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Demand Forecasting

Demand Forecasting
Forecasting is the process of estimating
future demand in terms of the quantity,
timing, quality and location for desired
products and services

Types of Forecasts
Long Term (2-10 years)
Intermediate Term (1-24 months)
Short Term (1-5 weeks)

Long Term Forecast

Time Horizon : 2 - 10 years


Types of Products/services to offer
Types & Sizes of Markets to serve
Processes & Technologies to employ
Plant location & size

Intermediate Term Forecast

Time Horizon : 1 - 24 months


Size of Work Force to employ
Kinds & amounts of inventories to maintain
Amount of desired subcontracting when
needed
Amount of desired overtime

Short Term Forecast


Time Horizon : 1 - 5 week
Assignment of orders to special facilities
and personnel
Dispatching to meet delivery times

The Forecasting System

Forecasting Outputs
Forecasting Inputs
Constraints
Decisions
Performance Criteria

Forecasting System
Constraints

Decisions

Data, Time, Experience,


Funds

Selection of Data & Method

Inputs

Forecasting Methods

Internal
Data:Historical,
Subjective, Survey

Predictive
Causal
Time Series
Routine Short Term

Environmental
Data: Social,
Economic,
Political,
Technological

Outputs
Estimates of
Long,Medium &
Short Term
Demand
Forecast Error

Performance Criteria
Accuracy, Stability,
Responsiveness, Objective,
Preparation Time

Forecasting : Outputs
Forecast of Expected Demand and not
future sales. Demand relates to orders
received, sales refer to shipments made.
Output expressed in appropriate form marketing, production, finance.
Translate demand for output units into
requirements for various production inputs.

Forecasting System : Inputs


Data from Internal and/or external sources.
Historical Data in the form of a time series;
Expert opinions of an organizations
personnel; Results of special surveys
External sources : industry experts, private
consulting firms and government agencies.
Internal for short/medium term, external for
long term.

Forecasting System : Constraints


Time available to prepare a forecast
Lack of relevant data from internal &
external sources.
Quality of available data
Expertise within the organization
Available computing facilities

Forecasting System : Decisions


Decision with respect to data and method
Data may be required in a particular form,
or may require adjustment or aggregation.
For a long history of demand, care has to be
exercised for how far back to go
Choice of method to prepare forecast will
depend on data available, time needed and
expertise that can be secured.

Forecasting System :
Performance Criteria
Accuracy of the forecast : Idle resources or
shortages
Time required to prepare a forecast
Benefit to cost ratio

Forecasting Methods
Predictive or Subjective (Estimates Survey
& Delphi Method)
Causal (Regression Analysis, Econometric
Models & Input Output Models)
Time Series (Trend, Seasonal, Cyclical,
Random)
Routine Short Term Forecasting (Moving
Averages and Exponential Smoothing)

Routine Short Term Forecasting


Short Term forecasts are related to specific
product & services. It relies on historical data. The
method should be programmed on a computer for
frequent updates and forecasts for scheduling &
inventory control
Simple & Weighted Moving Averages
Exponential Smoothing
Measurement & Control of Forecast Errors

Simple & Weighted Moving


Averages
Next Periods demand is a simple moving
average. Equal or different weights to the
periods can be given.
Fluctuations are smoothened with more
number of periods in the moving average
(3, 5 or 7)
Good when the demand is changing slowly.
Can only forecast for one period ahead

Moving Averages
Week
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Total Absolute
Deviation
Mean Absolute
Deviation

