24 CHAPTER 4 F O R E C A S T I N G

C H A P T E R

Forecasting
DISCUSSION
QUESTIONS
1. Qualitative   models
incorporate subjective factors
into   the   forecasting   model.
Qualitative models are useful
when   subjective   factors   are
important. When quantitative
data   are   difficult   to   obtain,
qualitative   models   may   be
appropriate.
2. Approaches   are
qualitative   and   quantitative.
Qualitative   is   relatively
subjective;   quantitative   uses
numeric models.
3. Short­range   (under   3
months),   medium­range   (3
months   to  
3 years), and long­range (over
3 years).
4. The steps that should be
used   to   develop   a
forecasting
system are:
(a) Determine   the
purpose   and   use   of   the
forecast
(b) Select   the   item   or
quantities   that   are   to   be
forecasted
(c) Determine   the   time
horizon of the forecast
(d) Select   the   type   of
forecasting model to be used
(e) Gather the necessary
data
(f)  Validate   the
forecasting model
(g) Make the forecast
(h) Implement   and
evaluate the results
5. Any   three   of:   sales
planning,   production
planning and budgeting, cash
budgeting,   analyzing   various
operating plans.
6. There   is   no   mechanism
for   growth   in   these   models;
they   are   built   exclusively
from   historical   demand
values.   Such   methods   will
always lag trends.
7. Exponential smoothing is
a   weighted   moving   average
where all previous values are
weighted   with   a   set   of
weights   that   decline
exponentially.
8. MAD, MSE, and MAPE
are   common   measures   of
forecast accuracy. To find the
4 10. A   time   series   model
more   accurate   forecasting
model,   forecast   with   each
tool for several periods where
the   demand   outcome   is
known,   and   calculate   MSE,
MAPE,   or   MAD   for   each.
The   smaller   error   indicates
the better forecast.
9. The  Delphi   technique
involves:
(a) Assembling   a   group
of   experts   in   such   a
manner as to preclude
direct communication
between   identifiable
members of the group
(b) Assembling   the
responses   of   each
expert   to   the
questions   or
problems of interest
(c) Summarizing   these
responses
(d) Providing   each
expert   with   the   summary   of
all responses
(e) Asking   each   expert
to study the summary
of   the   responses
and respond again to
the   questions   or
problems of interest.
(f)  Repeating   steps   (b)
through   (e)   several
times as necessary to
obtain   convergence
in   responses.   If
convergence   has   not
been obtained by the
end   of   the   fourth
cycle,   the   responses
at   that   time   should
probably be accepted
and   the   process
terminated—little
additional
convergence is likely
if   the   process   is
continued.
predicts   on   the   basis   of   the
assumption that the future is
a   function   of   the   past,
whereas an associative model
incorporates   into   the   model
the   variables   of   factors   that
might   influence   the   quantity
being forecast.
11. A   time   series   is   a
sequence of evenly spaced data
points   with   the
four   components   of   trend,
seasonality,   cyclical,   and
random variation.
12. When   the   smoothing
constant, , is large (close to
1.0), more weight is given to
recent   data;   when    is   low
(close to 0.0), more weight is
given to past data.
13. Seasonal patterns are of
fixed   duration   and   repeat
regularly.   Cycles   vary   in
length   and   regularity.
Seasonal   indexes   allow  
“generic”   forecasts   to   be
made   specific   to   the   month,
week, etc., of the application.
14. Exponential   smoothing
weighs   all   previous   values
with   a   set   of   weights   that
decline   exponentially.   It   can
place   a   full   weight   on   the
most   recent   period   (with   an
alpha of 1.0). This, in effect,
is the  naïve approach, which
places all its emphasis on last
period’s actual demand.
15. Adaptive   forecasting
refers   to   computer
monitoring   of   tracking
signals and self­adjustment if
a   signal   passes   its   present
limit.
16. Tracking   signals  alert
the user of a forecasting tool
to   periods   in   which   the
forecast   was   in   significant
error.
17. The
  correlation
coefficient   measures   the
degree   to   which   the
independent   and   dependent
variables   move   together.   A
negative   value   would   mean
that as X increases,  Y tends
to   fall.   The   variables   move
together,   but   move   in
opposite directions.
18. Independent   variable
(x)   is   said   to   explain
variations   in   the  dependent
variable (y).
19. Nearly   every   industry
has   seasonality.   The
seasonality   must   be   filtered
out   for   good   medium­range
planning   (of   production   and
inventory)   and   performance
evaluation.
20. There   are   many
examples.   Demand   for   raw
materials   and   component
parts such as steel or tires is a
function of demand for goods
such as automobiles.
21. Obviously,   as   we   go
farther   into   the   future,   it
becomes   more   difficult   to
make forecasts, and we must
diminish our reliance on the
forecasts.
ETHICAL DILEMMA
This   exercise,   derived   from
an   actual   situation,   deals   as
much   with   ethics   as   with
forecasting.   Here   are   a   few
points to consider:
No one likes a system

they don’t understand,
and   most  
college   presidents
would   feel
uncomfortable   with
this one. It does offer
the   advantage   of
depoliticizing   the
funds   al­
location if used wisely
and   fairly.   But   to   do
so   means   all   parties
must have input to the
process   (such   as
smoothing   constants)
and all data need to be
open to everyone.
The   smoothing

constants   could   be
selected by an agreed­
upon  criteria (such  as
lowest MAD) or could
be   based   on   input
from   experts   on   the
25
 CHAPTER 4 F O R E C A S T I N G 26

board   as   well   as   the The graph is a straight 4. At what level of alpha is an intercept of 57.81 with a

college.
 Abuse of the system
is   tied   to   assigning
alphas   based   on   what
results   they   yield,
rather   than   what
alphas make the most
line.   The   forecast   is   the the   mean   absolute   deviation slope of 9.44 yields a MAD
same in each period. (MAD) minimized? of 7.17.
2. What   happens   to   the alpha = .16
graph   when   alpha   equals END-OF-CHAPTER
one? ACTIVE MODEL 4.3: 
Exponential Smoothing 
PROBLEMS
The forecast follows the
same pattern as the demand with

4.2 (a) No, the data appear to have no consistent pattern 
(see part d for graph).
Year 1 2 3 4 5 6 7 8 9 10 11 Forecas
t
Demand 7 9 5 9.0 13.0  8.0 12.0 13.0  9.0 11.0  7.0
(b) 3-year moving 7.0  7.7  9.0 10.0 11.0 11.0 11.3 11.0 9.0
(c) 3-year weighted 6.4  7.8 11.0  9.6 10.9 12.2 10.5 10.6 8.4
sense. (except   for   the   first Trend Adjustment 374 + 368 + 381
4.1   (a)    374.33 pints
 Regression   is  open   to forecast) but is offset by one 1. Scroll   through   different 3
abuse as well. Models period.   This   is   a   naive values   for   alpha   and   beta. (b)
can use many years of forecast. Which  smoothing   constant
data   yielding   one 3. Generalize what happens appears   to   have   the   greater Weight
result   or  few  years Week Pint ed
to   a   forecast   as   alpha effect on the graph?
of s Moving
yielding   a   increases. alpha
Use Averag
totally   different As   alpha   increases   the 2. With   beta   set   to   zero, d e
forecast.   Selection   of forecast is more sensitive to find   the   best   alpha   and August 360
associative   variables changes in demand. observe the MAD. Now find 31
can   have   a   major *Active Models 4.1, 4.3, and the   best   beta.   Observe   the Septe 389 381
impact   on   results   as 4.4  appear  on  the  CD­ROM mber 7  .1
well. only.   Active  Model  4.2  also Forecasti Error = 
appears in the text. Week of Pints Forecas ng  .20 Foreca38.1
Active Model t Septe
Error 410 st 368
mber  .3
Exercises* August 31 360 360 0
14
0 360
=
September 7 389 360 29 5.8 365.8
110.
ACTIVE MODEL 4.1:  September 14 410 365.8 44.2 8.84 374.64
4
Moving Averages September 21 381 374.64 6.36
Septe 381
1.272 375.912
374
September 28 368 375.912 –7.912 –1.5824 374.329
1. What   does   the   graph mber
6
 .6
look like when n = 1? 21 =
October 5 374 374.3296–.3296 –.06592 374.263
224.
The   forecast   graph 6
4
mirrors the data graph but MAD. Does the addition of a Septe 368
one period later. trend improve the forecast? mber
2. What   happens   to   the alpha   =   .11,   MAD   = 28
graph   as   the   number   of 2.59; beta above .6 changes Octobe 374
periods   in   the   moving the   MAD   (by   a   little)   to r5
average increases? 2.54. Forec
ast
The   forecast   graph
becomes   shorter   and ACTIVE MODEL 4.4:  372.9

smoother. Trend Projections (c)

3. What   value   for  n 1. What is the annual trend The forecast is 374.26.
minimizes the MAD for this in the data?
data? 10.54
n = 1 (a naive forecast) 2. Use the scrollbars for the
slope   and   intercept   to
ACTIVE MODEL 4.2:  determine   the   values   that
Exponential Smoothing minimize   the   MAD.   Are
1. What   happens   to   the these   the   same   values   that
graph   when   alpha   equals regression yields?
zero? No   they   are  not  the
same   values.   For   example,
27 CHAPTER 4 F O R E C A S T I N G

(d) The   three­year (c) The   banking 4.5 (c) Weighted   2   year

moving   average industry has a great M.A. with .6 weight for most
appears   to   give deal   of   seasonality recent year.
better in   its   processing
results. requirements Year Mileage Forecast
1 3,000
3,700 + 3,800
4.5   (a)    =3,750 miles
2 4,000
2 3 3,400 3,600
(b) 4 3,800 3,640
5 3,700 3,640

Forecast   for   year   6   is   3,740

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

Demand 7 9.0 5.0 9.0 13.0  8.0 12.0 13.0  9.0 11.0  7.0
Naïve 7.0 9.0 5.0  9.0 13.0  8.0 12.0 13.0  9.0 11.0 7.0
Exp. Smoothing 6 6.4 7.4 6.5  7.5  9.7  9.0 10.2 11.3 10.4 10.6 9.2

miles.
Two-Year
Year Mileage Moving Average
� 420 �
MAD  140 �
1 3,000
� 3 � �
2 4,000
3 3,400 3,500 4.5   (d)
4 3,800 3,700 Forecast
5 3,700 3,600 Year Mileage Forecast Error
1 3,000 3,000
2 4,000 3,000 1,000
3 3,400 3,500
300 4 3,800 3,450
MAD   100.
3 5 3,700 3,625
Total

The forecast is 3,663 miles.
4.6
Y Sales X Period
January 20
February 21
March 15
April 14
Naive   tracks   the   ups May 13
and downs best but lags June 16
the data by one period. July 17
Exponential   smoothing August 18
is   probably   better September 20
October 20 10
because it smoothes the
November 21 11
data and does not have
December 23 12
as much variation.
Sum    218 78
TEACHING   NOTE: Average   18.2
Notice   how   well
exponential   smoothing
forecasts the naive. (a)

4.4    (a)  FJuly  FJune + 0.2(Forecasting error)

                       42 + 0.2(40 �42)  41.6

        (b)  FAugust  FJuly + 0.2(Forecasting error)

                          41.6 + 0.2(45 - 41.6)  42.3
 CHAPTER 4 F O R E C A S T I N G 28

(b) [i] Naive Forecast   =   15.73  (88 + 90)

       (b)     89
+ .38(1 2
The   coming   January   = 3)   =        (c)
December = 23 20.67,
Table for Problem 4.9 (a, b, c)
Forecast |Error|
Two-Month Three- Two-Month Three-
Month Month
Price per Moving Moving Moving Moving
Month Chip Average Average Average Average
January $1.80
February  1.67
March  1.70 1.735 .035
April  1.85 1.685 1.723 .165 .127
May  1.90 1.775 1.740 .125 .160
June  1.87 1.875 1.817 .005 .053
July  1.80 1.885 1.873 .085 .073
August  1.83 1.835 1.857 .005 .027
September  1.70 1.815 1.833 .115 .133
October  1.65 1.765 1.777 .115 .127
November  1.70 1.675 1.727 .025 .027
December  1.75 1.675 1.683 .075 .067
Totals . .793
[ii] 3­month where Temperatur 2 day |
moving   (20 + 21 next e M.A. Error|
+ 23)/3 = 21.33 January 93 — —
[iii] 6­month is   the 94 — —
weighted       [(0.1   13th 93 93.5    0.5
17) + (.1  18) month.
95 93.5    1.5
    + (c) Only trend provides
(0.1  20) an   equation 96 94.0    2.0
+ (0.2  that   can
20) extend 88 95.5    7.5
beyond   one
  
month 90 92.0    2.0
 +
(0.2 4.7 Present = Period (week) 13.
 6. 5
21)
MAD = 13.5/5 = 2.7
+ ��1 � �1 � �1 � �1 � � (c) MAD   (two­month
F7  �� �A6 + � �A5 + � �A4 + �(d)� AMSE3 � 1.0
  =   66.75/5   =
(0.3 So:  ��3 � �4 � �4 � �6 � � moving   average)   =   .750/10
 13.35
= .075
23)]/ �1 � �1 � �1 � � 1MAPE
�
 � �(52) + � �(63) + � �(48) +(e)   =   14.94%/5
� �(70) = 56.75 patients MAD   (three­month
1.0 3
� � 4
� � 4
� � = 2.99% 6
� �
moving average) = .793/9 = .
= 20.6 4.9 (a, b) The computations 088
[iv] Exponential where for both the two­
Therefore,   the   two­month
smoothing   with 1 1 1 1 and   three­month
1.0 = � weights   ,  ,  ,  moving   average   seems   to
alpha = 0.3 3 4 4 6 averages   appear
have performed better.
in   the   table;   the
FOct  18 + 0.3(20 - 18)  18.6 (96 + 88 + 90) results   appear   in
4.8    (a)     91.3
FNov  18.6 + 0.3(20 - 18.6)  19.02 3 the figure below.
FDec  19.02 + 0.3(21 - 19.02)  19.6
FJan  19.6 + 0.3(23 - 19.6)  20.62 � 21

[v] Trend 
� x  78, x  6.5,   � y = 218, y  18.17
1474 - (12)(6.5)(18.2) 54.4
b   0.38
650 - 12(6.5)2 143
a  18.2 - 0.38(6.5)  15.73
29 CHAPTER 4 F O R E C A S T I N G

4.9 (d) Table for Problem 4.9(d):
             (b) |Error| = |Actual – Forecast|
 = .1  = .3  = .5
Year 1 2 3 4 5 6 7 8 9 10 11 MAD
Month Price
Exp.per Forecast 1 |Error|
smoothing 1.3 1.1 Forecast
0.2 |Error|
5.2 1.6 Forecast
0.1 2.1|Error|
4.5 5.1 4.6 2.4
Chip
These calculations were completed in Excel. Calculations are slightly different in Excel OM and POM for Windows due to
January $1.80 $1.80 $.00 $1.80 $.00 $1.80 $.00
rounding differences.
February 1.67 1.80 .13  1.80 .13  1.80 .13
March 1.70 1.79 .09  1.76 .06  1.74 .04
April 1.85 1.78 .07  1.74 .11  1.72 .13
May 1.90 1.79 .11  1.77 .13  1.78 .12
June 1.87 1.80 .07  1.81 .06  1.84 .03
July 1.80 1.80 .00  1.83 .03  1.86 .06
August 1.83 1.80 .03  1.82 .01  1.83 .00
Septembe 1.70 1.81 .11  1.82 .12  1.83 .13
r
October 1.65 1.80 .15  1.79 .14  1.76 .11
November 1.70 1.78 .08  1.75 .05  1.71 .01
December 1.75 1.77 .02  1.73 .02  1.70 .05
Totals $.8 $.8 $.81
6 6
MAD (total/12) $.072 $.072 $.067
5

