PRODUCTION ENGINEERING 2 (PENG 201)

TUTORIAL 4 – FORECASTING

1. Given the following history, use a three-quarter moving average to forecast the demand
for the third quarter of this year. Note that the 1st quarter is Jan, Feb, and Mar; 2nd
quarter Apr, May, Jun; 3rd quarter Jul, Aug, Sep; and 4th quarter Oct, Nov, Dec.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Last year 100 125 135 175 185 200 150 140 130 200 225 250
This year 125 135 135 190 200 190

Solution
Three quarters ago (Oct, Nov, Dec last year) = 200 + 225 + 250 = 675
Two quarters ago (Jan, Feb, Mar this year) = 125 + 135 + 135 = 395
One quarter ago (Apr, May, Jun this year) = 190 + 200 + 190 = 580
At −1+ A t−2 + A t −3 + … … A t−n
F t=
N
For Jul Aug Sep, using a three-quarter average the forecast would be
= (675 + 395 + 580)/3 = 550
2. Your manager is trying to determine what forecasting method to use. Based upon the
following historical data. Calculate the following forecast and specify what procedure
you would utilize.

Month Actual Demand Month Actual Demand

1 62 7 76
2 65 8 78
3 67 9 78
4 68 10 80
5 71 11 84
6 73 12 85
2.1 Calculate the simple three-month moving average forecast for periods 4-12.

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2.2 Calculate the weighted three month moving average using weights of 0.5, 0.3 and 0.2
for periods 4-12.
2.3 Calculate the single exponential smoothing forecast for periods 2-12 using an initial
forecast ( F 1) of 61 and an ∝ of 0.3.
2.4 Calculate the exponential smoothing forecast with trend component forecast for periods
2-12 using an initial trend forecast (T 1) of 1.8, an initial exponential smoothing forecast (
F 1) of 60. an ∝ of 0.30 and δ of 0.30.
2.5 Calculate the mean absolute deviation (MAD) for the forecasts made by each technique
in periods 4-12. Which forecasting method do you prefer?

Solution
Month 3-mo. Absolute 3-mo Absolute Absolute Absolute
(t) Demand MA deviation WMA deviation Ft deviation Tt Ft FITt deviation
1 62 61.00 1.80 60.00 61.80
2 65 61.30 1.82 61.86 63.68
3 67 62.41 1.94 64.07 66.01
4 68 64.67 3.33 65.40 2.60 63.79 4.21 2.03 66.31 68.33 0.33
5 71 66.67 4.33 67.10 3.90 65.05 5.95 2.00 68.23 70.23 0.77
6 73 68.67 4.33 69.30 3.70 66.84 6.16 2.07 70.46 72.53 0.47
7 76 70.67 5.33 71.40 4.60 68.68 7.32 2.11 72.67 74.78 1.22
8 78 73.33 4.67 74.10 3.90 70.88 7.12 2.22 75.14 77.36 0.64
9 78 75.67 2.33 76.40 1.60 73.02 4.98 2.28 77.55 79.83 1.83
10 80 77.33 2.67 77.60 2.40 74.51 5.49 2.11 79.28 81.39 1.39
11 84 78.67 5.33 79.00 5.00 76.16 7.84 1.99 80.98 82.96 1.04
12 85 80.67 4.33 81.60 3.40 78.51 6.49 2.08 83.27 85.35 0.35

MAD 4.07 3.46 6.17 0.89

Based upon MAD, the exponential smoothing with trend component appears to be the best
method. This should not be a surprise given the apparent upward trend.

3. Harlen Industries has a simple forecasting model. Take the actual demand for the same
month last year and divide that by the number of fractional weeks in that month. This
gives the average weekly demand for that month. This weekly average is used as the
weekly forecast for the same month this year. This technique was used to forecast eight
weeks for this year, which are shown below along with the actual demand that occurred.
The following eight weeks show the forecast based on last year and the demand that
actually occurred.

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 Week Forecast Demand Actual Demand
1 140 137
2 140 133
3 140 150
4 140 160
5 140 180
6 150 170
7 150 185
8 150 205
3.1 Compute the MAD of forecast errors. Round answers to 2 decimal places.
3.2 Using the RSFE, compute the tracking signal. (Round your answers to 2 decimal places.
Negative values should be indicated by a minus sign.)
3.3 Based on your answers to parts (a) and (b), comment on Harlen’s method of forecasting

Solution
Absolute Sum of Absolute
Month Forecast Actual Deviation RSFE deviation deviations MAD TS
1 140 137 -3 -3 3 3 3.00 -1.00
2 140 133 -7 -10 7 10 5.00 -2.00
3 140 150 10 0 10 20 6.67 0.00
4 140 160 20 20 20 40 10.00 2.00
5 140 180 40 60 40 80 16.00 3.75
6 150 170 20 80 20 100 16.67 4.80
7 150 185 35 115 35 135 19.29 5.96
8 150 205 55 170 55 190 23.75 7.16

8
6
4
TS

2
0
-2 1 2 3 4 5 6 7 8

-4
Period

3.1 For month 8, the MAD is 23.75

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3.2 The tracking signal for month 8 is 7.16

3.3 The tracking signal is too large, so the forecast should be considered poor. It is not
effectively dealing with an apparent upward trend in demand.