Actual Forecast Absolute Forecast Absolute Forecast Absolute


Demand N = 3 wk Deviation N = 5 wk Deviation N = 7 wk Deviation
100.0
125.0
90.0
110.0
105.0
130.0
85.0
102.0
106.7
4.7
104.0
2.0
106.4
4.4
110.0
105.7
4.3
106.4
3.6
106.7
3.3
90.0
99.0
9.0
106.4
16.4
104.6
14.6
105.0
100.7
4.3
103.4
1.6
104.6
0.4
95.0
101.7
6.7
98.4
3.4
103.9
8.9
115.0
96.7
18.3
100.4
14.6
102.4
12.6
120.0
105.0
15.0
103.0
17.0
100.3
19.7
80.0
110.0
30.0
105.0
25.0
105.3
25.3
95.0
105.0
10.0
103.0
8.0
102.1
7.1
100.0
98.3
1.7
101.0
1.0
100.0
0.0
104.0

92.6

96.3

10.4

9.3
Lowest

9.6

Week
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Total Absolute
Deviation
Mean Absolute
Deviation

Weighted Moving Averages


Equal Weights
Weights 0.2,0.3,0.5 Weights 0.5,0.3.0.2
Actual Forecast Absolute Forecast Absolute Forecast Absolute
Demand N = 3 wk Deviation N = 3 wk Deviation N = 3 wk Deviation
100.0
125.0
90.0
110.0
105.0
5.0
102.5
7.5
105.5
4.5
105.0
108.3
3.3
107.0
2.0
111.5
6.5
130.0
101.7
28.3
103.5
26.5
99.0
31.0
85.0
115.0
30.0
118.5
33.5
112.5
27.5
102.0
106.7
4.7
102.5
0.5
108.5
6.5
110.0
105.7
4.3
102.5
7.5
110.9
0.9
90.0
99.0
9.0
102.6
12.6
95.1
5.1
105.0
100.7
4.3
98.4
6.6
102.0
3.0
95.0
101.7
6.7
101.5
6.5
103.0
8.0
115.0
96.7
18.3
97.0
18.0
95.5
19.5
120.0
105.0
15.0
107.0
13.0
104.0
16.0
80.0
110.0
30.0
113.5
33.5
106.0
26.0
95.0
105.0
10.0
99.0
4.0
109.5
14.5
100.0
98.3
1.7
95.5
4.5
103.0
3.0
104.0

106.7

102.5

6.9

7.1

6.8
Lowest

Exponential Smoothing
Exponential smoothing takes the forecast of
the prior period and adds an adjustment to
obtain the forecast of the current period
The adjustment is a proportion of the
forecast error (actual minus estimate)
Forecastt= Forecastt-1 + (Actualt-1 - Forecastt-1)

is a constant with value 0 to 1. Values of a are


0.1, 0.2, 0.3, or 0.5

Exponential Smoothing
Week
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
Total Absolute
Deviation
Mean Absolute
Deviation

Actual Forecast Absolute Forecast Absolute Forecast Absolute


Demand a = 0.1 Deviation a = 0.2 Deviation a = 0.3 Deviation
100.0
125.0
90.0
110.0
105.0
130.0
85.0
85.0
85.0
85.0
102.0
85.0
17.0
85.0
17.0
85.0
17.0
110.0
86.7
23.3
88.4
21.6
90.1
19.9
90.0
89.0
1.0
92.7
2.7
96.1
6.1
105.0
89.1
15.9
92.2
12.8
94.2
10.8
95.0
90.7
4.3
94.7
0.3
97.5
2.5
115.0
91.1
23.9
94.8
20.2
96.7
18.3
120.0
93.5
26.5
98.8
21.2
102.2
17.8
80.0
96.2
16.2
103.1
23.1
107.5
27.5
95.0
94.6
0.4
98.5
3.5
99.3
4.3
100.0
94.6
5.4
97.8
2.2
98.0
2.0
133.8

124.5

126.1

13.4

12.5
Lowest

12.6

Causal Forecasting Methods


Identify one or more variables which influence
demand. Select the form of relationships. Validate
the forecasting model to satisfy common sense and
statistical tests

Regression analysis models - Two variable,


multiple variables
Econometric Models

Regression Analysis Models


Demand is dependent variable, causative
factors are independent variables
Coefficient of Determination indicates the
proportion of variation in demand explained
by independent variable.

