Lecture 14

Demand Forecasting (Part II)

 1
 Forecasting Methods
Qualitative methods
use management judgment, expertise, and opinion to
predict future demand
Time series methods
statistical techniques that use historical demand data
to predict future demand
Regression methods
attempt to develop a mathematical associate or causal
relationship between demand and one or more factors
 Time Series Methods
 A time series is a collection of observations taken at
successive points in time spaced at uniform time
intervals (e.g., daily, weekly, monthly, yearly).
 Assume that historical demand behavior will repeat in
the future;
 Relate the forecast to only one factor: time;
 Time series methods include:
naive forecast
moving average: simple moving average and
weighted moving average
exponential smoothing
linear trend line
 The most popular methods for short-range forecasting
among service and manufacturing companies.
 Linear Trend Line
 Linear trend line is a forecasting method in which a linear
relationship is developed between demand and time.
 In the formula below, “a” and “b” can be calculated by
hand or using Excel functions intercept and slope,
respectively.
Linear Trend Line: Example

x (period) y (demand)
1 37
2 40
3 41
4 37
5 45
6 50
7 43
8 47
9 56
10 52
11 55
12 54

 12-5
 Linear trend line: y = 35.2 + 1.72x
Forecast for period 13: y = 35.2 + 1.72(13) = 57.56 units

70 –

60 – Actual

50 –
Demand

40 –
Linear trend line
30 –

20 –

10 – | | | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11 12 13
Period

 12-6
 Seasonal Adjustments
 A seasonal pattern is a repetitive increase and decrease in demand.
Many demand items exhibit seasonal behaviour.
 Seasonal patterns can also occur on a yearly, monthly, weekly, or even
daily basis.
 There are several methods for reflecting seasonal patterns in a time
series forecast. We will use one of the simpler methods using a
seasonal factor.
 Assume a season is a “quarter”. The seasonal factor means the
portion of total annual demand assigned to each season.
 Forecasting Demand with
Seasonal Adjustments
 Step #1: Compute seasonal adjustment factors based on
historical demand data.
 Step #2: Forecast future demand for a particular year.
 Step #3: Forecast future demands for that year’s four
seasons making use of the seasonal adjustment factors.

 12-8
Example: Wishbone Farms grows turkeys to sell to a meat-processing
company throughout the year. However, its peak season is obviously during
the fourth quarter of the year, from October to December. Wishbone Farms
has experienced the demand for turkeys for the past three years shown in
the following table. Forecast the quarterly demand for 2015.

Demand for Turkeys at Wishbone Farms

Year Demand (1000s) per Quarter
1 2 3 4
2012 12.6 8.6 6.3 17.5
2013 14.1 10.3 7.5 18.2
2014 15.3 10.6 8.1 19.6
 Forecast Accuracy
Forecast error (et = Dt – Ft) for period t
et > 0  under-forecast; et < 0  over-forecast.
A large degree of error may indicate that either the
forecasting technique is the wrong one, or its parameters
need to be adjusted.
Cumulative error ()
Average error or bias ()

Where:
t = period number
Dt = demand in period t
Ft = forecast for period t
n = total number of periods
 Forecast Accuracy
MAD: Mean Absolute Deviation;
MAD can be used to compare the accuracy of several
different forecasting techniques for the same demand.
MAPD: Mean Absolute Percent Deviation;
MSE: Mean Squared Error;

Where:
t = period number
Dt = demand in period t
Ft = forecast for period t
n = total number of periods
 = absolute value
Example
 Example
Forecast Ft Error (et)
Period Dt (αi = 0.30) =(Dt − Fi) Error2 |Dt − Ft |
1 37 37.00 — — —
2 40 37.00 3.00 9.00 3.00
3 41 37.90 3.10 9.61 3.10
4 37 38.83 −1.83 3.35 1.83
5 45 38.28 6.72 45.16 6.72
6 50 40.29 9.69 93.90 9.69
7 43 43.20 −0.20 0.04 0.20
8 47 43.14 3.86 14.90 3.86
9 56 44.30 11.70 136.89 11.70
10 52 47.81 4.19 17.56 4.19
11 55 49.06 5.94 35.28 5.94
12 54 50.84 3.15 9.92 3.15
557 49.32 375.61 53.38
 Regression Methods for Forecasting

Simple Linear Regression for Forecasting

mathematical technique that relates demand to a single
independent variable in the form of a linear equation;

Y = a + b * X

 12-14
 Simple Linear Regression Example
 A university's athletic department wants to develop its budget for the coming
year using a forecast for football attendance. Football attendance accounts for
the largest portion of its revenues, and the athletic director believes attendance
is directly related to the number of wins by the team. The business manager has
accumulated total annual average attendance figures for the past eight years.
 Given the number of returning starters and the schedule, the athletic director
believes the team will win seven games next year. Develop a simple regression
equation for this data to forecast attendance for this level of success.
Wins Attendance Wins Attendance Wins Attendance
4 36,300 8 53,000 5 39,000
6 40,100 6 44,000 7 47,500
6 41,200 7 45,600
Correlation and Coefficient of Determination
 Correlation, r
 A measure of the strength and direction of the
relationship between independent and dependent
variables
 Varies between -1.00 and +1.00
 Excel function: CORREL
 Coefficient of determination, r2
 Percentage of variation in dependent variable
resulting from changes in the independent variable
 Varies between 0.00 and +1.00

 12-17
Multiple Linear Regression for Forecasting

 12-18
 Multiple Linear Regression ： Example
 We will expand our university athletic department example for forecasting
attendance at football games that we used to demonstrate simple linear regression.
 Instead of attempting to predict attendance based on only variable (wins), we will
include a second variable for advertising and promotional expenditures as follows:

 The multiple linear regression line can be confirmed to be: