Forecasting

Exponential Smoothing
 Exponential Smoothing
• It is a type of MA technique which Month Actual Forecast (α=0.10) Forecast
introduces smoothing constant (α) Parts Prod (α=0.50)

• Smoothing constant can be changed to January 180 175 175

give more weight to recent data when February 168 176 =175+0.1x(180-175) 178
the value is high or more weight to the
past data when it is low. March 159 175 173

• It however requires experience and April 175 173 166

experimenting with the data May 190 173 170
• New Forecast = last forecast + α(last June 205 175 180
period actual demand – last period
forecast) July 180 178 193

• Ft = Ft-1 + α (At-1 – Ft-1)

Exponential Smoothing

Month Actual Parts Prod Forecast Forecast Forecast Forecast

(α=0.10) Error(α=0.10) (α=0.50) Error(α=0.50)

January 180 175 5 175 5

February 168 176 =175+0.1x(180-175) 8 178 10

March 159 175 16 173 14

April 175 173 2 166 9

May 190 173 17 170 20

June 205 175 30 180 25

July 180 178 2 193 13

Sum of absolute forecast errors 80 96

MAD = ∑│forecast errors│/n 11.428 13.714

 Trend Projections
Trend projection fits a trend line or curve to a series of historical data points and then projects the line or curve to
predict for future or inter-extrapolate between the values. Two types of methods are used for trend projection

• Least square Method: For a given data of discrete values, it fits a single line that represents the general trend of
the data.

• Interpolation: For a given data of discrete values, it fits a curve or a series of curves (polynomial of degree 2 or
more) that pass directly through each of the points.

Scatter plot LSM – Trend line plot Interpolation – Curve fitting

 Trend Projections
We will discuss a statistical method called ‘The Least Square
Method’ which finds a straight line that minimizes the sum of
vertical differences from the line to each of the data point

Equation of straight line is Ŷ = a + bX;

• b = slope of straight line
• a = y-intercept
• X = value of independent variable
• Ŷ = value of dependent variable
• n= number of data points
∑𝑋𝑌 − 𝑛 𝑋ത 𝑌ത
𝑎 = 𝑌ത − 𝑏 𝑋ത 𝑏=
∑𝑋 2 − 𝑛𝑋ത 2
 Trend Projections

Year Time Period Generator Demand

GE company manufactures and overhauls on-board 2001 1 74

generators of various aircraft types. Overhauling
2002 2 79
demand of generators for F-16 A from different
customers is shown in table below from 2001 to 2007. 2003 3 80
Make a forecast for period 2008 to 2010 to make a
production plan to meet expected demand of the 2004 4 90
generators for F-16 A aircraft for next three years 2005 5 105
using LSM.
2006 6 142

2007 7 122
 Trend Projections
Time Generator
Year X2 XY
Period Demand

2001 1 74 1 74

2002 2 79 4 158

2003 3 80 9 240

2004 90 16 360

2005 5 105 25 525

2006 6 142 36 852

Years 2007 7 122 49 854
∑𝑋 28 ∑𝑌 692
𝑋ത = = =4 𝑌ത = = = 98.86 ∑X= 28 ∑Y = 692 ∑X2 = 140 ∑XY = 3063
𝑛 7 𝑛 7
∑𝑋𝑌 −𝑛 𝑋ത 𝑌ത (3063 – (7∗4∗98.86)) 295
𝑏= = = 28 = 10.54 Ŷ (2008) = 56.70 + 10.54 x 8 = 141.02 = 142
∑𝑋 2 −𝑛𝑋ത 2 (140−(7∗4∗4)) Ŷ = a + bX Ŷ (2009) = 56.70 + 10.54 x 9 = 151.56 = 152
Ŷ = 56.70 + 10.54 X Ŷ (2010) = 56.70 + 10.54 x 10 = 162.1 = 162
𝑎 = 𝑌ത − 𝑏 𝑋ത = 98.86 − 10.54 4 = 56.70
Causal Forecasting Methods
 Regression Analysis
Causal forecasting models considers interaction between the variables; independent variables are related to variable to be
predicted (dependent variable)
• Regression analysis considers that causal variation in independent variable that effect the dependent variable
• This approach is more powerful than time series methods that uses only historical values of the forecasted variable
• However, in Regression method we need to know the values of independent variable as well to predict the
dependable variable
• The method follows LSM and the equation is Ŷ = a + bX; where
• b = slope of straight line
• a = y-intercept ∑𝑋𝑌 − 𝑛 𝑋ത 𝑌ത
𝑏= 𝑎 = 𝑌ത − 𝑏 𝑋ത
• X = value of independent variable ∑𝑋 2 − 𝑛𝑋ത 2
• Ŷ = value of dependent variable
• n= number of data points
 Forecasting - Regression Analysis
GE company manufactures and overhauls on-board generators of various aircraft types. Demand of
new generators for F-16 A during 2001 to 2006 received from different customers is shown in table
below. Make a forecast for period 2007 to make a production plan to meet the expected demand of new
generators for F-16 A aircraft.

