Quantitative Analysis for Management

Thirteenth Edition, Global Edition

Chapter 5
Forecasting

Copyright © 2018 Pearson Education, Ltd. All Rights Reserved

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

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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

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Forecasting Models
FIGURE 5.1 Forecasting Models

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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

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Qualitative Models (2 of 3)
• Delphi Method
– Iterative group process
– Participant groups: DMs, Staff, Respondents
– 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

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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

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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

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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)

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Components of a Time Series (2 of 3)
FIGURE 5.2 Scatter Diagram for Four Time Series of
Quarterly Data

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Components of a Time Series (3 of 3)
FIGURE 5.3 Scatter Diagram of a Time Series with Cyclical
and Random Components

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Time-Series Models
• Two basic forms
– Multiplicative
Demand = T × S × C × R
– Additive
Demand = T + S + C + R
– Combinations are possible

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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

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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),
MONTH SPEAKERS FORECAST SALES (ACTUAL − 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

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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),
MONTH SPEAKERS FORECAST SALES (ACTUAL − 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

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Measures of 
Forecast
forecast Accuracy
error 160 (4 of 5)
MAD    17.8
TABLE 5.1 Computing then Mean Absolute
9 Deviation (MAD)
ACTUAL ABSOLUTE VALUE OF
SALES OF WIRELESS ERRORS (DEVIATION),
MONTH SPEAKERS FORECAST SALES (ACTUAL − 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

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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

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Forecasting Random Variations
• No other components are present
• Averaging techniques smooth out forecasts
– Moving averages
– Weighted moving averages
– Exponential smoothing

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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

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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

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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)

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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

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Weighted Moving Averages
• Weighted moving averages use weights to put more
emphasis on most recent 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
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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

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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

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Using Software (1 of 7)
PROGRAM 5.1A Selecting the Forecasting Model in
Wallace Garden Supply Problem

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Using Software (2 of 7)
PROGRAM 5.1B Initializing Excel QM Spreadsheet for
Wallace Garden Supply Problem

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Using Software (3 of 7)
PROGRAM 5.1C Excel QM Output for Wallace Garden
Supply Problem

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Exponential Smoothing (1 of 2)
• Exponential smoothing
– A type of moving average
– Easy to use
– Requires recent 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

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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

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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

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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

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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

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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 FORECAST DEVIATIONS
QUARTER UNLOADED WITH α = 0.10 α = 0.10 WITH α = 0.50 FOR 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 d e v ia tio n s MAD = 12.33
MAD = = 1 0 .3 1
Blank Blank n Blank

Best choice

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Using Software (4 of 7)
Exponential Smoothing for Port of Baltimore Data with Excel
QM

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Using Software (5 of 7)
Excel QM Output for Port of Baltimore Example
(Exponential Smoothing )

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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

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Exponential Smoothing with Trend (1 of 2)
• The equation for the trend correction uses a new
smoothing constant β
• Ft and Tt (initials) 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 )

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Exponential Smoothing with Trend (2 of 2)
Step 2: Update the trend (Tt +1) using

Smoothed trend = Previous 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
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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

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Midwestern Manufacturing (1 of 6)
• Demand for electrical generators from 2007 – 2013
– Midwest assumes F1 is perfect (F1= Y1), 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

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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

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Midwestern Manufacturing (3 of 6)
Step 3: Calculate the trend-adjusted exponential smoothing
forecast (Ft+1) using

FIT2 = F2 + T2
= 74 + 0 = 74

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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

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 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)

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Midwestern Manufacturing (6 of 6)
PROGRAM 5.3 Output from Excel QM in Excel 2016 for
Trend-Adjusted Exponential Smoothing Example

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Trend Projections (1 of 2)
• Another method for forecasting time series with trend
• 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

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Trend Projections (2 of 2)
• Mathematical formula

Yˆ  b0  b1 X

where
Ŷ = predicted value
b0 = intercept
b1 = slope of the line
X = time period (i.e., X = 1, 2, 3, …, n)

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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

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Midwestern Manufacturing (2 of 4)
PROGRAM 5.4 Regression Analysis Output from Excel 2016

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Midwestern Manufacturing (4 of 4)
FIGURE 5.4 Generator Demand and Projections for Next
Three Years Based on Trend Line

