Professional Documents
Culture Documents
+ =
Slope:
2 2
i
n
1 i
i i
n
1 i
x n x
y x n y x
b
=
=
=
Y-Intercept: x b y a =
21
Slope (b)
Estimated Y changes by b for each 1 unit
increase in X
If b = 2, then sales (Y) is expected to increase
by 2 for each 1 unit increase in advertising (X)
Y-intercept (a)
Average value of Y when X = 0
If a = 4, then average sales (Y) is expected to
be 4 when advertising (X) is 0
Interpretation of Coefficients
22
Variation of actual Y from predicted Y
Measured by standard error of estimate
Sample standard deviation of errors
Denoted S
Y,X
Random Error Variation
23
Least Squares Assumptions
Relationship is assumed to be linear.
Relationship is assumed to hold only within or
slightly outside data range. Do not attempt to predict
time periods/independent variable far beyond the
range of the data base.
Deviations around least squares line are assumed to
be random.
24
Standard Error of the Estimate
( )
2
2
1 1 1
2
1
2
,
= = =
=
n
y x b y a y
n
y y
S
n
i
n
i
i i i
n
i
i
n
i
c i
x y
25
Answers: how strong is the linear
relationship between the variables?
Coefficient of correlation Sample
correlation coefficient denoted r
Values range from -1 to +1
Measures degree of association
Used mainly for understanding
Correlation
26
Sample Coefficient of
Correlation
(
|
.
|
\
|
|
.
|
\
|
=
1 =
2
1 =
2
1 =
2
1 =
2
1 = 1 = 1 =
n
i
n
i
i i
n
i
n
i
i i
n
i
n
i
n
i
i i i i
y y n x x n
y x y x n
r
28
r = 1 r = -1
r = .89 r = 0
Y
X
Y
i
= a + b X
i
^
Y
X
Y
X
Y
X
Y
i
= a + b X
i
^
Y
i
= a + b X
i
^
Y
i
= a + b X
i
^
Coefficient of Correlation and
Regression Model
r
2
= square of correlation coefficient (r), is the percent of the
variation in y that is explained by the regression equation
29
Set of evenly spaced numerical data
Obtained by observing response variable at
regular time periods
Forecast based only on past values
Assumes that factors influencing past and
present will continue influence in future
Example
Year: 1998 1999 2000 2001 2002
Sales: 78.7 63.5 89.7 93.2 92.1
What is a Time Series?
30
Trend
Seasonal
Cyclical
Random
Time Series Components
31
Persistent, overall upward or downward
pattern
Several years duration
Mo., Qtr., Yr.
Response
1984-1994 T/Maker Co.
Trend Component
32
Regular pattern of up & down
fluctuations
Due to weather, customs etc.
Occurs within 1 year
Mo., Qtr.
Response
Summer
1984-1994 T/Maker Co.
Seasonal Component
33
Repeating up & down movements
Due to interactions of factors influencing
economy
Mo., Qtr., Yr.
Response
Cycle
Cyclical Component
34
Erratic, unsystematic, residual
fluctuations
Due to random variation or unforeseen
events
Union strike
Tornado
Short duration &
nonrepeating
1984-1994 T/Maker Co.
Random Component
35
Demand Charted over 4 Years
with Trend and Seasonality
Year
1
Year
2
Year
3
Year
4
Seasonal peaks Trend component
Actual
demand line
Average demand
over four years
D
e
m
a
n
d
f
o
r
p
r
o
d
u
c
t
o
r
s
e
r
v
i
c
e
Random
variation
36
Naive Approach
Assumes demand in
next period is the same
as demand in most
recent period
e.g., If May sales were
48, then June sales will
be 48
Sometimes cost
effective & efficient
1995 Corel Corp.
41
MA is a series of arithmetic means
Used if little or no trend
Used often for smoothing
Provides overall impression of data over
time
Equation
MA
n
n
=
Demand in Previous Periods
Moving Average Method
USEFUL:
When the demand for services stays fairly
steady over time
42
Moving Average Solution
Time Response
Y
i
Moving
Total
(n=3)
Moving
Average
(n=3)
1998 4 NA NA
1999 6 NA NA
2000 5 NA NA
2001 3 4+6+5=15 15/3=5.0
2002 7 6+5+3=14 14/3=4.7
2003 NA 5+3+7=15 15/3=5.0
43
Used when trend is present
Older data usually less important
Weights based on intuition
Often lay between 0 & 1, & sum to 1.0
Equation
WMA =
(Weight for period n) (Demand in period n)
Weights
Weighted Moving Average
Method
Useful:
When there is a trend or pattern, weights can be used to place
more emphasis on recent values. This makes the technique more
responsive to change
44
Actual Demand, Moving Average, Weighted
Moving Average
(Note: All forecasting methods lag ahead of or
behind actual demand)
0
5
10
15
20
25
30
35
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Month
S
a
l
e
s
D
e
m
a
n
d
Actual sales
Moving average
Weighted moving average
45
Increasing n makes forecast less
sensitive to changes
Do not forecast trend well
Require much historical
data
Disadvantages of
Moving Average Methods
46
Form of weighted moving average
Weights decline exponentially
Most recent data weighted most
Requires smoothing constant (o)
Ranges from 0 to 1
Subjectively chosen
Involves little record keeping of past
data
Exponential Smoothing Method
47
Exponential Smoothing (Averaging)
F
t
= S
t-1
= F
t-1
+ o(A
t-1
- F
t-1
)
F
t
= oA
t-1
+ (1-o)F
t-1
Premise--The most recent observations is normally a better
to predict the next observation than are older observations.