4. Use regression analysis on deseasonalized demand to forecast next summer’s demand,

given the following historical demand data:

Year Season Actual Demand

Spring 205
Summer 140
2 years ago
Fall 375
Winter 575
Spring 475
Summer 275
Last year
Fall 685
Winter 965

Solution
Average from same Seasonal Deseasonalize t*deseasonalized
t y quarterly period factor d demand t2 demand
1 205 340.0 0.736 278.48 1 278.48
2 140 207.5 0.449 311.63 4 623.25
3 375 530.0 1.147 326.80 9 980.40
4 575 770.0 1.667 344.91 16 1379.63
5 475 0.736 645.27 25 3226.33
6 275 0.449 612.12 36 3672.74
7 685 1.147 596.95 49 4178.66
8 965 1.667 578.84 64 4630.75
Total 36 3695 3695.00 204 18970.24

y = 461.88
t = 4.50
∑ tyd−nt y d
55.78
b= ∑ t 2−nt 2 =
a=
y d −bt = 210.87

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 Forecast
Seasonal (Yd*seasonal
Period (t) Yd factor factor)
9 712.88 0.736 525
10 768.66 0.449 345
11 824.44 1.147 946
12 880.22 1.667 1467

5. Mark Price, the new productions manager for Speakers and Company, needs to find out
which variable most affects the demand for their line of stereo speakers. He is uncertain
whether the unit price of the product or the effects of increased marketing are the main
drivers in sales and wants to use regression analysis to figure out which factor drives
more demand for their particular market. Pertinent information was collected by an
extensive marketing project that lasted over the past 10 years and was reduced to the
data that follow:
Sales/unit
Year Price/unit Advertising (R000)
(thousands)
1 400 280 600
2 700 215 835
3 900 211 1100
4 1300 210 1400
5 1150 215 1200
6 1200 200 1300
7 900 225 900
8 1100 207 1100
9 980 220 700
10 1234 211 900
11 925 227 700
12 800 245 690

5.1 Perform a regression analysis based on these data using Excel.

5.2 Which variable, price or advertising, has a larger effect on sales and how do you
know?
5.3 Predict average yearly speaker sales for Speakers and Company based on the
regression results if the price was R300 per unit and the amount spent on advertising
(in thousands) was R900.

Solution

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5.1 We can use the Regression tool or the LINEST() function within Excel. Answers using
Regression function in Microsoft Excel follow.

Advertisi Fitted
Sales Price ng Values
400 280 600 451.72
700 215 835 977.21
900 211 1100 1090.98
1300 210 1400 1195.40
1150 215 1200 1095.85
1200 200 1300 1231.99
900 225 900 929.25
1100 207 1100 1118.62
980 220 700 898.79
1234 211 900 1025.98
925 227 700 850.42
800 245 690 722.80

2191.33
Constant 74
Price -6.9094
Advertisi
ng 0.3250

ȳ= a+b1 x 1 +b2 x 2 =2191 .3374−6 . 9094 x 1 +. 3250 x 2

Where

a = y intercept, x1 = price, b1 = slope of price

x2 = advertising b2 = slope of advertising

5.2 Price has a larger effect on sales because it slope value is much higher (-6.9094
versus .3250). Price actually has a negative effect since raising price decreases sales.
5.3 Sales = 2191.3374 - 6.9094 (300) + .3250 (900)

Sales = 411.04

FORMULAE

At −1+ A t−2 + A t −3 + … … A t−n

F t=
N

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F t=w1 A t−1 +w 2 At −2+ w3 A t −3 + … … wn A t −n

F t=F t−1 +∝ ( A t−1−F t−1 ) Ft =FIT t−1 +∝ ( A t−1−FIT t−1 )

T t=T t −1 +δ ( Ft −FIT t−1 ) FIT t =Ft +T t

Y =a+bt b=
∑ ty −n t́ . ´y a= ý−b t́
∑ t 2−n ṫ 2
n n

√
2
∑ ( y i−Y i ) ∑ |At −Ft| RSFE
n
| At −Ft| TS=
S yt = i=1
n−2
MAD= i=1
n
MAP=
100
∑
n i=1 [ At ] MAD

where RSFE is running ∑ of forecasting errors ¿

Decomposition Using Least Squares Regression

Step 1: Determine the seasonal factor – Calculate the averages for the periods

Step 2: Deseasonalize the original data

Step 3: Develop a least squares regression line for the deseasonalized data

i.e. Y = a + bt

Step 4: Project the regression line through the period to be forecast - Use slope and intercept
given

Step 5: Create the final forecast by adjusting the regression line by the seasonal factor