Regression Method
Regression Method can be used for Demand
Forecasting.
Historical Yearly Data can be used to
forecast for future years.
Make a Scatter Plot and calculate
Correlation Coefficient.
If Correlation Coefficient is +/- 0.7 or more,
linear regression (Y = a + bX) can be used,
where X is Year and Y is Demand.

Two Variable Regression Least Square method

Causal Relationship between Demand Y


and Causative Factor X (X Price, Income)
Y = a + bX, Y= demand, X=causative factor
Method of Least Squares
Y = Na + bX
. (1)
- Sum
XY = a X + bX2 . (2)
Values of a & b can be derived by solving
above 2 simultaneous equations
a = (X2 Y XXY)/(nX2 (X)2)
b = (n XY XY)/(n X2 (X)2 )

Y = a + bX
Y = Na + b X

Summing up .Eq 1

Y = a + bX
XY = aX + bX2
Multiplying by X
XY = aX + b X2 Summing Up Eq 2
a = (Y - b X )/N
XY = (Y - b X ) X/N + b X2
= X Y/N - b (X)2/N + b X2
NXY = X Y - b (X)2 + N b X2
N b X2 - b (X)2 = NXY - X Y
b = (NXY- X Y)/(N X2 (X)2)
Similarly derive for a
a = (X2 Y XXY)/(NX2 (X)2)

Simple Linear Regression

Year
1
2
3
4
5
6
7
8
9
10
Total

Time
Annual
Period
Sales
X
Y
1
1000
2
1300
3
1800
4
2000
5
2000
6
2000
7
2200
8
2600
9
2900
10
3200
55

11
12

21000

X2
1
4
9
16
25
36
49
64
81
100

XY
1000
2600
5400
8000
10000
12000
15400
20800
26100
32000

385

133300

Year
1
2
3
4
5
6
7
8
9
10

Time
Period
X
-5
-4
-3
-2
-1
1
2
3
4
5
0

Annual
Sales
Y
1000
1300
1800
2000
2000
2000
2200
2600
2900
3200

X2
25
16
9
4
1
1
4
9
16
25

XY
-5000
-5200
-5400
-4000
-2000
2000
4400
7800
11600
16000

21000

110

20200

Y = a + bX
Sum Y = Na + bSumX
Sum XY = aSumX + bSumX 2

Y = a + bX
Sum Y = Na + bSumX
Sum XY = aSumX + bSumX 2

21000 = 10a + 55b


133300 = 55a + 385b

21000 = 10a + 0
20200 = 0 + 110b

a = 913.32, b = 215.76

a = 2100, b = 183.64

Y = 913.32 + 215.76X

Y = 2100 + 183.64X

11
12

3286.68
3502.44

11
12

6
7

3201.84
3385.48

Coefficient of Determination
Exam Score is dependent on Study Hours
Study Hours (X) vs Exam Score (Y). More
the study hours, higher is the exam score.
Analyze Available Data. Calculate
Coefficient of Determination (r2)and
Correlation Coefficient (r)
Coefficient of Determination gives the % of
explained Variations

SrNo
1
2
3
4
5
6
7
8
9
10

Study Exam
Student Hours Score
X
Y
1
2
Tom
1
53
Mary
5
74
Sarah
7
59
Oscar
8
43
Cullyn
10
56
Jaime
11
84
Theresa
14
96
Knut
15
69
Jim
15
84
Courtney 19
83
Sum
105
Average 10.5
Observns 10

701
70.1

Y' = a + bX
Y' = 49.477+1.964X

SSE
(Y-Y' )2

SSR
SST
2
(Y'-AVG(Y) ) (Y - Avg(Y))2

51.44
59.30
63.23
65.19
69.12
71.08
76.97
78.94
78.94
86.79

2.43
216.16
17.86
492.39
172.08
166.87
361.98
98.77
25.62
14.40

348.15
116.69
47.26
24.11
0.96
0.96
47.26
78.12
78.12
278.71

292.41
15.21
123.21
734.41
198.81
193.21
670.81
1.21
193.21
166.41

701

1568.56

1020.34

2588.90

Variations
Explained
39.41%

Coefficient of
Determination
= (Corelation Coeff)2

= 1- (1568.56/2588.90)
= (0.62779)2

0.3941
0.3941

Standard Error

= 1568.56/(10-2)

14.0025

Study Hours VS Exam Score


120

100
y = 1.9641x + 49.477
R2 = 0.3941

Exam Score

80

Series1

60

Linear (Series1)

40

20

0
0

10
Study Hours

12

14

16

18

20

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.627790986
R Square
0.394121523
Adjusted R Square 0.318386713
Standard Error
14.00249438
Observations
10
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

1
8
9

SS
MS
F
Significance F
1020.34121 1020.34121 5.203967954 0.051972204
1568.55879 196.0698488
2588.9

Coefficients Standard Error t Stat


P-value
Lower 95% Upper 95% Lower 95.0% Upper 95.0%
49.47712665 10.06646125 4.915046652 0.001171307 26.26382541 72.6904279 26.26382541 72.6904279
1.964083176 0.86097902 2.281220716 0.051972204 -0.021338002 3.949504354 -0.021338002 3.949504354

Orders Orders
SrNo
X
1
1 1
1068
2 2
1026
3 3
767
4 4
885
5 5
1156
6 6
1146
7 7
892
8 8
938
9 9
769
10 10
677
11 11 1174
12 12 1009

Ship
Costs
Y
2
4489
5611
3290
4113
4883
5425
4414
5506
3346
3673
6542
5088

Sum
11507 56380
Average 958.92 4698
Observns 12

Avg(X) Avg(Y) X -Avg(x)


3
4
5
958.92 4698.3 109.0833
958.92 4698.3 67.08333
958.92 4698.3 -191.917
958.92 4698.3 -73.9167
958.92 4698.3 197.0833
958.92 4698.3 187.0833
958.92 4698.3 -66.9167
958.92 4698.3 -20.9167
958.92 4698.3 -189.917
958.92 4698.3 -281.917
958.92 4698.3 215.0833
958.92 4698.3 50.08333

Y - Avg(Y) (X -Avg(x))(Y-AVG(Y))
6
5x6
-209.3333333 -22834.77778
912.6666667
61224.72222
-1408.333333
270282.6389
-585.3333333
43265.88889
184.6666667
36394.72222
726.6666667
135947.2222
-284.3333333
19026.63889
807.6666667
-16893.69444
-1352.333333
256830.6389
-1025.333333
289058.5556
1843.666667
396541.9722
389.6666667
19515.80556

4.55E-13 3.63798E-12

1488360.333
SQRT

Y' = a + bX

SSE
2
(Y-Y' )

43820.4444
832960.444
1983402.78
342615.111
34101.7778
528044.444
80845.4444
652325.444
1828805.44
1051308.44
3399106.78
151840.111

5236.35
5029.20
3751.77
4333.77
5670.38
5621.06
4368.29
4595.17
3761.64
3307.88
5759.16
4945.35

558530.42
338492.94
213232.59
48737.23
619964.60
38438.26
2089.39
829612.83
172752.82
133314.47
612843.09
20348.47

289460.78
109471.78
895979.98
132910.00
944871.44
851418.58
108928.50
10642.85
877402.93
1933367.56
1125346.95
61018.20

301766.917 10929176.7
549.33 3305.93

56380

3588357.12

7340819.55 10929176.67

11899.1736
4500.17361
36832.0069
5463.67361
38841.8403
35000.1736
4477.84028
437.506944
36068.3403
79477.0069
46260.8403
2508.34028

(X -Avg(X)) (Y -Avg(Y))