 = .5 is preferable, using MAD, to  = .1 or  = .3. One could
3 52 43.4 + 0.6(50–43.4) =
4.10 Year 1 2 3 4 5 6 7 8 9 10 11 Forecast
4 56 47.4 + 0.6(52–47.4) =
Demand 4 6 4 5.0 10.0 8.0 7.0 9.0 12.0 14.0 15.0 5 58 50.2 + 0.6(56–50.2) =
(a) 3-year moving 4.7  5.0 6.3 7.7 8.3  8.0  9.3 11.7 13.7
6 ? 53.7 + 0.6(58–53.7) =
(b) 3-year 4.5  5.0 7.3 7.8 8.0  8.3 10.0 12.3 14.0
weighted
4.12   = 25.3
MAD = 5.06
Actual
t Day Demand Exponential   smoothing,    =
0.9:
1 Monday 88
Exponential
2 Tuesday 72
Year Demand Smoothing  = 0.9
3 Wednesday 68
1 45 41
4 Thursday 48 2 50 41.0 + 0.9(45–41) = 44.6
5 Friday 3 52 44.6 + 0.9(50–44.6 ) = 49
4 56 49.5 + 0.9(52–49.5) = 51
Ft = Ft–1 + (At–1 – Ft–1) 5 58 51.8 + 0.9(56–51.8) = 55
Let    =   .25.   Let   Monday 6 ? 55.6 + 0.9(58–55.6) = 57
forecast demand = 88  = 18.5
(c) The   forecasts   are
F2 = 88 + .25(88 – 88) = 88 MAD = 3.7
about the same.
+ 0 = 88 (b) 3­year   moving
4.11  (a) Year 1 2 3 4 5 6 7 8 9 10 11 Forecast
Demand 4 6.0 4.0 5.0 10.0 8.0 7.0 9.0 12.0 14.0 15.0
Exp. Smoothing 5 4.7 5.1 4.8  4.8 6.4 6.9 6.9  7.5  8.9 10.4 11.8

F3 = 88 + .25(72 – 88) = 88 average:
– 4 = 84 Three-Year
F4 = 84 + .25(68 – 84) = 84 Year Demand Moving Average
– 4 = 80 1 45
F5 = 80 + .25(48 – 80) = 80 2 50
– 8 = 72 3 52
4 56 (45 + 50 + 52)/3 = 49
4.13 (a) Exponential 5 58 (50 + 52 + 56)/3 =
smoothing,  = 0.6: 52.7
6
Exponential ? (52 + 56 + 58)/3 =
Year Demand Smoothing 55.3
1 45 41  = 12.3
2 50 41.0 + 0.6(45–41) = 43.4
 CHAPTER 4 F O R E C A S T I N G 30

MAD = 6.2 Method 2: MAD:   0.1   + 4.15

(c) Trend projection: 0.20 + 0.10 + 0.11 = 0.51
Forecast Three-Year
        MSE : 0.01 + Year Sales Moving Average
Year Demand 0.04 + 0.01 + 0.0121 = 0.072
Trend Projection
 better
1 45 42.6 + 3.2 2003 450
2 50 42.6 + 3.2 2004 495
3 52 42.6 + 3.2 2005 518
4 56 42.6 + 3.2 2006 563 (450 + 495 + 518)/3 =
5 58 42.6 + 3.2 487.7
6 ? 42.6 + 3.2 2007 584 (495 + 518 + 563)/3 =
525.3
 = 3.2 2008 (518 + 563 + 584)/3 =
MAD = 0.64 555.0
Y  a + bX
�XY �nXY                                     
b
�X 2 �nX 2
a  Y �bX 4.16
X Y XY X 2
Year Time Period X Sales
1 45 45 1 2003 1
2 50 100 4 2004 2
3 52 156 9 2005 3
4 56 224 16 2006 4
5 58 290 25 2007 5

Then:  X   =  15,  Y   =  261,
2 2610
XY = 815, X  = 55,  X = 3,
Y = 52.2 Therefore: X  3,  Y  522
815 �5 �3 �52.2
b  3.2 Y  a + bX
55 �5 �3 �3
a  52.20 �3.20 �3  42.6 �XY - nXY 8166 - (5)(3)(522) 336
b 2 2
   33.6
Y6  42.6 + 3.2 �6  61.8 �X - nX 55 - (5)(9) 10
a  Y - bX  522 - (33.6)(3)  421.2
(d)    Comparing   the
results   of   the   forecasting y  421.2 + 33.6 x
methodologies   for   parts   (a), y  421.2 + 33.6 �6  622.8
(b), and (c).
Year Sales Forecast Trend
Forecast Methodology
Exponential smoothing,  = 0.6 2003 450 454.8
Exponential smoothing,  = 0.9 2004 495 488.4
3-year moving average 2005 518 522.0
Trend projection 2006 563 555.6
Based   on   a   mean   absolute 2007 584 589.2
deviation  criterion,   the  trend 2008 622.8
projection   is   to   be   preferred
over   the   exponential
smoothing   with    =   0.6,
4.17
exponential   smoothing   with
 = 0.9, or the 3­year moving Forecast Exponential
average   forecast Year Sales Smoothing
methodologies. 2003 450 410.0
4.14 2004 495 410 + 0.6(450 – 410) = 434.0
2005 518 434 + 0.6(495 – 434) = 470.6
Method 1: MAD:   0.20   +
2006 563 470.6 + 0.6(518 – 470.6) =
0.05 + 0.05 + 0.20 = 0.5   499.0
better 2007 584 499 + 0.6(563 – 499) = 537.4
        MSE : 0.04 + 2008 537.4 + 0.6(584 – 537.4) =
0.0025   +   0.0025   +   0.04   = 565.6
0.085
31 CHAPTER 4 F O R E C A S T I N G

4.19 Trend adjusted  4.20 Trend   adjusted

Forecast Exponential
Unadjusted Adjusted
Year Sales Smoothing Month Demand (y) Forecast Trend Forecast Error |Error| Error2
February 70.0 65.0 0 65.0 5.00 5.0 25.00
2003 450 410.0 March 68.5 65.5 0.4 65.9 2.60 2.6 6.76
2004 495 410 + 0.9(450 – 410) = April
446.0 64.8 66.16 0.61 66.77 –1.97 1.97 3.87
2005 518 446 + 0.9(495 – 446) = May
490.1 71.7 66.57 0.45 67.02 4.68 4.68 21.89
2006 563 490.1 + 0.9(518 – June =
490.1) 71.3 67.49 0.82 68.31 2.99 2.99 8.91
515.2 July 72.8 68.61 1.06 69.68 Note:   To  
3.12 use
3.12  POM   9.76
for
2007 584 515.2 + 0.9(563 – Totals =
515.2) 419.1 Windows   to20.3   solve  76.19
this
16.42
558.2 problem,   a   period
6   0,   which
2008 558.2 Average
+ 0.9(584 – 558.2) =   69.85 contains   the   initial   forecast
2.74 3.39 12.70
581.4 August Forecast 71.30 (Bias)
and   initial  (MAD)
trend,   must(MSE)
  be
Based   upon   the   MSE   criterion,   the   exponential   smoothing   with    =   0.1, added.
   =   0.8   is   to   be   preferred
over the exponential smoothing with    = 0.1,    = 0.2.  Its MSE of 12.70 is lower.  Its MAD of 3.39 is
also lower than that in Problem 4.19.
(Refer   to   Solved   Problem exponential smoothing:  =  exponential   smoothing:    = FIT8  F8 + T8  27.14 + 2.45  29.59
4.1) 0.1,  = 0.2 0.1,  = 0.8
For    =   0.3,   absolute Unadjust F9  A8 + 1 � F8 + T8  0.2 28 ( )( ) ( )( )
deviations for 2003–2007 are ( )(
4.21  F5   A4 + 1 � F4 + T4  0.2 19 + 0.8 20.14 ) ( )( ) ( )( )
40.0,   73.0,   74.1,   96.9,   88.8,
ed
Month Income Forecast Trend            3.8 + 16.11  19.91
              + 0.8 29. ( )(
respectively. So the MAD =
372.8/5 = 74.6. T5   ( F5 �F4 ) + ( 1 �) T4  ( 0.4 ) ( 19.91 F9 �F) 8 ) + ( 1 �) T8  ( 0.4 ) ( 29.28
(17.82
T9  �
Februar 70.0 65.0 0.0
y            + ( 0.6 ) ( 2.32 )  0.4 ( 2.09 )               + ( 0.6 ) ( 2.4
MAD  0.3  74.6 March 68.5 65.5 0.1
     
     + 1.39  0.84 + 1.39  2.23
MAD  0.6  51.8 April 64.8 65.9 0.16 FIT9  F9 + T9  29.28 + 2.32  31.60
May 71.7 65.92 0.13 FIT5  F5 + T5  19.91 + 2.23  22.14
MAD  0.9  38.1 June 71.3 66.62 0.25
July 72.8 67.31 0.33
Because   it   gives   the   lowest F6  A5 + ( 1 � ) ( F5 + T5 )  ( 0.2) ( 24) + ( 0.8) ( 22.14 )
August 68.16
MAD,   the   smoothing
constant   of           4.8 + 17.71  22.51
  =   0.9   gives   the   most MAD  = 24.3/6 = 4.05, MSE
accurate forecast. = 113.2/6 = 18.87. Note that T6   ( F6 �F5 ) + ( 1 � ) T5  0.4 ( 22.51 �19.91) + 0.6 ( 2.23)

4.18 We   need   to   find   the all numbers are rounded.          0.4 ( 2.6 ) + 1.34
smoothing   constant  .   We Note:   To   use   POM   for           1.04 + 1.34  2.38
know   in  general   that  Ft  = Windows   to   solve   this
FIT6  F6 + T6  22.51 + 2.38  24.89
Ft–1 + (At–1 – Ft–1); t = 2, problem,   a   period   0,   which
3, 4. Choose either contains   the   initial   forecast
and   initial   trend,   must   be 4.22   F7  A6 + (1 �)( F6 + T6 )  (0.2)(21) + (0.8)(24.89)
t = 3 or t = 4 (t = 2 won’t let
us find  because F2 = 50 = added.  4.2 + 19.91  24.11
50   +  (50   –   50)   holds   for           T7  ( F7 �F6 ) + (1 �)T6  (0.4)(24.11 �22.51)
any ). Let’s pick t = 3. Then + (0.6)(2.38)  2.07
F3 = 48 = 50 + (42 – 50)
         FIT7  F7 + T7  24.11 + 2.07  26.18
or                    48 = 50 + 42 
– 50 F8  A7 + (1 � )( F7 + T7 )  (0.2)(31)
or                    –2 = –8 + (0.8)(26.18)  27.14
So,                 .25 =  T8   ( F8 �F7 ) + ( 1 � ) T7  0.4 ( 27.14 �24.11)
Now we can find F5 : F5 = 
               + 0.6 ( 2.07)  2.45
50 + (46 – 50)
      F5 = 50 + 46 – 50
= 50 – 4
For           = .25, F5 = 50 – 
4(.25) = 49
The forecast for time period 5
= 49 units.
 CHAPTER 4 F O R E C A S T I N G 32

Y  a + bX January 30 �xy - n x y 650 �4(2.5)(55) 650

b  
4.23 Students   must �XY - nXY February 40 2
�x �nx 2
30 �4(2.5) 2 30
determine   the   naive   forecast b March 60
�X 2 - nX 2 100
for   the   four   months.   The April 90   20
naive   forecast   for   March   is a  Y - bX  Totals 220 5
the February actual of 83, etc.  Averages y = 55 a  y �bx
Assume
 55 �(20)(2.5)
(a) Actual Forecas |Error|
Appearances Demand Y
5
t X
March 101 120 3 3 The regression line is y = 5 +
4 6 20x. The forecast for May (x
April  96 114 7 7 = 5) is y = 5 + 20(5) = 105.
6 5 4.26
May  89 110 8 10
5 7 A
June 108 108 9 ?
S
X  =   33,  Y  =   38,  XY  = Year1 Year2 Average
2
227, X  = 199,  X = 5.5,  Y = Seaso Deman DemanYear1-Year2 D
6.33. Therefore: n d d Demand
58
MAD (for manager)   14.5 227 �6 �5.5 �6.333
4 b  1.0286 Fall 200 250 225.0
61.16% 199 �6  �5.5 �5.5 Winter 350 300 325.0
MAPE (for manager)   15.29%
4 a  6.333 �1.0286  �5.5  .6762
Spring 150 165 157.5
Summe 300 285 292.5
Y  .676 + 1.03 x  (rounded) r
(b) Actual Naive |Error|
The   following   figure   shows
March 101  83 18
both the data and the resulting Average Yr1 to Yr2 � Yr1  Demand + Yr2  Demand
�
� �
April  96 101   equation: Demand for season �
� 2
May  89  96   Sum of Ave Yr1 to Yr2  Demand
Average seasonal demand 
June 108  89 19
4
Average Yr1 to Yr2  Demand
Seasonal index = 
Average Seasonal Demand
New Annual Demand
Yr3  �Seasonal index
49 4
MAD (for naive)   12.25
4 1200
 �Seasonal index
48.49% 4
MAPE (for naive)   12.12%.
4
 Naive outperforms 
management. 4.27
(c) MAD   for   the   manager’s
technique   is   14.5,   while
If   there   are   nine
MAD   for   the   naive
performances   by   Stone 20,000
forecast   is   only   12.25. Average over all seasons:   1, 250
Temple   Pilots,   the  
MAPEs   are   15.29%   and 16
estimated sales are:
12.12%,   respectively.   So 6,000
Y9  .676 + 1.03 �9  .676 + 9.27  9.93 drums Average over spring:   1,500
the naive method is better. 4
4.24 (a) Graph of demand �10 drums 1,500
Spring index:   1.2
The   observations   obviously (d)  R   =   .82   is   the 1, 250
do not form a straight line but correlation   coefficient,   and �5,600 �
2
R   =  .68  means 68%  of the Answer:  � (1.2)  1,680 sailboats
do   tend   to   cluster   about   a � 4 � �
straight   line   over   the   range variation   in   sales   can   be
Winter Spring Sum
shown. explained   by   TV
(b) Least­squares appearances. 2004 1,400 1,500 1,
regression: 2005 1,200 1,400 2,
4.25 
2006 1,000 1,600 2,
Number of 2007 900 1,500 1,
Accidents 4,500 6,000 7,
Month (y)
4.28
33 CHAPTER 4 F O R E C A S T I N G

4.29 2009   is   25   years Then  y  =  a  +  bx, where  y  =

beyond   1984.   Therefore,   the number sold, x = price, and
Quarte 2005 2006 2007 2009 quarter numbers are 101
r through 104.

Winter 73 65 89 (2) (3)

Spring 104 82 146 (1) Quarter Forecast
Summer 168 124 205 Quarter Number (77 + .
Fall 74 52 98 43Q
Winter 101 120.43
Spring 102 120.86
Summer 103 121.29
Fall 104 121.72
4.30 Given Y = 36 + 4.3X
(a)      Y = 36 + 4.3(70)
= 337
(b)     Y = 36 + 4.3(80)
= 380
(c)      Y = 36 + 4.3(90)
= 423
4.31 Let x1,  x2 , K ,  x6  be the prices and y1,  y2 , K , y6
be the number sold.
4.33 (a) See the table below. 6
�xi
2,880 - 5(3)(180) 2,880X  -i 2,700
1
  Average price = 3.2583                 (1)
b  6
2 55 -645
55 - 5(3)
�yi
180
  18 Y  i 1   Average number sold = 550 (2)
10 6
a  180 - 3(18)  180 - 54 6126
�xi yi  9,783                 (3)
y  126 + 18 x i 1
6
2
�xi  = 67.1925                 (4)
i1

6
�xi yi - nx y
i 1 (9, 783) - 6(3.25833)(550)
b 6

2 2 67.1925 - 6 (3.25833)2
�x i - nx
i 1
-969.489
  -277.6
3.49222
a  y - bx  1, 454.6
 4.32 (a) x y xy x2
16 330 5,280 256
12 270 3,240 144
18 380 6,840 324
14
CHAPTER 300
4 F O R E C A S4,200
TING 196 34
60 1,280 19,560 920

