniques for Seasonality
• Techniques for Cycles

Techniques for Averaging
1. Naïve Forecasts
2. Moving Average
3. Exponential smoothing

NAIVE FORECASTS
Uh, give me a minute....

We sold 250 wheels last
week.... Now, next week
we should sell....

Naive Approach
• Assumes demand in next
period is the same as
demand in most recent period
– e.g., If January sales were 68, then
February sales will be 68
• Sometimes cost effective and efficient
• Can be good starting point

Moving Average Method
• MA is a series of arithmetic means

• Used if little or no trend
• Used often for smoothing
– Provides overall impression of data over
time
∑ demand in previous n periods

Moving average = n

MOVING AVERAGES
Simple moving average (MA):
Ft = (At - 1 + At - 2 + ... + At - n)/n
• If the time series is stable, take n large;
• if not, take n small.
Weighted moving average (WMA):

Ft = w1 At - 1 + w2 At - 2 + ... + wn At - n
with w1 + w2 + ... + wn = 1.
The most recent periods usually have heavier weights.
3-WEEK MOVING AVERAGE CALCULATIONS
WEEK ACTUAL FORECAST FORECAST (ERROR)2
VALUE ERROR
1 17 - - -
2 21 - - -
3 19 - - -
4 23
5 18
6 16
7 20
8 18
9 22
10 20
11 15
12 22
13 ?
TOTALS 16
VALUE ERROR
1 17 - - -
2 21 - - -
3 19 - - -
4 23 19 4 16
5 18
6 16
7 20
8 18
9 22
10 20
11 15
12 22
13 ?
TOTALS 17
VALUE ERROR
1 17 - - -
2 21 - - -
3 19 - - -
4 23 19 4 16
5 18 21 -3 9
6 16 20 -4 16
7 20 19 1 1
8 18 18 0 0
9 22 18 4 16
10 20 20 0 0
11 15 20 -5 25
12 22 19 3 9
13 ? 19
TOTALS 0 92 18
3-WEEK MOVING AVERAGE
FORECASTS
25
20
SALES
15
10
0
0 1 2 3 4 5 6 7 8 9 10 11 12
WEEK 19
WEIGHTED MOVING AVERAGE CALCULATIONS
W1 = 0.5, W2 = 0.3, W3 = 0.2
VALUE ERROR
1 17 - - -
2 21 - - -
3 19 - - -
4 23
5 18
6 16
7 20
8 18
9 22
10 20
11 15
12 22
13 ?
TOTALS
20
WEIGHTED MOVING AVERAGE CALCULATIONS
W1 = 0.5, W2 = 0.3, W3 = 0.2
VALUE ERROR
1 17 - - -
2 21 - - -
3 19 - - -
4 23 19.2 3.8 14.44
5 18 21.4 -3.4 11.56
6 16 19.7 -3.7 13.69
7 20 18.0 2.0 4.00
8 18 18.4 -0.4 0.16
9 22 18.2 3.8 14.44
10 20 20.4 -0.4 0.16
11 15 20.2 -5.2 27.04
12 22 17.9 4.1 16.81
13 ? 19.5
TOTALS 0.6 102.30

21
WEIGHTED MOVING
AVERAGE FORECASTS
25
20
SALES
15
10
0
0 1 2 3 4 5 6 7 8 9 10 11 12
WEEK 22
DISADVANTAGES OF
MOVING AVERAGE
METHODS
• Increasing n smoothes
the forecast but makes it
less sensitive to changes
• Do not forecast trend
well
• Require much historical
data
Simple Exponential Smoothing
Method
• Form of weighted moving average
– Weights decline exponentially
– Most recent data weighted most
• Requires smoothing constant ()
– Ranges from 0 to 1
– Subjectively chosen
• Involves little record keeping of past data