Correlation
Coefficient

0.8196

Y' = a + bX
b (Slope)
a (intercept)

4.9322
-31.1895

SSR
SST
2
2
(Y'-AVG(Y) ) (Y - Avg(Y))
43820.44
832960.44
1983402.78
342615.11
34101.78
528044.44
80845.44
652325.44
1828805.44
1051308.44
3399106.78
151840.11

Coefficient of
Determination
= (Corelation Coeff)2

Variations
0.6717 Explained
0.6717
67.17%

Standard Error

599.0290

Multiple Variable Regression


Demand (Y) is dependent on 2 or more
independent variables (Price X1, Income
X2)
No relation between Price (X1) and Income
(X2)

Inter Fuel Substitution


Dependent Variable
Demand of Naptha (Y)
Y = -9.3X1 + 30.3
Y = -4X1 -0.8X2 + 15.5
Y = -3.95X1 -0.4X2 + 1X3
+1.56
Y = -3.9X1 -0.35X2 + 0.98X3
+ 0.21X4 + 1.2
Secondary Data used

Independent Variables
Natural Gas Sale (X1)
Naptha Price (X2)
Furnace Oil Sale (X3)
Furnace Oil Price (X4)
Naptha Price and Naptha
Demand has negative
relationship
Naptha Demand has inverse
relationship with Gas Sale.
Positive relationship with
Furnace Oil and Furnace Oil
Price

Multiple Regression Examples


Y Expected Travel
Cost
X1 No of days on
Road
X2 Distance
Travelled in miles
Y = $90 + $48.5X1 +
$0.4X2
200 vouchers analyzed
with r = 0.68

Estimate Johns Travel


cost 300 miles and 5
days.
If John submits a bill
for $685, will he get
payment?
Are there any other
factors ? Comment

Student

SAT Score

2 Year GPA

421

2.90

377

2.93

585

3.00

690

3.45

608

3.66

390

2.88

415

2.15

481

2.53

729

3.22

501

1.99

613

2.75

709

3.90

366

1.60

Regression
Example
Estimate
GPA
For SAT
Score
350
&
800

MultiVariable Regression Models


Reliability of Regression Model can be increased by
introducing 2 or more independent variables affecting
demand and formulate a multivariate regression model
Y = ao + a1X1 + a2X2 + . + anXn
Y = a + b1X1 + b2X2
Y = Na + b1X1 + b2X2
X1Y = aX1 + b1X12 + b2X1X2
X2Y = aX2 + b1X1X2 + b2X22
Std Devn Sy = SQRT{(Y2 a Y b1X1Y-b2 X2Y)/ n-k-1}

Multiple Variable Regression


Example
A firm produces and sells 2 products X1
and X2.
Data for 5 years is available for Total Profit
and units sold of X1 and X2.
Calculate the contribution (b1) of X1 and
(b2) X2 and Fixed Cost by Multiple
Regression.
Profit (Y) = b1X1 + b2X2 FC

Year

Sales of X1

Sales of X2

Profit

2007

12

16

192

2008

14

13

87

2009

10

11

(181)

2010

14

(216)

2011

16

10

(8)

Qty
X1
12
14
10
14
16

Qty
X2
16
13
11
8
10

Profit
Y
192
87
-181
-216
-8

X1Y
2304
1218
-1810
-3024
-128

Sq X1
144
196
100
196
256

X2Y
3072
1131
-1991
-1728
-80

Sq X2
256
169
121
64
100

X1*X2
192
182
110
112
160

66

58

-126

-1440

892

404

710

756

Multiple Regression
Y = A + BX1 + CX2
SUM Y = N*A + B*SUM X1 + C*SUM X2
SUM X1Y = A*SUM X1 + B*SUM SqX1 + C*SUM X1X2
SUM X2Y = A*SUM X2 + B*SUM X1X2 + C*SUM SqX2
-126 = 5A + 66B + 58C
-1440 = 66A + 892B + 756C
404 = 58A + 756B + 710C

