2008 Prentice Hall, Inc. 4 – 1 Outline – Continued Outline – Continued Time-Series Forecasting Time-Series Forecasting Decomposition of a Time Series Decomposition of a Time Series Naive Approach Naive Approach Moving Averages Moving Averages Exponential Smoothing Exponential Smoothing Exponential Smoothing with Trend Exponential Smoothing with Trend Adjustment Adjustment Trend Projections Trend Projections Seasonal Variations in Data Seasonal Variations in Data Cyclical Variations in Data Cyclical Variations in Data
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Outline – ContinuedOutline – Continued Time-Series ForecastingTime-Series Forecasting
Decomposition of a Time SeriesDecomposition of a Time Series Naive ApproachNaive Approach Moving AveragesMoving Averages Exponential SmoothingExponential Smoothing Exponential Smoothing with Trend Exponential Smoothing with Trend
AdjustmentAdjustment Trend ProjectionsTrend Projections Seasonal Variations in DataSeasonal Variations in Data Cyclical Variations in DataCyclical Variations in Data
Associative Forecasting Methods: Associative Forecasting Methods: Regression and Correlation Regression and Correlation AnalysisAnalysis Using Regression Analysis for Using Regression Analysis for
ForecastingForecasting
Standard Error of the EstimateStandard Error of the Estimate
Correlation Coefficients for Correlation Coefficients for Regression LinesRegression Lines
Forecasting at Disney WorldForecasting at Disney World
Global portfolio includes parks in Hong Global portfolio includes parks in Hong Kong, Paris, Tokyo, Orlando, and Kong, Paris, Tokyo, Orlando, and AnaheimAnaheim
Revenues are derived from people – how Revenues are derived from people – how many visitors and how they spend their many visitors and how they spend their moneymoney
Daily management report contains only Daily management report contains only the forecast and actual attendance at the forecast and actual attendance at each parkeach park
Forecasting at Disney WorldForecasting at Disney World
Disney generates daily, weekly, monthly, Disney generates daily, weekly, monthly, annual, and 5-year forecastsannual, and 5-year forecasts
Forecast used by labor management, Forecast used by labor management, maintenance, operations, finance, and maintenance, operations, finance, and park schedulingpark scheduling
Forecast used to adjust opening times, Forecast used to adjust opening times, rides, shows, staffing levels, and guests rides, shows, staffing levels, and guests admittedadmitted
Forecasting at Disney WorldForecasting at Disney World
20% of customers come from outside the 20% of customers come from outside the USAUSA
Economic model includes gross Economic model includes gross domestic product, cross-exchange rates, domestic product, cross-exchange rates, arrivals into the USAarrivals into the USA
A staff of 35 analysts and 70 field people A staff of 35 analysts and 70 field people survey 1 million park guests, employees, survey 1 million park guests, employees, and travel professionals each yearand travel professionals each year
Forecasting at Disney WorldForecasting at Disney World
Inputs to the forecasting model include Inputs to the forecasting model include airline specials, Federal Reserve airline specials, Federal Reserve policies, Wall Street trends, policies, Wall Street trends, vacation/holiday schedules for 3,000 vacation/holiday schedules for 3,000 school districts around the worldschool districts around the world
Average forecast error for the 5-year Average forecast error for the 5-year forecast is 5%forecast is 5%
Average forecast error for annual Average forecast error for annual forecasts is between 0% and 3%forecasts is between 0% and 3%
Short-range forecastShort-range forecast Up to 1 year, generally less than 3 monthsUp to 1 year, generally less than 3 months Purchasing, job scheduling, workforce Purchasing, job scheduling, workforce
levels, job assignments, production levelslevels, job assignments, production levels
Medium-range forecastMedium-range forecast 3 months to 3 years3 months to 3 years Sales and production planning, budgetingSales and production planning, budgeting
Long-range forecastLong-range forecast 33++ years years New product planning, facility location, New product planning, facility location,
research and developmentresearch and development
Forecasting Time HorizonsForecasting Time Horizons
Forecasts are seldom perfectForecasts are seldom perfect
Most techniques assume an Most techniques assume an underlying stability in the systemunderlying stability in the system
Product family and aggregated Product family and aggregated forecasts are more accurate than forecasts are more accurate than individual product forecastsindividual product forecasts
Set of evenly spaced numerical dataSet of evenly spaced numerical data Obtained by observing response Obtained by observing response
variable at regular time periodsvariable at regular time periods
Forecast based only on past values, Forecast based only on past values, no other variables importantno other variables important Assumes that factors influencing Assumes that factors influencing
past and present will continue past and present will continue influence in futureinfluence in future
Assumes demand in next Assumes demand in next period is the same as period is the same as demand in most recent perioddemand in most recent period e.g., If January sales were 68, then e.g., If January sales were 68, then