Therefore, we should give more weight to the more recent
time periods when forecasting
49
75
80
85
90
95
100
105
0 1 2 3 4 5 6
Period
O
c
c
u
p
a
n
c
y
Effect of Alpha ( =0.1 vs. =0.5)
Forecast
Forecast
( . ) o = 05
( . ) o = 01
50
Choosing o
Seek to minimize the Mean Absolute Deviation (MAD)
If: Forecast error = demand - forecast
Then:
n
errors forecast
= MAD
Exponential Smoothing With
Trend Adjustment
S A S T
T S S T
F S T
t t t t
t t t t
t t t
= + +
= +
= +
+
o o
| |
( ) ( )( )
( ) ( )
1
1
1 1
1 1
1
Commuter Airline Load Factor
Week Actual load factor Smoothed value Smoothed trend Forecast Forecast error
t A
t
S
t
T
t
F
t
| A
t
- F
t
|
1 31 31.00 0.00
2 40 35.50 1.35 31 9
3 43 39.93 2.27 37 6
4 52 47.10 3.74 42 10
5 49 49.92 3.47 51 2
6 64 58.69 5.06 53 11
7 58 60.88 4.20 64 6
8 68 66.54 4.63 65 3
MAD = 6.7
( . , . ) o | = = 05 0 3
Exponential Smoothing with
Seasonal Adjustment
S A I S
F S I
I
A
S
I
t t t L t
t t t L
t
t
t
t L
= +
=
= +
+ +
o o
( / ) ( )
( )( )
( )
1
1
1
1 1
53
Ferry Passengers taken to a Resort Island
Actual Smoothed Index Forecast
Error
Period t A
t
value S
t
I
t
F
t
| A
t
- F
t|
2003
January 1 1651 .. 0.837 ..
February 2 1305 .. 0.662 ..
March 3 1617 .. 0.820 ..
April 4 1721 .. 0.873 ..
May 5 2015 .. 1.022 ..
June 6 2297 .. 1.165 ..
July 7 2606 .. 1.322 ..
August 8 2687 .. 1.363 ..
September 9 2292 .. 1.162 ..
October 10 1981 .. 1.005 ..
November 11 1696 .. 0.860 ..
December 12 1794 1794.00 0.910 ..
2004
January 13 1806 1866.74 0.876 - -
February 14 1731 2016.35 0.721 1236 495
March 15 1733 2035.76 0.829 1653 80
( . , . ) o = = 02 03
54
55
You want to achieve:
pattern or direction in forecast error
Error = (Y
i
- Y
i
) = (Actual - Forecast)
Seen in plots of errors over time
Smallest forecast error
Mean square error (MSE)
Mean absolute deviation (MAD)
Guidelines for Selecting
Forecasting Model
^
56
Mean Square Error (MSE)
Mean Absolute Deviation (MAD)
Mean Absolute Percent Error (MAPE)
Forecast Error Equations
2
n
1 i
2
i i
n
errors forecast
n
) y (y
MSE
=
=
n n
y y
MAD
n
i
i i
=
=
| errors forecast |
| |
1
n
actual
forecast actual
100 MAPE
n
1 i
i
i i
=
57
Tracking Signal Equation
MAD
error forecast
MAD
y
y
TS
n
1 i
i i
=
58
MONTH PERIOD DEMAND FORECAST ERROR ABS DVN RUNNING SUM MAD
TRACKING
SIGNAL
January-05 1 37 37.35 -0.35 0.35 -0.35 0.35 -1.00
February-05 2 40 38.97 1.03 1.03 0.68 0.69 0.99
March-05 3 41 40.60 0.40 0.40 1.08 0.59 1.82
April-05 4 37 42.23 -5.23 5.23 -4.15 1.75 -2.37
May-05 5 45 43.85 1.15 1.15 -3.00 1.63 -1.84
June-05 6 50 45.48 4.52 4.52 1.52 2.11 0.72
July-05 7 43 47.10 -4.10 4.10 -2.58 2.40 -1.08
August-05 8 47 48.73 -1.73 1.73 -4.31 2.31 -1.86
September-05 9 56 50.36 5.64 5.64 1.33 2.68 0.50
October-05 10 52 51.98 0.02 0.02 1.35 2.42 0.56
November-05 11 55 53.61 1.39 1.39 2.74 2.32 1.18
December-05 12 54 55.23 -1.23 1.23 1.51 2.23 0.68
January-06 13 55 56.86 -1.86 1.86 -0.35 2.20 -0.16
59
Plot of a Tracking Signal
Time
Lower control limit
Upper control limit
Signal exceeded limit
Tracking signal
Acceptable range
+
0
-
60
Tracking Signal
A tracking signal statistically determines if
a forecasting method is out-of-control.
As long as tracking signal stays within 3
standard deviations, probability of forecast
error caused by random variation is high
Used by companies to track changes in
demand patterns
A tracking signal outside of established
limits indicates that a forecasting method
should be modified.
Compatible with any forecasting method
61