So at x = 1.80, y = 1,454.6 – the   additional Therefore,   the 1 20 20 0.00

277.6($1.80) = 954.90.  Now value. expected   cost   of 2 21 20 1.00
round to the nearest integer: (c) Some   other the trip is $452.50. 3 28 20.5 7.50
Answer: 955 lattes. quantitative (b) The
4 37 24.25 12.75
5 25 30.63 –5.63
variables   would reimbursement
60 6 29 27.81 1.19
x  15 be   age   of   the request   is   much 7 36 28.41 7.59
4 house,   number   of higher   than 8 22 32.20 –10.20
1,280 bedrooms,   size   of predicted   by   the 9 25 27.11 –2.10
y  320
4 the lot, and size of model.   This 10 28 26.05   1.95
�xy - nx y 19,560 - 4(15)(320) the garage, etc.
360 request   should
b    18
�x 2 - nx 2 920 - 4(15)2 (d) Coefficient
20   of probably   be
questioned   by   the RSFE = 14.05; MAD = 5
a  y - bx  320 - 18(15)  50 determination   =
2 accountant. Tracking = 14.05/5  2.82
(0.63)   =   0.397.
Y  50 + 18 x 4.38 (a) least   squares
This   means   that (c) A number of other
only   about   39.7% variables   should   be equation:  Y  =   –0.158   +
(b) If   the   forecast   is
of   the   variability included, such as: 0.1308X
for   20   guests,   the
in   the   sales   price (b) Y  =  – 0.158   +
bar   sales   forecast 1. the   type   of
of   a   house   is 0.1308(22)   =   2.719
is   50   +   18(20)   = travel (air or car)
explained   by   this million
$410.   Each   guest 2. conference fees,
regression   model (c) coefficient   of
accounts   for   an if any
that   only   includes correlation = r = 0.966
additional   $18   in
square   footage   as 3. costs   of coefficient   of
bar sales.
the   explanatory entertaining customers determination =  r
2

variable. 4. other = 0.934

(b) MSE = 160/5 = 32
(c) MAPE = 13.23%/5 4.36 (a) Given:  Y  =   90   + transportation 4.39
= 2.65% 48.5X1 + 0.4X2 where:  costs—cab, Year X Patients Y X2
limousine,
4.34 Y  =   7.5   +   3.5X1  + Y  expected travel cost  1  36   1
special   tolls,   or
4.5X2 + 2.5X3 X1  number of days on the road  2  33   4
parking  3  40   9
(a) 28 X2  distance traveled, in miles In   addition,   the   correlation  4  41  16
(b) 43 r  0.68 (coefficient of correlation)coefficient   of   0.68   is   not  5  40  25
(c) 58
If: exceptionally   high.   It  6  55  36
4.35 (a)  Y�  =   13,473   + indicates   that   the   model  7  60  49
Number of days on the
37.65(1860) = 83,502 explains   approximately   46%  8  54  64
road    X1  =   5   and  9  58  81
(b) The   predicted distance   of the overall variation in trip
10  61 100
selling   price   is traveled  X2 = 300 cost.   This   correlation 55 478 385
$83,502,   but   this coefficient   would   suggest
then: that   the   model   is   not   a
is   the   average
price for a Table for Problem 4.33
house   of
this   size. Year Transistors
(x) (y) xy x2 126 + 18x Error Error 2 |% Error|
There   are
other   1 140  140  1 144 –4  16 100 (4/140)  =
2.86%
factors
 2 160  320  4 162 –2   4 100 (2/160)  =
besides 1.25%
square  3 190  570  9 180 10 100 100 (10/190) =
footage 5.26%
that   will  4 200  800 16 198  2   4 100 (2/200) =
impact 1.00%
the  5 210 1,050 25 216 –6  36 100 (6/210)  =
selling 2.86%
price of a Totals 1 90 2,80 5 16 13.23
house.   If 5 0 0 5 0 %
x = 3 y = 180
such   a
house   sold   for  Y = 90 + 48.5  5 + particularly good one. Given: Y = a + bX where:
$95,000,   then 0.4  300 = 90 + 242.5 + 120 = 4.37  (a, b)
these other factors 452.5
Perio Demand Forecas
could   be
d t
contributing   to
35 CHAPTER 4 F O R E C A S T I N G

 XY - nXY Year Patients Trend

b
 X 2 - nX 2 X Y Forecast  8  94.8  54  8,987.0

a  Y - bX  9 103.3  58 10,670.9

 1 36 29.8 + 3.28
and X = 55, Y = 478, XY 33.1 10 116.2  61 13,502.4
2 2  2 33 29.8 + 3.28
=   2900,  X   =   385,  Y   =
23892, 36.3
Column Totals 854.0 478 76,129.
 3 40 29.8 + 3.28
X  5.5, Y  47.8,  Then: 9
39.6
 4 41 29.8 + 3.28 Given: Y = a + bX where
2900 - 10  5.5  47.8 2900 - 2629 271
b    3.28 42.9
 XY - nXY
385 - 10  5.52 385 - 302.5 82.5  5 40 29.8 + 3.28 b
a  47.8 - 3.28  5.5  29.76 46.2  X 2 - nX 2
 6 55 29.8 + 3.28 a  Y - bX
and Y = 29.76 + 3.28X. For: 49.4
 7 60 29.8 + 3.28 and  X  =   854,  Y  =   478,
X  11: Y  29.76 + 3.28 � 11  65.8 2
52.7 XY  =   42558.6,  X   =
X  12: Y  29.76 + 3.28 � 12  69.1  8 54 29.8 + 3.28 76129.9,
56.1 2
Therefore: Y   = 23892,   X   = 85.4,   Y
 9 58 29.8 + 3.28 = 47.8. Then:
Year 11  65.8 patients 59.3
Year 12  69.1 patients 10 61 29.8 + 3.28 42558.6 - 10  85.4  47.8 42558.6
62.6 b 
The model “seems” to fit the 76129.9 - 10  85.42 76129.9
data pretty well. One should, 1737.4
  0.543
however, be more precise in 3197.3
judging   the   adequacy   of   the The  MAD  is   3.26—this   is a  47.8 - 0.543  85.4  1.43
model. approximately   7%   of   the
and      Y = 1.43 + 0.543X
Two possible approaches are average   number   of   patients
computation   of   (a)   the and   10%   of   the   minimum For:
correlation coefficient, or (b) number  of  patients.   We  also X  131.2 :  Y  1.43 + 0.543(131.2)  72
the mean absolute deviation. see   absolute   deviations,   for X  90.6 :  Y  1.43 + 0.543(90.6)  50.6
The correlation coefficient: years 5, 6, and 7 in the range  Therefore:
5.6–7.3.   The   comparison   of
n  XY -  X  Y the  MAD  with   the   average Crime rate = 131.2
r  72.7 patients
n  X 2 - (  X ) 2  n  Y 2 - (  Y ) 2  and   minimum   number   of
    patients   and   the Crime   rate   =   90.6
comparatively   large  50.6 patients
10  2900 - 55  478
 deviations  during   the   middle Note   that   rounding
10  385 - 552  10  23892 - 4782  years indicate that the forecast differences   occur   when
  
model   is   not   exceptionally solving with Excel.
29000 - 26290 accurate. It is more useful for 4.41 (a) It appears from the

3850 - 3025  238920 - 228484 predicting general trends than following   graph
the actual number of patients that   the   points   do
2710 2710
   0.924 to be seen in a specific year. scatter   around   a
825  10436 2934.3 straight line.
4.40
r 2  0.853
Crime Patient
The   coefficient   of s
determination   of   0.853   is Year Rate X Y
quite   respectable—indicating
 1  58.3  36
our   original   judgment   of   a
“good” fit was appropriate.  2  61.1  33

 3  73.4  40

 4  75.7  41

 5  81.1  40
(b) Developing   the
 6  89.0  55 regression
relationship, we have:
 7 101.1  60 (Summe Tourists Ridership
 CHAPTER 4 F O R E C A S T I N G 36

r the   data.   Moving   averages

 Y 2 - a  Y - b  XY smooth   out   seasonality.
months) (Millions) (1,000,000s Syx 
) n-2 Exponential   smoothing   can
Year (X) (Y) 71.59 - 0.511  27.1 - 0.159  352.9 forecast   January   next   year,  

 1  7 1.5 12 - 2 but   not   farther.   Because
 2  2 1.0 71.59 - 13.85 - 56.11 seasonality is strong, a naive
  .163
 3  6 1.3 10 model that students create on
 4  4 1.5  .404 (rounded to .407 in POM for Windows software) their own might be best.
 5 14 2.5 (b) One model might be:
 6 15 2.7 (f)  The   correlation Ft+1 = At–11
 7 16 2.4 coefficient and the That   is   forecastnext
 8 12 2.0 coefficient   of
 9 14 2.7 period = actualone year earlier
determination   are to account for 
10 20 4.4 given by:
11 15 3.4 seasonality.   But   this   ignores
12  7 1.7 n  XY - the trend.
X Y
r
Given: Y = a + bX where:  n  X 2 - (  X ) 2   n  YOne very good approach
2 2
- ( Y ) 
  would   be   to   calculate   the
 XY - nXY
b 12  352.9 -increase from each month last
132  27.1
 X 2 - nX 2  year to each month this year,
2
12  1796 - 132  sum 12  71.59 - 27.12 
a  Y - bX      all   12   increases,    and
divide by 12. The forecast for
4234.8 - 3577.2
and  X  =   132,  Y  =   27.1,  next   year   would   equal   the
2
XY  =   352.9,  X   =   1796, 21552 - 17424  859.08 - 734.41
value for the same month this
2
Y   =   71.59,   X   =   11,   Y = 657.6 year plus the average increase
657.6
2.26. Then:   over   the   12  months 0.917   of   last
4128  124.67 64.25  11.166
Then: year.
and r 2  0.840 (c) Using this model, the
352.9 - 12  11  2.26 352.9 - 298.3 54.6
b    0.159 January forecast for next year
1796 - 12  112 1796 - 1452 344 4.42 (a) This   problem
becomes:
a  2.26 - 0.159  11  0.511 gives   students   a
chance to tackle a 148
and Y = 0.511 + 0.159X F25  17 +  17 + 12  29
realistic   problem 12
(c) Given   a   tourist in   business,   i.e., where   148   =   total   monthly
population   of not enough data to increases   from   last   year   to
10,000,000,   the make   a   good this year.
model   predicts   a forecast. As can be The forecasts for each of
ridership of: seen   in   the the months of next year
Y = 0.511 + 0.159  accompanying then become:
10   =   2.101,   or   2,101,000 figure,   the   data
contains   both Jan. 29 July.
persons. Feb. 26 Aug.
seasonal and trend
(d) If   there   are   no Mar. 32 Sep.
factors.
tourists   at   all,   the Apr. 35 Oct.
model   predicts   a May. 42 Nov.
ridership of 0.511, Jun. 50 Dec.
or   511,000 Both history and forecast for
persons.   One the next year are shown in the
would   not   place accompanying figure:
much   confidence
in   this   forecast,
however,   because
the   number   of
tourists   (zero)   is
outside   the   range
of   data   used   to
develop   the
model.
(e) The standard error Averaging   methods   are
of   the   estimate   is not   appropriate   with   trend,
given by: seasonal, or other patterns in
37 CHAPTER 4 F O R E C A S T I N G

standard   error
of the estimate and
the   MAD,   the  0.2
constant   is
better.   However,
other   smoothing
constants   need   to
be examined.

4.43 (a)   and   (b)   See   the

following table:

Actual Smoothed

Week Value Value Forecast

t A(t) Ft ( =
0.2)
1 50 +50.0
2 35 +50.0
3 25 +47.0
4 40 +42.6
5 45 +42.1
6 35 +42.7
7 20 +41.1
8 30 +36.9
9 35 +35.5
10 20 +35.4
11 15 +32.3
12 40 +28.9
13 55 +31.1
14 35 +35.9
15 25 +36.7
16 55 +33.6
17 55 +37.8
18 40 +41.3
19 35 +41.0
20 60 +39.8
21 75 +43.9
22 50 +50.1
23 40 +50.1
24 65 +48.1
25 +51.4

MAD
(c) Students   should
note   how   stable
the   smoothed
values are for    =
0.2.   When
compared to actual
week   25   calls   of
85,   the   smoothing
constant,    =   0.6,
appears   to   do   a
slightly better job.
On the basis of the
 CHAPTER 4 F O R E C A S T I N G 38

4.44  XY - nXY
b
Week Actual Value Smoothed 87Trend Estimate Forecast Forecas  X 2 - nX 2
So: MAD:   10.875
Value 8 t
a  Y - bX
t At Ft ( = 0.3)
39 Tt (  = 0.2) FITt Error
   3.586
 1 50.000 50.00010.875  0.000 50.000   0.000
 2 35.000 50.000  0.000 50.000 –15.000
 3 25.000 45.500 –0.900 44.600 –19.600
 4 40.000 38.720 –2.076 36.644   3.356
 5 45.000 37.651 –1.875 35.776   9.224
 6 35.000 38.543 –1.321 37.222  –2.222
 7 20.000 36.555 –1.455 35.101 –15.101
 8 30.000 30.571 –2.361 28.210   1.790
 9 35.000 28.747 –2.253 26.494   8.506
10 20.000 29.046 –1.743 27.303  –7.303
11 15.000 25.112 –2.181 22.931  –7.931
12 40.000 20.552 –2.657 17.895  22.105
13 55.000 24.526 –1.331 23.196  31.804
14 35.000 32.737  0.578 33.315   1.685
15 25.000 33.820  0.679 34.499  –9.499
16 55.000 31.649  0.109 31.758  23.242
17 55.000 38.731  1.503 40.234  14.766
18 40.000 44.664  2.389 47.053  –7.053
19 35.000 44.937  1.966 46.903 –11.903 Note: To use POM for Windows
20 60.000 43.332  1.252 44.584  15.416 to solve this problem, a period 0,
21 75.000 49.209  2.177 51.386  23.614 which   contains   the   initial   fore
22 50.000 58.470  3.594 62.064 –12.064 cast   and   initial   trend,   must   be
23 40.000 58.445  2.870 61.315 –21.315
added.
24 65.000 54.920  1.591 56.511   8.489
25 59.058  2.100 61.158

4.46 X Y
To   evaluate   the   trend
adjusted   exponential  421  2.90
smoothing   model,   actual
 377  2.93
week   25   calls   are   compared
to   the   forecasted   value.   The  585  3.00
model   appears   to   be
producing   a   forecast  690  3.45
approximately   mid­range
between that given by simple  608  3.66
exponential   smoothing   using
  = 0.2 and    = 0.6. Trend  390  2.88
adjustment does not appear to
give    415  2.15
any significant improvement.
 481  2.53

n  729  3.22
�( At - Ft )
4.45 t 1
Tracking signal   501  1.99
MAD
Month At Ft  613  2.75
May 100 100
 709  3.90
June 80 104
July 110 99
 366  1.60
August 115 101
Septemb 105 104
6885 36.96
er Column totals
October 110 104
Novembe 125 105
r Given: Y = a + bX where:
Decembe 120 109
r
39 CHAPTER 4 F O R E C A S T I N G

and  X  = 6885,  Y  = 36.96, February’s 4.48 (a) 27  7.70 5.497 2.20
2 28 10.10 6.818 3.28
XY  =   20299.5,  X   = forecast   equal   to Quarter Contracts Sales Y 29 15.20 8.787 6.41
3857893, January’s   sales) X
2
Y   =   110.26,   X   =   529.6, with   alpha    0.1. (Continued)
1   153  8
Y  = 2.843, Then: Barbara   wants   to 2   172 10
use   a   3­period 3   197 15
20299.5 - 13  529.6  2.843 20299.5 - 19573.5
moving  
b  4   178  9
3857893 - 13  529.62 average.
3857893 - 3646190 5   185 12
726 6   199 13
  0.0034 Sales Amit Barba
211703 7   205 12
a  2.84 - 0.0034  529.6  1.03 January 400 —
8   226 16
Totals 1,51 95
and Y = 1.03 + 0.0034X February 380 400
March 410 398 5
As   an   indication   of   the Average 189.375    
April 375 399.2 396.67
usefulness   of   this May 405 396.8 388.33 11.875
relationship, we can calculate MAD b  = (18384 – 8    189.375  
the correlation coefficient:
11.875)/(290,413   –   8  
(d) Note that Amit has more 189.375
n  XY -  X  Y
r forecast   observations,  189.375) = 0.1121
 n  X 2 - (  X ) 2   n  Y 2 - (  Y )while Barbara’s moving
2
a  =   11.875   –   0.1121  
   