SIMPLE EXPONENTIAL SMOOTHING
Ft = Ft - 1 +  (At - 1 - Ft - 1) (0 ≤  ≤ 1)
New forecast = previous forecast + part of previous
forecast error.
• If the time series is stable, take  close to 0;
• if not, take  close to 1
Note:
Ft =  At - 1 + (1 - ) Ft - 1
Ft =  At - 1 +  (1 -  ) At - 2 + (1- )2·At - 3 + ... +
 (1 -  )m At - m - 1 + ... + (1- )t-2·A1 + (1- )t-1·F1
EXPONENTIAL SMOOTHING FORECASTS AND FORECAST
ERRORS FOR GASOLINE SALES WITH  = .2
WEEK TIME SERIES EXPONENTIAL FORECAST
t VALUE SMOOTHING ERROR
At Ft At - Ft
1 17 17.00 -
2 21
3 19
4 23
5 18
6 16
7 20
8 18
9 22
10 20
11 15
12 22
EXPONENTIAL SMOOTHING FORECASTS AND FORECAST
ERRORS FOR GASOLINE SALES WITH  = .2
WEEK TIME SERIES EXPONENTIAL FORECAST
t VALUE SMOOTHING ERROR
At Ft At - Ft
1 17 17.00 -
2 21 17.00 4.00
3 19 17.80 1.20
4 23 18.04 4.96
5 18 19.03 -1.03
6 16 18.83 -2.83
7 20 18.26 1.74
8 18 18.61 -.61
9 22 18.49 3.51
10 20 19.19 .81
11 15 19.35 -4.35
12 22 18.48 3.52
EXPONENTIAL SMOOTHING
FORECAST WITH  = .2
25
20
SALES
15
10
0
0 1 2 3 4 5 6 7 8 9 10 11 12
WEEK 28
Mean Square Error Computations for Forecasting Gasoline Sales
with  = .2
Week Time Series Forecast Forecast Squared
t Value Ft Error Error
At At - Ft (At - Ft)2
1 17 17.00 - -
2 21 17.00 4.00 16.00
3 19 17.80 1.20 1.44
4 23 18.04 4.96 24.60
5 18 19.03 -1.03 1.07
6 16 18.83 -2.83 7.98
7 20 18.26 1.74 3.03
8 18 18.61 -.61 .37
9 22 18.49 3.51 12.34
10 20 19.19 .81 .66
11 15 19.35 -4.35 18.94
12 22 18.48 3.52 12.38
13 ? 19.18
Total: 98.80
Mean Square Error (MSE) = (98.80/11) = 8.9813 29

Mean Square Error Computations for Forecasting Gasoline Sales
with = .3
Week Time Series Forecast Forecast Squared
t Value Ft Error Error
At At - Ft (At - Ft)2
1 17 17.00 - -
2 21 17.00 4.00 16.00
3 19 18.20 .80 .64
4 23 18.44 4.56 20.79
5 18 19.81 -1.81 3.27
6 16 19.27 -3.27 10.66
7 20 18.29 1.71 2.94
8 18 18.80 -.80 .64
9 22 18.56 3.44 11.83
10 20 19.59 .41 .17
11 15 19.71 -4.71 22.23
12 22 18.30 3.70 13.69
13 ? 19.41
Total: 102.86
Mean Square Error (MSE) = (102.86/11) = 9.351 30

COMPARING  = .2 WITH  = .3
25
20
SALES
15
10
0
0 1 2 3 4 5 6 7 8 9 10 11 12
WEEK
FORECAST EFFECT OF
SMOOTHING CONSTANT ()
Ft = ·At - 1 + ·(1-·At - 2 + ·(1- 2·At - 3 +
...
 is: Weight Weight Weight

1 period ago 2 periods ago 3 periods ago
  
0.1 0.1 0.09 0.081

0.9 0.9 0.09 0.009
32
Impact of Different 
225 –
Actual  = .5
200 – demand
Demand
175 –
 = .1
150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
© 2011 Pearson Education, Inc. publishing as Prentice Hall 33
Impact of Different 
225 –
Actual  = .5
200
Chose
– of  when
high valuesdemand
underlying average is likely to
Demand
change
–
175
Choose low values of  when
underlying average is stable  = .1
150 – | | | | | | | | |
1 2 3 4 5 6 7 8 9
Quarter
© 2011 Pearson Education, Inc. publishing as Prentice Hall 34
Selecting the Smoothing
Constant
The objective is to obtain the most
accurate forecast no matter the technique
We generally do this by selecting the model

that gives us the lowest forecast error
according to one of three preferred measures:
► Mean Absolute Deviation (MAD)

► Mean Squared Error (MSE)
► Mean Absolute Percent Error (MAPE)
EXAMPLE 3
(Lakehead City Health Center)
Year Quarter Period Number of
number patients visit
2013 1 1 3,500
2 2 8,000
3 3 5,500
4 4 10,000
2014 1 5 4,500
2 6 6,000
3 7 3,000
4 8 5,500
2015 1 9 5,000
2 10 9,500
3 11 7,500
4 12 15,000
2016 1 13 13,500
2 14 17,500
36
LAKEHEAD CITY HEALTH
CENTER
15000
PATIENTS
10000
5000
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
PERIOD 37
Year Quarter Actual Forecast ( = 0.1) Forecast ( = 0.3)
A F F
2013 1 3.5 3.50 3.50
2 8.0 3.50 3.50
3 5.5 3.95 4.85
4 10.0 4.11 5.04
2014 1 4.5 4.69 6.53
2 6.0 4.68 5.92
3 3.0 4.81 5.95
4 5.5 4.63 5.06
2015 1 5.0 4.71 5.19
2 9.5 4.74 5.14
3 7.5 5.22 6.44
4 15.0 5.45 6.76
2016 1 13.5 6.40 9.23
2 17.5 7.11 10.51
3 ? 8.15 12.61