A = -1229.71, B = 38.45, C = 60.075

Eq 1
Eq 2
Eq 3

SUMMARY OUTPUT
Regression Statistics
Multiple R
0.999673241
R Square
0.999346589
Adjusted R Square 0.998693179
Standard Error
6.280605814
Observations
5

Multiple Regression

ANOVA
df
Regression
Residual
Total

Intercept
X1
X2

SS
MS
F
Significance F
2 120659.908 60329.95399 1529.431112 0.000653411
2 78.89201878 39.44600939
4
120738.8

Coefficients
-1229.713615
38.45774648
60.07511737

Standard Error
t Stat
P-value
Lower 95%
26.74174571 -45.98479203 0.000472567 -1344.77406
1.467263844 26.21051874 0.001452452 32.14461969
1.097156078 54.75530652 0.000333373 55.35443578

Upper 95%
-1114.65317
44.77087326
64.79579897

Lower 95.0%
-1344.77406
32.14461969
55.35443578

Upper 95.0%
-1114.65317
44.77087326
64.79579897

Econometric Models
It consists of a system of statistical equations that
interrelate the activities of different sectors in the
economy and help to assess their impact on the
demand for a product or service.
Econometric models are used when causative
factors used in a regression equation are
interdependent.
Used for Long Term Demand Estimation
Modelling for the National Economy(example
Steel)

Subjective Forecasting Methods


Rely on experience & opinions of people inside
or outside the organization.
Employed when there is lack of time, data, or
introduction of a new product
Estimates survey: Pooling of estimates made
by individual salesmen
Delphi Method: Panel of experts respond to a
questionnaire.

Estimates Survey
Individual Salesmen submit estimates of demand
in their areas for a future period.
These estimates are pooled at regional level and
adjusted for regional economic and demographic
factors
Regional estimates are combined at headquarters
Drawbacks are : recent experiences influence,
dominant personalities may divert from general
consensus, lack of measure for any accuracy.

National
Level

Regional
Level

Zonal
Level

Sales
Man

Sales
Man

Estimates Survey
Regional
Level

Zonal
Level

Sales
Man

Zonal
Level

Sales
Man

Sales
Man

Delphi Method
Panel of experts respond to a questionnaire
about future demand.
Individual estimates are summarised and
returned to panel members for revision.
Feedback allows arriving at a consensus
Cost depends on panel composition and
number of rounds made.
Used for Technological Forecasting

Delphi Technique Expert 1

Expert
5

Expert 2

Expert
4

Expert 3

Time Series Forecasting Methods


Time series data refers to a set of values of some
variable (Demand) measured at equally spaced time
intervals (Months, Quarters)
Trend: long term growth or decline in the average level
of demand
Cyclical: business cycle - large deviation of actual
demand values from those expected from a trend
Seasonal: annually repetitive demand fluctuations
caused by weather, tradition, festivals
Random: irregular residual in the demand due to many
complex random forces in environment

Time Series
Total Demand D = T x S x C x R or
Total Demand D = T + S + C + R
T = Trend Component, S = Seasonal
Component, C = Cyclical Component and R
= Random Component
Total Demand can be either a product or
sum of all the above 4 components

Time Series
700

600

500

Demand

400

300

200

Data exhibits long term increasing trend


With seasonal fluctuations

100

0
Q1 Q2

Q3

Q4 Q1

Q2

Q3 Q4

Q1

Q2 Q3

Q4

Q1 Q2

Q3 Q4

Quarter

Q1

Q2 Q3

Q4

Q1 Q2

Q3

Q4 Q1

Q2

Q3 Q4

Seasonal Indices for Time Series


If Time Series is exhibiting quarterly seasonal fluctuations
every year, seasonal indices are to be calculated.
Tabulate the quarterly data
The Demand data is to be de-seasonalized by dividing the
quarterly data by the respective seasonal index.
The de-seasonalized data is used for estimating the trend
(by regression)
The de-seasonalized forecast for a future quarter is
multiplied by the respective seasonal index to get the
seasonalized forecast.
Refer the example