average   does   not   start 189.375 = –9.3495
13  20299.5 - 6885  36.96 until month 4. Also note Sales (y) = –9.349 + 0.1121
 that the MAD for Amit
13  3857893 - 68852  13  110.26 - 36.962  (Contracts)
  is   an   average
   of   4
(b)
263893.5 - 254469.6 numbers,   while
 Barbara’s is only 2. r  (8 � 18384 - 1515 � 95) ((8 � 290,413 - 15152 )(8 � 1183 - 952 ))
50152609 - 47403225 1433.4 - 1366.0 
Amit’s   MAD   for  0.8963
9423.9 exponential   smoothing
 Sxy  (1183 - (-9.3495 � 95) - (0.112 � 18384 / 6)  1.3408
2749384  67.0 (16.11)   is   lower   than
9423.9 that   of   Barbara’s r 2  .8034
  0.692 moving average (19.17).
1658.13  8.21 4.49 (a)
2 So his forecast seems to
r  0.479 be better. Method  Exponential Smoothing
A   correlation   coefficient   of 0.6 =
Year Deposits Forecast
0.692 is not particularly high.
(Y )
The   coefficient   of
2
determination,  r ,   indicates 1  0.25 0.25
that the model explains only 2  0.24 0.25
47.9%   of   the   overall 3  0.24 0.244
4  0.26 0.241
variation.   Therefore,   while
5  0.25 0.252
the   model   does   provide   an 6  0.30 0.251
estimate   of   GPA,   there   is 7  0.31 0.280
considerable   variation   in 8  0.32 0.298
GPA,   which   is   as   yet 9  0.24 0.311
unexplained. For 10  0.26 0.268
11  0.25 0.263
X  350: Y  1.03 + 0.0034 � 350  2.22 12  0.33 0.255
X  800: Y  1.03 + 0.0034 � 800  3.75 13  0.50 0.300
14  0.95 0.420
Note:   When   solving   this 15  1.70 0.738
problem, care must be taken 16  2.30 1.315
to interpret significant digits.  17  2.80 1.906
4.47 (a) There   is  not  a 18  2.80 2.442
19  2.70 2.656
strong   linear   trend   in   sales
20  3.90 2.682
over time. 21  4.90 3.413
(b,   c) Amit   wants   to 22  5.30 4.305
forecast  by 23  6.20 4.90
exponential 24  4.10 5.680
smoothing  (setting 25  4.50 4.732
26  6.10 4.592
 CHAPTER 4 F O R E C A S T I N G 40

4.49 (a)  (Continued) of   error   and

goodness­of­fit are
Method  Exponential Smoothing
0.6 = really   irrelevant.
Year Deposits Forecast Exponential
(Y ) smoothing
30  18.10 12.6350 provides a forecast
31  24.10 15.9140 only   of   deposits
32  25.60 20.8256 for the next year—
33  30.30 23.69 and thus does not
34  36.00 27.6561 address   the   five­
35  31.10 32.6624
Forecasting Summary Table
36  31.70 31.72
Exponential Linear Regression
37  38.50 31.71 Method used: Smoothing (Trend Analysis) Linear Regression
38  47.90 35.784 Y = –18.968 + Y = –17.636 +
39  49.10 43.0536       1.638  YEAR       13.59364 
40  55.80 46.6814 GSP
41  70.10 52.1526 MAD  3.416   10.587   10.255
42  70.90 62.9210 MSE  34.39  171.817  204.919
43  79.10 67.7084 Standard error using  6.075   13.416   14.651
44  94.00 74.5434  n – 2 in denominator
TOTALS 787.30 Correlation coefficient   0.846    0.813
AVERAGE    17.8932 32 32 25.60 15 1.20  1.70 –1 year   forecast
33 33 30.30 16 1.60  2.30  4 problem.   In   order
Next period forecast = 86.2173 17 1.50  2.80  2
34 34 36.00 to   use   the
35 35 31.10 regression   model
18 1.60  2.80  4
36 36 31.70 based   upon   GSP,
19 1.70  2.70  5
Method  Linear Regression 37 (Trend37
Analysis) 38.50 20 1.90  3.90  8
one   must   first
Year Period (X) Deposits 38 38 47.90 21 1.90  4.90  8 develop   a   model
 1  1 0.25 39 39 49.10 22 2.30  5.30 13 to   forecast   GSP,
 2  2 0.24 40 40 55.80 23 2.50  6.20 16 and   then   use   the
 3  3 0.24 41 41 70.10 24 2.80  4.10 20 forecast of GSP in
 4  4 0.26 42 42 70.90 25 2.90  4.50 21 the   model   to
 5  5 0.25 43 43 79.10 26 3.40  6.10 28 forecast   deposits.
44 44 94.00 27 3.80  7.70 34 This   requires   the
 6  6 0.30
28 4.10 10.10 38 development   of
 7  7 0.31 TOTALS 990.0 787.3
29 4.00 15.20 36
 8  8 0.32 0 0 two  models—one
30 4.00 18.10 36
 9  9 0.24 AVERAGE 22.50 17.893 31 3.90 24.10 35
of   which   (the
10 10 0.26 32 3.80 25.60 34 model   for   GSP)
11 11 0.25 33 3.80 30.30 34 must   be   based
12 12 0.33 34 3.70 36.00 32 solely   on   time   as
Method  Least squares–Simple
35 Regression
4.10 31.10on 38 the   independent
13 13 0.50 36 4.10 31.70 38 variable   (time   is
a b
14 14 0.95 37 4.00 38.50 36 the   only   other
–17.636 13.5936 38 4.50 47.90 43
15 15 1.70 variable   we   are
Coefficients GPS Deposit 39 4.60 49.10 44
16 16 2.30 : s given).
40 4.50 55.80 43
17 17 2.80 Year (X ) (Y ) Forecast (b) One could make a
41 4.60 70.10 44
18 18 2.80 case   for   exclusion
 1 0.40  0.25 –12 42 4.60 70.90 44
19 19 2.70  2 0.40  0.24 –12 43 4.70 79.10 46 of   the   older   data.
20 20 3.90  3 0.50  0.24 –10 44 5.00 94.00 50 Were   we   to
21 21 4.90  4 0.70  0.26 –8 TOTALS exclude   data   from
22 22 5.30  5 0.90  0.25 –5 AVERAGE roughly the first 25
23 23 6.20  6 1.00  0.30 –4 years, the forecasts
24 24 4.10  7 1.40  0.31  1
Given   that   one for   the   later   years
25 25 4.50  8 1.70  0.32  5
 9 1.30  0.24   wishes  to  develop would   likely   be
26 26 6.10 considerably   more
0.036086 a   five­year
27 27 7.70 accurate.   Our
10 1.20  0.26 –1 forecast,   trend
28 28 10.10 argument would be
11 1.10  0.25 –2 analysis   is   the
29 29 15.20 that   a   change   that
12 0.90  0.33 –5 appropriate
30 30 18.10 caused an increase
13 1.20  0.50 –1 choice.   Measures
31 31 24.10 14 1.20  0.95 –1
41 CHAPTER 4 F O R E C A S T I N G

in   the   rate   of 2 DIGITAL CELL  S xy - nx y 378,661 - 36 � 18.5 Analysis for Management,

� 537.9 20390.0
b  5.25
 
 
growth   appears   to PHONE, INC. 2
S x - nx 2
16,206 - (36 � 18.52 ) ed.,   Prentice
9th  3885.0   Hall
have taken place at Objectives: Publishing.
a  y - bx  537.9 - 5.25 � 18.5  440.85
the   end   of   that Cases   =   432.28   +   5.73
 Selection of an appropriate nS xy - Sx S y 2
period.   Exclusion r (time),  r   =   .93,   MAD   =
time   series   forecasting
of   this   data, 2 2 2 2 12.84
[ nS x - ( S x ) ][ nS y - (S y) ]
model based upon a plot of
however,   would
not   change   our
the data. (36)(378,661) - c) Additive seasonal model,
(666)(19,366)

 The   importance   of 2 Cases   =   444.29   +   5.06
choice   of [(36) � (16,206) - (666) ][(36)(10,558,246) 2 - (19,366)2 ]
combining   a   qualitative (time),  r   =   .86,   MAD   =
forecasting   model 13,631,796 - 12,897,756
model   with   a   quantitative  20.02
because   we   still
need   to   forecast model   in   situations   where [(583,416) - (443,556)][380,096,856) - (375,041,956)]
d)   Additive   seasonal   model,
deposits   for   a technological   change   is 737,040 with  
734,040 centered   moving
occurring.   averages.
future   five­year [139,860][5,054,900] 706,978,314,000
period. Cases   =   431.31   +   5.72
1. A   plot   of   the   data 734,040 2
  .873 (time),  r   =   .94,   MAD   =
indicates a linear trend (least 840,820
CASE STUDIES 12.28
squares)   model   might   be 2
appropriate   for   forecasting. r  .76 The two methods that use
1 SOUTHWESTERN Using linear trend you obtain y  440.85 + 5.25 (time) the   average   of   all   data   have
UNIVERSITY: B the following: very   similar   results,   and   the
    r = 0.873 indicating a 
This is the second in a series reasonably good fit two  CMA methods  also look
of integrated case studies that x y quite close. As suggested with
run throughout the text.  1 480      The   student   should this analysis, CMA is typically
 2 436      report the linear trend results, the better technique.
1. One   way   to   address   the
 3 482      but   deflate   the   forecast
case   is   with   separate    16 obtained   based   upon
forecasting   models   for   each
 4 448 VIDEO CASE
 5 458    25 qualitative information about
game.   Clearly,   the  6 489    36 industry   and   technology STUDY
homecoming   game   (week   2)  7 498    49 trends.
and   the   fourth   game   (craft  8 430    64 FORECASTING AT 
Because there is limited HARD ROCK CAFE
festival) are unique attendance  9 444    81
seasonality   in   the   data,   the
situations. 10 496   100 There   is   a   short   video   (8
11 487   121 linear   trend   analysis
2
  above
minutes)   available   from
12 525   144 provides a good r  of .76.
Game Model However, a more precise Prentice   Hall   and   filmed
13 575   169
14 527   196 forecast   can   be   developed specifically for this text that
 1 y = 30,713 + 2,534x
15 540   225 addressing   the   seasonality supplements   this   case.  
 2 y = 37,640 + 2,146x
 3 y = 36,940 + 1,560x 16 502   256 issue,   which   is   done   below.
 4 y = 22,567 + 2,143x 17 508   289 Methods a and c yield  r2  of .
 5 y = 30,440 + 3,146x 18 573   324 85 and .86,  respectively,  and
19 508   361
Total methods b and d, which also
20 498   400
21 485   441
center   the   seasonal
2
(where  y  = attendance and  x 22 526   484 adjustment, yield r  of .93 and
= time) 23 552   529 .94, respectively.
2. Revenue   in   2008   = 24 587   576 2. Four   approaches   to
25 608   625 decomposition of The Digital
(239,000)   ($20/ticket)   =
26 597   676 Cell Phone data can address
$4,780,000 27 612   729 seasonality, as follows:
Revenue   in   2009   = 28 603   784
(250,530)   ($21/ticket)   = 29 628   841 a)   Multiplicative   seasonal
$5,261,130 30 605   900 model,
31 627   961 Cases   =   443.87   +   5.08
3. In   games   2   and   5,   the 32 578
2
1,024 (time),  r   =   .85,   MAD   =
forecast   for   2009   exceeds 33 585 1,089 20.89
stadium   capacity.   With   this 34 581 1,156
appearing to be a continuing 35 632 1,225
b)   Multiplicative   Seasonal
trend, the time has come for a 36 656 1,296 Model,   with   centered
new or expanded stadium. moving   averages  (CMA),
Totals 666 19,366 16,206
which   is   not   covered   in
Average 18.5 537.9 450.2 our text but can be seen in
Render,  Stair,   and
Hanna’s  Quantitative
 CHAPTER 4 F O R E C A S T I N G 42

A   2­minute   version   of   the Totals 36 37  Coefficient   of

video   also   appears   on   the 6 6 correlation = 0.6249
student DVD in the text. Averag 36.6   37.6 INTERNET CASE
Southeast   Airlines—Engine
1. Hard   Rock   uses
e STUDY* Maintenance Cost;
forecasting for (1) sales (guest  Cost = –0.67 + 0.0041
THE NORTH­SOUTH 
counts)   at   cafes,   (2)   retail  Airframe age
AIRLINE
sales,   (3)   banquet   sales,   (4) 15,772 - 10 � 36.6 � 37.6  Coefficient   of
concert   sales,   (5)   evaluating b 2
 0.7996 � .8 determination = 0.4600
15,910 - 10 � 36.6 Northern Airline Data
managers,   and   (6)   menu  Coefficient   of
planning.   They   could   also a  37.6 - 0.7996 � 36.6  8.3363 � 8.3 Airframe Cost
correlation = 0.6782
Year per Aircraft
employ   these   techniques   to Y  8.3363 + 0.7996 X The   following   graphs
forecast:   retail   store   sales   of At $65,000; y  8.3 + .8 (65) 2001 51.80
portray   both   the   actual   data
individual   (SKU)   product   8.3  +  52 = 60.3, or 60,300 2002 54.92
and   the   regression   lines   for
demands; sales of each entrée; guests. 2003 69.70
2004 68.90 airframe   and   engine
sales at each work station, etc. For   the   instructor   who   asks maintenance   costs   for   both
2005 63.72
2. The POS system captures other questions than this one: 2006 84.73 airlines.
2
all the basic sales data needed          r   0.8869 2007 78.74
to   drive   individual   cafe’s Std. error  5.062
scheduling/ordering. It also is
aggregated   at   corporate   HQ. Southeast Airline Data
Each   entrée   sold   is   counted Airframe Cost
as one guest at a Hard Rock Year per Aircraft
Cafe. 2001 13.29
*This case study appears on our
3. The weighting system is 2002 25.15
companion   Web   site,   at
subjective, but is reasonable. 2003 32.18
www.prenhall.
More weight is given to each 2004 31.78
2005 25.34 com/heizer.
of the past 2 years than to 3
2006 32.78
years   ago.   This   system
2007 35.56
actually   protects   managers
from   large   sales   variations
Utilizing   the   software
outside   their   control.   One
package   provided   with   this
could   also   justify   a   50%–
text,   we   can   develop   the
30%–20%   model   or   some
following   regression
other variation.
equations for the variables of
4. Other   predictors   of   cafe interest:
sales could include season of
Northern   Airlines—
year   (weather);   hotel
Airframe Maintenance Cost:
occupancy; spring break from
 Cost = 36.10 + 0.0026
colleges;   beef   prices;
 Airframe age
promotional budget; etc.
 Coefficient   of
5. Y  a + bx determination = 0.7695
 Coefficient   of
Month Advertising Guest Count
X Y correlation = 0.8772

 1 14 21
Northern   Airlines—Engine
 2 17 24 Maintenance Cost:
 3 25 27  Cost = 20.57 + 0.0026

 4 25 32  Airframe age
 5 35 29  Coefficient   of
determination = 0.6124
 6 35 37  Coefficient   of
correlation = 0.7825
 7 45 43
Southeast   Airlines—
 8 50 43 Airframe Maintenance Cost:
 Cost = 4.60 + 0.0032

 9 60 54  Airframe age
 Coefficient   of
10 60 66 determination = 0.3905
43 CHAPTER 4 F O R E C A S T I N G
Note that the two graphs
have been drawn to the same
scale   to   facilitate
comparisons between the two
airlines.
Comparison:
 Northern   Airlines:
There   seem   to   be
modest   correlations
between   maintenance
costs and airframe age
for Northern Airlines.
There   is   certainly
reason   to   conclude,
however, that airframe
age   is   not   the   only
important factor.
 Southeast   Airlines:
The   relationships
between mainte­nance
costs and airframe age
for Southeast Airlines
are   much   less   well
defined.   It   is   even
more   obvious   that
airframe age is not the  The   data   with   which
only   important   factor she   is   currently
—perhaps   not   even working   does   not
the   most   important provide   conclusive
factor. results.
Overall, it would seem that: Concluding Comment:
 Northern   Airlines   has The   question   always   arises,
the   smallest   variance with this case, as to whether
in   mainte­nance   costs the data should be merged for
—indicating   that   its the  two airlines,  resulting  in
day­to­day two   regressions   instead   of
management   four. The solution provided is
of   maintenance   is that   of   the   consultant   who
working pretty well. was hired to analyze the data.
The   airline’s   own   internal
 Maintenance   costs
analysts   also   conducted
seem   to   be   more   a
regressions,   but  did  merge
function   of   airline
the data sets. This shows how
than of airframe age.
statisticians can take different
 The   airframe   and views of the same data.
engine   maintenance
costs   for   Southeast
Airlines   are   not   only
lower, but more nearly
similar  than those  for
Northern   Airlines.
From   the   graphs,   at
least,   they   appear   to
be rising more sharply
with age.
 From   an   overall
perspective,   it   appears
that   Southeast  Airlines
may   perform   more
efficiently   on   sporadic
or   emergency 
repairs,   and   Northern
Airlines   may   place
more   emphasis   on
preventive
maintenance.
Ms.   Young’s   report   should
conclude that:
 There   is   evidence   to
suggest   that
maintenance   costs
could be made to be a
function   of   airframe
age  by   implementing
more   effective
management
practices.
 The   difference
between   maintenance
procedures of the two
airlines   should   be
investigated.