Algebraic difference Absolute difference
(Actual - Forecast) ActualForecast
Year Quarter  = 0.1  = 0.3  = 0.1  = 0.3
2013 1 - - - -
2 +4.50 +4.50 4.50 4.50
3 +1.55 +0.65 1.55 0.65
4 +5.90 +4.96 5.90 4.96
2014 1 -0.19 -2.03 0.19 2.03
2 +1.32 +0.08 1.32 0.08
3 -1.81 -2.95 1.81 2.95
4 +0.87 +0.44 0.87 0.44
2015 1 +0.29 -0.19 0.29 0.19
2 +4.76 +4.36 4.76 4.36
3 +2.28 +1.06 2.28 1.06
4 +9.55 +8.24 9.55 8.24
2016 1 +7.10 +4.27 7.10 4.27
2 +10.39 +6.99 10.39 6.99
Sum +46.51 +30.36 50.51 40.70
Mean Bias = Bias = MAD = MAD =
+3.58 +2.34 3.88 3.13

COMPARING  = .1 WITH  = .3
15000
PATIENTS
10000
5000
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
PERIOD 40
Exponential Smoothing with Trend
Adjustment
(DOUBLE EXPONENTIAL SMOOTHING)
When a trend is present, exponential

smoothing must be modified
Forecast Exponentially Exponentially

including (FITt) = smoothed (Ft) + smoothed (Tt)
trend forecast trend

Adjustment
Ft = (At - 1) + (1 - ) FITt-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
Adjustment
• At = actual demand in period t
• FITt = Forecast including trend in period t
• Ft = exponentially smoothed forecast of the
data series in period t
• Tt = exponentially smoothed trend in period t
•  = smoothing constant for the average
• b = smoothing constant for the trend
EXAMPLE 4
(Blitz Beer Sales)
Period Sales Period Sales
t At t At
1 4,890 11 5,220
2 4,910 12 5,280
3 4,970 13 5,330
4 5,010 14 5,380
5 5,060 15 5,440
6 5,100 16 5,460
7 5,050 17 5,520
8 5,170 18 5,490
9 5,180 19 5,550
10 5,240 20 5,600
BLITZ BEER SALES
6000
5500
SALES
5000
4500
0 2 4 6 8 10 12 14 16 18 20
PERIOD
45
Period Actual Sales Forecast Sales Error
t At Ft ( = .2) At - Ft
1 4,890 4,890.0 -
2 4,910 4,890.0 20.0
3 4,970 4,894.0 76.0
4 5,010 4,909.2 100.8
5 5,060 4,929.4 130.6
6 5,100 4,955.5 144.5
7 5,050 4,984.4 65.6
8 5,170 4,997.5 172.5
9 5,180 5,032.0 148.0
10 5,240 5,061.6 178.4
11 5,220 5,097.3 122.7
12 5,280 5,121.8 158.2
13 5,330 5,153.5 176.5
14 5,380 5,188.8 191.2
15 5,440 5,227.0 213.0
16 5,460 5,269.6 190.4
17 5,520 5,307.7 212.3
18 5,490 5,350.2 139.8
19 5,550 5,378.1 171.9
20 5,600 5,412.5 187.5
46
21 ? 5,450.0
Period Actual Sales Smoothed data Smoothed trend Forecast Sales Error
t At Ft ( = .2) Tt (b = .3) FITt At - FITt
1 4,890 - - - -
2 4,910 - - - -
3 4,970
4 5,010
5 5,060
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600
47
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0
4 5,010
5 5,060
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600 48
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0
4 5,010
5 5,060
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600 49
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0 4,910.0 60.0
4 5,010
5 5,060
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600 50
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0 4,910.0 60.0
4 5,010 4,922.0
5 5,060
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600 51
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0 4,910.0 60.0
4 5,010 4,922.0 23.6
5 5,060
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600 52
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0 4,910.0 60.0
4 5,010 4,922.0 23.6 4,945.6 64.4
5 5,060