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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

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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 (without trend)
– Centered-moving-average approach (with trend)

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Seasonal Indices with No Trend (1 of 4)
• Overall average approach
• Divide average value for each season (time period) by the
average of all data
• Example:
– A company sells telephone answering machines
– Sales data for the past two years for one model
– Create a forecast that includes seasonality

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Seasonal Indices with No Trend (2 of 4)
TABLE 5.8 Answering Machine Sales

Blank SALES DEMAND Blank Blank

AVERAGE 2-
MONTH YEAR 1 YEAR 2
YEAR DEMAND
January 80 100 90
February 85 75 80
March 80 90 85
April 110 90 100
May 115 131 123
June 120 110 115
July 100 110 105
August 110 90 100
September 85 95 90
October 75 85 80
November 85 75 80
December 80 80 80
Blank Blank

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Plot of the Data

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 Seasonal Indices with No Trend (3 of 4)
TABLE 5.8 Answering Machine Sales and Seasonal Indices
Blank SALES DEMAND Blank Blank Blank Blank
AVERAGE 2- MONTHLY AVERAGE
MONTH YEAR 1 YEAR 2
YEAR DEMAND DEMANDa SEASONAL 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

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Seasonal Indices with No Trend (4 of 4)
• Make predictions for the third year
• Assume that third year’s annual demand is 1,200 units

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
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Seasonal Indices with Trend (1 of 2)
• When there is both trend and seasonality, changes could
be due to trend, seasonal, or random
• In this case, seasonal indices should be computed with
Centered moving average (CMA) approach

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Turner Industries (1 of 7)
TABLE 5.9 Quarterly Sales ($1,000,000s) for Turner
Industries

QUARTER YEAR 1 YEAR 2 YEAR 3

1 108 116 123
2 125 134 142
3 150 159 168
4 141 152 165

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Plot of the Data

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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

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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
• Have a total of 4 quarters (1 year data) with and equal
number of quarters before and after quarter 3 so the trend
is averaged out
• 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
Total of 4 quarters centered on quarter 3

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

CMA(q3, y1) = = 132.0
4
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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

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Turner Industries (5 of 7)
TABLE 5.10 Centered Moving Averages and Seasonal
Ratios for Turner Industries
SEASONAL
YEAR QUARTER SALES ($1,000,000s) CMA
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

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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

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Seasonal Indices with Trend (2 of 2)
• Steps in CMA
1. Compute the CMA for each observation (where
possible)
2. Compute the seasonal ratio

3. Average seasonal ratios to get seasonal indices

4. If seasonal indices do not add to the number of
seasons, multiply each index by:

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Turner Industries (7 of 7)
• Scatterplot of Turner Industries Sales Data and Centered
Moving Average

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Trend, Seasonal, and Random Variations
• Forecasting models when there is trend and seasonality

– The decomposition method

– Regression with trend and seasonal component

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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

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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

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Deseasonalized Data (2 of 4)
• Find a trend line using the deseasonalized data where
X = time
b1 = 2.34 b0 = 124.78
Yˆ  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
Yˆ  124.78  2.34(13)
 155.2 (before seasonality adjustment)

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Deseasonalized Data (3 of 4)

Including the seasonal index

Yˆ ´ I1  155.2 ´ 0.85  131.92

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Deseasonalized Data (4 of 4)
FIGURE 5.5 Scatterplot of Turner Industries Original Sales
Data and Deseasonalized Data

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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

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Turner Industries (2 of 2)
FIGURE 5.6 Scatterplot of Turner Industries’ Original Sales
Data and Deseasonalized Data with Unadjusted and
Adjusted Forecasts

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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
Yˆ  a b X  b X  b X  b X
1 1 2 2 3 3 4 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
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Using Regression with Trend and Seasonal (2
of 5)
PROGRAM 5.7A Excel 2016 Regression Analysis for Turner
Industries

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Using Regression with Trend and Seasonal (4
of 5)

• Regression equation

Yˆ  104.1 + 2.3X 1 + 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

• We use MAD or MSE to determine the best model

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Quiz 2
• Next week, 30th of March
• Regression Models and Forecasting
• 2/3 questions, 30/40 minutes

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