Year Number of Customers Generator Demand X2 XY

2001 1 2 1 2
2002 3 3 9 9
2003 4 2.5 16 10
2004 2 2 4 4
2005 1 2 1 2
2006 7 3.5 49 24.5
∑X= 18 ∑Y = 15 ∑X2 = 80 ∑XY = 51.5
 Forecasting - Regression Analysis
Year Number Generator X2 XY
of demand from
Customers each customer GE company manufactures aircraft generators for
2001 1 2 1 2 various aircraft types. Demand of new generators for F-
16 A during 2001 to 2006 received from different
2002 3 3 9 9
customers is shown in table below. Make a forecast for
2003 4 2.5 16 10 period 2007 to make a production plan to meet the
expected demand of new generators for F-16 A aircraft.
2004 2 2 4 4

2005 1 2 1 2
∑𝑋 18
2006 7 3.5 49 24.5 𝑋ത = = =3
𝑛 6
∑X= 18 ∑Y = 15 ∑X2 = 80 ∑XY = 51.5 ∑𝑌 15
𝑌ത = 𝑛 = 6 =2.5
Ŷ = a + bX = 1.75 + 0.25 X
∑𝑋𝑌 −𝑛 𝑋ത 𝑌ത (51.5 – (6∗3∗2.5))
𝑏= ∑𝑋 2 −𝑛𝑋ത 2
= (80−(6∗3∗3))
= 0.25
Lets say that req of new generators is expected from
6 customers in 2007
Ŷ (2007) = 1.75 + 0.25 x 6 = 3.25 generators/customer 𝑎 = 𝑌ത − 𝑏 𝑋ത = 2.5 − 0.25 3 =1.75
 Standard Error of Estimate
• Accuracy of regression estimates is measured by standard error of estimates, also called as SD of Regression

∑𝑌 2 −𝑎∑𝑌 −𝑏∑𝑋𝑌
• 𝑆𝑌,𝑋 =
𝑛−2

Year # of Generator Forecas Erro Abs Squar

• MAD = ∑│forecast errors│/n = 1/6 = 0.166667 Customer Demand t r Error e
s(X) from each (Y) Error
• MSE = ∑│Square forecast errors│/n = 0.375/6 = 0.0625 2001 1 2 2 0 0 0
2002 3 3 2.5 0.5 0.5 0.25
෠ 2
∑ 𝑌−𝑌)
• SEE = 𝑆𝑌,𝑋 = = (0.375/4)1/2 = 0.306186 2003 4 2.5 2.75 -0.25 0.25 0.0625
𝑛−2
2004 2 2 2.25 -0.25 0.25 0.0625
2005 1 2 2 0 0 0
2006 7 3.5 3.5 0 0 0
Total 0 1 0.375
Forecasting - Regression Analysis
(Correlation Coefficient)
• Regression equation expresses nature of relationship between two
variables.
• The relationship between two variables is determined by
computing coefficient of correlation, a measure of strength of linear
relationship between the two variables
(6𝑥51.5 −18 𝑥15) Year Number of Generator X2 Y2 XY
• 𝑟= Customers demand per
(6𝑥80−182 )(6𝑥39.5−152 ) (X) customer
(309−270).
• 𝑟= 0 5 = 0.901
2001 1 2 1 4 2
156𝑥12 2002 3 3 9 9 9

2003 4 2.5 16 6.25 10

r can be any number between
+1 & -1. 2004 2 2 4 4 4

2005 1 2 1 4 2
(𝒏∑𝑿𝒀 − ∑𝑿 ∑𝒀 2006 7 3.5 49 12.25 24.5
𝒓=
[𝒏 ∑𝑿𝟐 − (∑𝑿)𝟐 ] [𝒏 ∑𝒀𝟐 − ∑𝒀 𝟐 ∑X= 18 ∑Y = 15 ∑X2 = ∑Y2 = 80 ∑XY = 51.5
80
Forecasting - Regression Analysis
(Correlation Coefficient)
(6𝑥51.5 −18 𝑥15) (𝒏∑𝑿𝒀 − ∑𝑿 ∑𝒀
𝑟= = 0.901 𝒓=
(6𝑥80−182 )(6𝑥39.5−152 ) [𝒏 ∑𝑿𝟐 − (∑𝑿)𝟐 ] [𝒏 ∑𝒀𝟐 − ∑𝒀 𝟐

• r can be any number between +1 and -

1.
• In our case r =0.901 shows high
correlation and confirms closeness of
relation ship between the two
variables.
• Another measure called coefficient of
determination exists which is square
of coefficient of correlation (r2)
• r2 = 0.81, indicating that 81% of total
variation is covered by the regression
expression
Forecasting – Multiple Regression
Analysis

If there are more than one independent variables that have effect on
the dependable variable then, the Multiple Regression analysis is
used
For a case of two independent variable, the equation is given as;
Ŷ = a + b1X1 +b2X2
 Monitoring & Controlling Forecasts
• Forecast is monitored and controlled
by defining upper and lower control
limits which defines the acceptable
range of values
• acceptable range of values is
expressed in-terms of MAD (which
may be expressed in terms of SD)
• One MAD is approximately 0.8
times SD