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600 53
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0 4,910.0 60.0
4 5,010 4,922.0 23.6 4,945.6 64.4
5 5,060 4,958.5
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600 54
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0 4,910.0 60.0
4 5,010 4,922.0 23.6 4,945.6 64.4
5 5,060 4,958.5 27.5
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600 55
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0 4,910.0 60.0
4 5,010 4,922.0 23.6 4,945.6 64.4
5 5,060 4,958.5 27.5 4,985.9 74.1
6 5,100
7 5,050
8 5,170
9 5,180
10 5,240
11 5,220
12 5,280
13 5,330
14 5,380
15 5,440
16 5,460
17 5,520
18 5,490
19 5,550
20 5,600 56
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0 4,910.0 60.0
4 5,010 4,922.0 23.6 4,945.6 64.4
5 5,060 4,958.5 27.5 4,985.9 74.1
6 5,100 5,000.8 31.9 5,032.7 67.3
7 5,050 5,046.1 35.9 5,082.1 -32.1
8 5,170 5,075.7 34.0 5,109.7 60.3
9 5,180 5,121.7 37.6 5,159.4 20.6
10 5,240 5,163.5 38.9 5,202.4 37.6
11 5,220 5,209.9 41.3 5,251.0 -31.1
12 5,280 5,244.8 39.3 5,284.1 -4.1
13 5,330 5,283.3 39.0 5,322.3 7.7
14 5,380 5,323.9 39.5 5,363.3 16.7
15 5,440 5,366.7 40.5 5,407.2 32.8
16 5,460 5,413.7 42.5 5,456.2 3.8
17 5,520 5,456.9 42.7 5,499.6 20.4
18 5,490 5,503.7 43.9 5,547.6 -57.6
19 5,550 5,536.1 40.5 5,576.5 -26.5
20 5,600 5,571.2 38.9 5,610.1 -10.1
21 ? 57
1 4,890 - - - -
2 4,910 - - - -
3 4,970 4,890.0 20.0 4,910.0 60.0
4 5,010 4,922.0 23.6 4,945.6 64.4
5 5,060 4,958.5 27.5 4,985.9 74.1
6 5,100 5,000.8 31.9 5,032.7 67.3
7 5,050 5,046.1 35.9 5,082.1 -32.1
8 5,170 5,075.7 34.0 5,109.7 60.3
9 5,180 5,121.7 37.6 5,159.4 20.6
10 5,240 5,163.5 38.9 5,202.4 37.6
11 5,220 5,209.9 41.3 5,251.0 -31.1
12 5,280 5,244.8 39.3 5,284.1 -4.1
13 5,330 5,283.3 39.0 5,322.3 7.7
14 5,380 5,323.9 39.5 5,363.3 16.7
15 5,440 5,366.7 40.5 5,407.2 32.8
16 5,460 5,413.7 42.5 5,456.2 3.8
17 5,520 5,456.9 42.7 5,499.6 20.4
18 5,490 5,503.7 43.9 5,547.6 -57.6
19 5,550 5,536.1 40.5 5,576.5 -26.5
20 5,600 5,571.2 38.9 5,610.1 -10.1
21 ? 5,608.1 38.3 5,646.3 58
BLITZ BEER SALES
6000
Double Exponential
smoothing (α= .2 and β = .3)
5500
SALES
5000
Exponential smoothing
(α= .2)
4500
0 2 4 6 8 10 12 14 16 18 20
PERIOD 59

Forecasting Time Series

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Forecasting Time Series

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WHAT IS A TIME SERIES?

• Set of evenly spaced numerical data

ADM 3301 ~ Rim Jaber 1

ADM 3301 ~ Rim Jaber 4

• Persistent, overall upward or

ADM 3301 ~ Rim Jaber 10

ADM 3301 ~ Rim Jaber 11

Uh, give me a minute....

ADM 3301 ~ Rim Jaber 12

ADM 3301 ~ Rim Jaber 13

• MA is a series of arithmetic means

∑ demand in previous n periods

ADM 3301 ~ Rim Jaber 14

Weighted moving average (WMA):

TOTALS 0.6 102.30

ADM 3301 ~ Rim Jaber 24

Mean Square Error (MSE) = (98.80/11) = 8.9813 29

Mean Square Error (MSE) = (102.86/11) = 9.351 30

 is: Weight Weight Weight

0.1 0.1 0.09 0.081

We generally do this by selecting the model

► Mean Absolute Deviation (MAD)

ADM 3301 ~ Rim Jaber 38

ADM 3301 ~ Rim Jaber 39

When a trend is present, exponential

Forecast Exponentially Exponentially

ADM 3301 ~ Rim Jaber 41

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