February sales will be 68February sales will be 68
Sometimes cost effective and Sometimes cost effective and efficientefficient
Can be good starting pointCan be good starting point
The objective is to obtain the most The objective is to obtain the most accurate forecast no matter the accurate forecast no matter the techniquetechnique
We generally do this by selecting the We generally do this by selecting the model that gives us the lowest forecast model that gives us the lowest forecast errorerror
Forecast errorForecast error = Actual demand - Forecast value= Actual demand - Forecast value
Fitting a trend line to historical data points Fitting a trend line to historical data points to project into the medium to long-rangeto project into the medium to long-range
Linear trends can be found using the least Linear trends can be found using the least squares techniquesquares technique
y y = = a a + + bxbx^̂
where ywhere y= computed value of the = computed value of the variable to be predicted (dependent variable to be predicted (dependent variable)variable)aa= y-axis intercept= y-axis interceptbb= slope of the regression line= slope of the regression linexx= the independent variable= the independent variable
Seasonal Variations In DataSeasonal Variations In Data
The multiplicative The multiplicative seasonal model seasonal model can adjust trend can adjust trend data for seasonal data for seasonal variations in variations in demanddemand
Seasonal Variations In DataSeasonal Variations In Data
1.1. Find average historical demand for each Find average historical demand for each season season
2.2. Compute the average demand over all Compute the average demand over all seasons seasons
3.3. Compute a seasonal index for each season Compute a seasonal index for each season
4.4. Estimate next year’s total demandEstimate next year’s total demand
5.5. Divide this estimate of total demand by the Divide this estimate of total demand by the number of seasons, then multiply it by the number of seasons, then multiply it by the seasonal index for that seasonseasonal index for that season
Used when changes in one or more Used when changes in one or more independent variables can be used to predict independent variables can be used to predict
the changes in the dependent variablethe changes in the dependent variable
Most common technique is linear Most common technique is linear regression analysisregression analysis
We apply this technique just as we did We apply this technique just as we did in the time series examplein the time series example
Forecasting an outcome based on predictor Forecasting an outcome based on predictor variables using the least squares techniquevariables using the least squares technique
y y = = a a + + bxbx^̂
where ywhere y= computed value of the = computed value of the variable to be predicted (dependent variable to be predicted (dependent variable)variable)aa= y-axis intercept= y-axis interceptbb= slope of the regression line= slope of the regression linexx= the independent variable though = the independent variable though to predict the value of the to predict the value of the dependent variabledependent variable
How strong is the linear How strong is the linear relationship between the relationship between the variables?variables?
Correlation does not necessarily Correlation does not necessarily imply causality!imply causality!
Coefficient of correlation, r, Coefficient of correlation, r, measures degree of associationmeasures degree of association Values range from Values range from -1-1 to to +1+1
Coefficient of Determination, rCoefficient of Determination, r22, , measures the percent of change in measures the percent of change in y predicted by the change in xy predicted by the change in x Values range from Values range from 00 to to 11
Easy to interpretEasy to interpret
CorrelationCorrelation
For the Nodel Construction example:For the Nodel Construction example:
If more than one independent variable is to be If more than one independent variable is to be used in the model, linear regression can be used in the model, linear regression can be
extended to multiple regression to extended to multiple regression to accommodate several independent variablesaccommodate several independent variables
y y = = a a + + bb11xx11 + b + b22xx22 … …^̂
Computationally, this is quite Computationally, this is quite complex and generally done on the complex and generally done on the
y y = 1.80 + .30= 1.80 + .30xx11 - 5.0 - 5.0xx22^̂
In the Nodel example, including interest rates in In the Nodel example, including interest rates in the model gives the new equation:the model gives the new equation:
An improved correlation coefficient of r An improved correlation coefficient of r = .96= .96 means this model does a better job of predicting means this model does a better job of predicting the change in construction salesthe change in construction sales
Measures how well the forecast is Measures how well the forecast is predicting actual valuespredicting actual values
Ratio of running sum of forecast errors Ratio of running sum of forecast errors (RSFE) to mean absolute deviation (MAD)(RSFE) to mean absolute deviation (MAD) Good tracking signal has low valuesGood tracking signal has low values
If forecasts are continually high or low, the If forecasts are continually high or low, the forecast has a bias errorforecast has a bias error
Monitoring and Controlling Monitoring and Controlling ForecastsForecasts