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Chapter 16 Qualitative Approaches to Forecasting Quantitative Approaches to Forecasting The Components of a Time Series Using Smoothing Methods in Forecasting Measures of Forecast Accuracy Using Trend Projection in Forecasting Using Regression Analysis in Forecasting
Forecasting Introduction
An essential aspect of managing any organization is planning for the future. Organizations employ forecasting techniques to determine future inventory, costs, capacities, and interest rate changes. There are two basic approaches to forecasting: -Qualitative -Quantitative
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Sales
I labeled Sales as My Value (y) axis
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Smoothing Methods
In cases in which the time series is fairly stable and has no significant trend, seasonal, or cyclical effects, one can use smoothing methods to average out the irregular components of the time series. Three common smoothing methods are: Moving average Weighted moving average Exponential smoothing
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Forecast the sales for period 11 using a three period moving average (MA3).
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Example: Roberts Drugs: Moving Average Steps to Moving Average Using Excel Step 1: Select the Tools pull-down menu. Step 2: Select the Data Analysis option. Step 3: When the Data Analysis Tools dialog appears, choose Moving Average. Step 4: When the Moving Average dialog box appears: Enter B4:B13 in the Input Range box. This specifies the value of n Enter 3 in the Interval box. Enter C5 in the Output Range box. This is the column following our data, and one row below where Select OK.
our data begins.
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where: is the smoothing constant (a number between 0 and 1) Ft is the forecast for period t Ft +1 is the forecast for period t+1 Yt is the actual data value for period t
Dr. C. Lightner Fayetteville State University
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Realistically we should have experimented with more values of n for the moving average, and for exponential smoothing to determine the absolute best parameters to use for our technique. On the next slide we randomly chose to use the MSE criterion to judge the best technique.
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n=2 Yt Ft
#N/A 112.5 120 122.5 122.5 122.5 125 122.5 112.5 120
110 115 125 120 125 120 130 115 110 130
n=3 Yt Ft
110 115 125 120 125 120 130 115 110 130
#N/A #N/A 116.6667 3.333333 11.11111 120 5 25 123.3333 -3.33333 11.11111 121.6667 8.333333 69.44444 125 -10 100 121.6667 -11.6667 136.1111 118.3333 11.66667 136.1111 118.3333 MSE 69.84127
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Yt
110 115 125 120 125 120 130 115 110 130
=0.1 Ft
#N/A 110 5 25 110.5 14.5 210.25 111.95 8.05 64.8025 112.755 12.245 149.94 113.9795 6.0205 36.24642 114.5816 15.41845 237.7286 116.1234 -1.1234 1.262016 116.0111 -6.01106 36.13279 115.4099 14.59005 212.8696 MSE 108.248
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Yt
110 115 125 120 125 120 130 115 110 130
=0.2 Ft
#N/A 110 5 111 14 113.8 6.2 115.04 9.96 117.032 2.968 117.6256 12.3744 120.1005 -5.10048 119.0804 -9.08038 117.2643 12.73569 MSE
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Trend Projection
If a time series exhibits a linear trend, the method of least squares may be used to determine a trend line (projection) for future forecasts. Least squares, also used in regression analysis, determines the unique trend line forecast which minimizes the mean square error between the trend line forecasts and the actual observed values for the time series. The independent variable is the time period and the dependent variable is the actual observed value in the time series.
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Trend Projection
Using the method of least squares, the formula for the trend projection is: Yt = b0 + b1t. where: Yt = trend forecast for time period t b1 = slope of the trend line b0 = trend line projection for time 0
b1 = n tYt - t Yt
b0 Y b1 t
nt 2 - (t )2
where: Yt = observed value of the time series at time period t
t
tt
Forecast the number of repair jobs Auger's will perform in December using the least squares method.
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(Mar.) (Apr.) (May) (June) (July) (Aug.) (Sep.) (Oct.) (Nov.) Sum
1 2 3 4 5 6 7 8 9 45
353 387 342 374 396 409 399 412 408 3480
353 774 1026 1496 1980 2454 2793 3296 3672 17844
1 4 9 16 25 36 49 64 81 285
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t t = 45/9 = 5
Y = 3480/9 = 386.667
(9)(17844) - (45)(3480) = 7.4 (9)(285) - (45)2
ntYt - t Yt b1 = = n t 2 - ( t)2
b0 Y b1 t
Thus our trend line is Yt = 349.667 + 7.4 t. Y10 = 349.667 + (7.4)(10) = 423.667
For December t=10
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Projected
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Week (t )
1 2 3 4 5 6 7 8 9 10 11
Yt
110 115 125 120 125 120 130 115 110 130 124
Forecast
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Question????
How could we use the MSE or MAD to verify that the MA3 is a better smoothing technique than trend analysis for Roberts Drug Sales data?
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Regression Equation
Using the method of least squares, the formula for the regression line is: Y = b0 + b1x. where: Y= dependent variable which depends on the value of x b1 = slope of the regression line b0 = regression line projection for x= 0
b1 = n XiYi - Xi Yi
b0 y b1 x
nXi2 - (Xi)2
where: Yt = observed value of the time series at time period t
t
tt
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THE END
See your textbook for more examples and detailed explanations of all topics discussed in these notes.
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