Steps for Isolating Components Time


Series
Seasonal Component

Trend Component
Cyclical Component
Random

Compute Seasonal
Indices. Deseasonalize by
dividing vales by seasonal
indices
Use Regression to fit the
Trend with
Deseasonalized Data
Isolate Trend component
and use Moving averages
for Cylical Component
Isolate Cylical and
remaining is Random

Quarterly Sales, Lakh Rupees

586.67/725 = 0.81

Annual

Year

Q1

Q2

Q3

Q4

Total

2002

520

730

820

530

2600

2003

590

810

900

600

2900

2004

650

900

1000

650

3200

1760

2440

2720

1780

8700

586.67

813.33

906.67

593.33

725

Total
Average

8700/12 = 725
813.33/725 = 1.12

Seasonal Index = Quarter Average/Total Quarter Average


Seasonal

0.81

1.12

1.25

0.82

4.00

Index

12 = 4Qtr x 3 yr

520/0.81 = 642.61
Deseasonalise by dividing by seasonal indices for each quarter
Year

Q1

Q2

Q3

Q4

Total

2002

642.61

650.72

655.70

647.61

2596.64

2003

729.12

722.03

719.67

733.15

2903.96

2004

803.27

802.25

799.63

794.24

3199.40

2175.00

2175.00

2175.00

2175.00

8700.00

900/1.12 = 802.25
Total

Deseasonalising is also termed as Normalisation

Time Series Example


Year
2002

2003

2004

2005

2006

2007

2008

Quarter
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

X
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Y=TSCR
289
410
301
213
212
371
374
333
293
441
411
363
324
462
379
301
347
520
340
521
381
594
573
504
444
592
571
507

Year
2002
2003
2004
2005
2006
2007
2008
Total
Average

Quarterly Sales, Lakh Rupees


Q1
Q2
Q3
289
410
301
212
371
374
293
441
411
324
462
379
347
520
340
381
594
573
444
592
571
2290
327.14

3390
484.29

2949
421.29

Q4
213
333
363
301
521
504
507

Annual
Total
1213
1290
1508
1466
1728
2052
2114

2742
391.71

11371
406.11

Seasonal Index = Quarter Average/Total Quarter Average


Seasonal
0.81
1.19
1.04
0.96
Index
Deseasonalise by dividing by seasonal indices
Year
Q1
Q2
Q3
2002
358.76
343.81
290.16
2003
263.17
311.11
360.53
2004
363.72
369.81
396.19
2005
402.21
387.42
365.34
2006
430.76
436.06
327.75
2007
472.96
498.11
552.36
2008
551.17
496.43
550.43
Total

2842.75

2842.75

2842.75

4.00

for each quarter


Q4
Total
220.83
1213.55
345.24
1280.04
376.34
1506.06
312.06
1467.03
540.14
1734.71
522.52
2045.95
525.63
2123.66

2842.75

11371.00

Year
Quarter
2005 Q1
Q2
Q3
Q4
2003 Q1
Q2
Q3
Q4
2004 Q1
Q2
Q3
Q4
2005 Q1
Q2
Q3
Q4
2006 Q1
Q2
Q3
Q4
2007 Q1
Q2
Q3
Q4
2008 Q1
Q2
Q3
Q4
Total

Y=TSCR
289
410
301
213
212
371
374
333
293
441
411
363
324
462
379
301
347
520
340
521
381
594
573
504
444
592
571
507
11371

SI
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96

Y=TCR
358.76
343.81
290.16
220.83
263.17
311.11
360.53
345.24
363.72
369.81
396.19
376.34
402.21
387.42
365.34
312.06
430.76
436.06
327.75
540.14
472.96
498.11
552.36
522.52
551.17
496.43
550.43
525.63
11371.00

Y = 9.83X + 263.54
11371 = 28A + 406B
182843 = 406A + 7714B
A = 263.54, B = 9.83

X
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

XY
358.76
687.63
870.47
883.31
1315.86
1866.66
2523.68
2761.88
3273.51
3698.09
4358.11
4516.05
5228.67
5423.87
5480.17
4992.96
7322.87
7849.01
6227.25
10802.86
9932.25
10958.42
12704.17
12540.45
13779.27
12907.26
14861.54
14717.61

406.00

182842.62

X2
1
4
9
16
25
36
49
64
81
100
121
144
169
196
225
256
289
324
361
400
441
484
529
576
625
676
729
784
7714.00

700
600
500
400
Series1
300
200
100

Seasonalised Data

Q
3

Q
1

Q
3

Q
1

Q
3

Q
1

Q
3

Q
1

Q
3

Q
1

Q
3

Q
1

Q
3

Q
1

600.00
500.00
400.00
300.00

Series1

200.00
100.00
0.00
1

11

13

15

17

19

Deseasonalized Data

21

23

25

27

Year
2002

2003

2004

2005

2006

2007

2008

Total

Quarter
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4

X
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Y=TSCR
289
410
301
213
212
371
374
333
293
441
411
363
324
462
379
301
347
520
340
521
381
594
573
504
444
592
571
507
11371

SI
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96
0.81
1.19
1.04
0.96

Y=TCR
358.76
343.81
290.16
220.83
263.17
311.11
360.53
345.24
363.72
369.81
396.19
376.34
402.21
387.42
365.34
312.06
430.76
436.06
327.75
540.14
472.96
498.11
552.36
522.52
551.17
496.43
550.43
525.63

Trend T
Y=9.83X+263.54
273.37
283.20
293.03
302.86
312.69
322.52
332.35
342.18
352.01
361.84
371.67
381.50
391.33
401.16
410.99
420.82
430.65
440.48
450.31
460.14
469.97
479.80
489.63
499.46
509.29
519.12
528.95
538.78

11371.00

11370.10

Y=CR
1.31
1.21
0.99
0.73
0.84
0.96
1.08
1.01
1.03
1.02
1.07
0.99
1.03
0.97
0.89
0.74
1.00
0.99
0.73
1.17
1.01
1.04
1.13
1.05
1.08
0.96
1.04
0.98

Cyclical
C

Random
R

1.17
0.98
0.85
0.85
0.96
1.02
1.04
1.02
1.04
1.02
1.03
0.99
0.96
0.87
0.88
0.91
0.91
0.96
0.97
1.07
1.06
1.07
1.09
1.03
1.03
0.99

1.04
1.01
0.85
1.00
1.00
1.06
0.97
1.01
0.98
1.04
0.96
1.03
1.01
1.03
0.85
1.10
1.09
0.76
1.21
0.94
0.98
1.05
0.96
1.05
0.93
1.05

Cyclical Graph (Y=CR vs Quarters)


1.20
1.15

Mean = 0.99

1.10
1.05
1.00
0.95
0.90
0.85
0.80
1

13

Quarters

17

21

25

Measurement & Control of


Forecast Errors
Forecast is incomplete without an estimate of the
expected error.
Mean Squared Error (MSE) = Sum of Squared
Errors/Number of Periods
Mean Absolute Deviation (MAD) = Sum of
Absolute Errors/Number of Periods
Tracking Signal = Running sum of forecast
Errors/Mean Absolute Deviation

Summary
Forecasting provides vital information for any future
activity
Estimates of Demand cover quantity, timing, locations,
quality
Long, Intermediate, Short Term Forecasts
Cost Benefits
Forecasting Methods Predictive, Causal, Time Series,
Moving Averages, Exponential Smoothing
Forecast error Idle resources or shortages
Forecasting is more as an art rather than a science

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