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Forecasting Models

TEACHING SUGGESTIONS
Teaching Suggestion 5.1: Wide Use of Forecasting.
Forecasting is one of the most important tools a student can master
because every firm needs to conduct forecasts. Its useful to motivate students with the idea that obscure sounding techniques such
as exponential smoothing are actually widely used in business, and
a good manager is expected to understand forecasting. Regression
is commonly accepted as a tool in economic and legal cases.
Teaching Suggestion 5.2: Forecasting as an Art and a Science.
Forecasting is as much an art as a science. Students should understand that qualitative analysis (judgmental modeling) plays an important role in predicting the future since not every factor can be
quantified. Sometimes the best forecast is done by seat-of-thepants methods.
Teaching Suggestion 5.3: Use of Simple Models.
Many managers want to know what goes on behind the forecast.
They may feel uncomfortable with complex statistical models with
too many variables. They also need to feel a part of the process.
Teaching Suggestion 5.4: Management Input to the Exponential
Smoothing Model.
One of the strengths of exponential smoothing is that it allows decision makers to input constants that give weight to recent data.
Most managers want to feel a part of the modeling process and
appreciate the opportunity to provide input.
Teaching Suggestion 5.5: Wide Use of Adaptive Models.
With todays dominant use of computers in forecasting, it is
possible for a program to constantly track the accuracy of a
models forecast. Its important to understand that a program
can automatically select the best alpha and beta weights in
exponential smoothing. Even if a firm has 10,000 products, the
constants can be selected very quickly and easily without human
intervention.

ALTERNATIVE EXAMPLES
Alternative Example 5.1:
demand in previous n periods
Moving average =
n
Bicycle sales at Bowers Bikes are shown in the middle column of the
following table. A 3-week moving average appears on the right.

52

Week

Actual
Bicycle Sales

Three-Week
Moving Average

1
2
3
4
5
6
7

8
10
9
11
10
13

(8  10  9)/3  9
(10  9  11)/3  10
(9  11  10)/3  10
(11  10  13)/3  11Z\c

Alternative Example 5.2: Weighted moving average

(weight for period n)(demand in period n))

weights
Bowers Bikes decides to forecast bicycle sales by weighting the
past 3 weeks as follows:
Weights Applied

Period

3
2
1
6

Last week
Two weeks ago
Three weeks ago
Sum of weights

A 3-week weighted moving average appears below.

Week

Actual
Bicycle
Sales

1
2
3
4
5
6
7

8
10
9
11
10
13

Three-Week Moving Average

[(3  9)  (2  10)  (1  8)]/6  9Z\n

[(3  11)  (2  9)  (1  10)]/6  10Z\n
[(3  10)  (2  11)  (1  9)]/6  10Z\n
[(3  13)  (2  10)  (1  11)]/6  11X\c

Alternative Example 5.3: A firm uses simple exponential

smoothing with a  0.1 to forecast demand. The forecast for the
week of January 1 was 500 units, whereas actual demand turned
out to be 450 units. The demand forecasted for the week of January 8 is calculated as follows.
Ft1 Ft (At Ft)
500 0.1(450 500) 495 units

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Alternative Example 5.4: Exponential smoothing is used to

forecast automobile battery sales. Two values of  are examined,
  0.8 and   0.5. To evaluate the accuracy of each smoothing
constant, we can compute the absolute deviations and MADs.
Assume that the forecast for January was 22 batteries.

Actual
Battery
Sales

Month
January
February
March
April
May
June

20
21
15
14
13
16

Absolute
Deviation
with
 0.8

Forecast
with
 0.8

Absolute
Deviation
with
 0.5

Forecast
with
 0.5

22
2
20.40
0.6
20.880
5.88
16.176
2.176
14.435
1.435
13.287
2.713
Sum of absolute deviations: 15

22
21
21
18
16
14.5

2
0
6
4
3
31.5
16.5

MAD: 2.46

On the basis of this analysis, a smoothing constant of   0.8 is

preferred to   0.5 because it has a smaller MAD.
Alternative Example 5.5: Use the sales data given below to determine: (a) the least squares trend line, (b) the predicted value for
2000 sales.
Year

Sales (Units)

1993
1994
1995
1996
1997
1998
1999

100
110
122
130
139
152
164

1993
1994
1995
1996
1997
1998
1999

Alternative Example 5.6: The rated power capacity (in hours/

week) over the past 6 years has been:

Year

Rated Capacity
(hrs/wk)

1
2
3
4
5
6

115
120
118
124
123
130

Here is an alternative way to recode years which simplifies the

math since X  0.

To minimize computations, transform the value of x (time) to simpler numbers. In this case, designate 1993 as year 1, 1994 as year
2, and so on.

Year

2.75

Time
Period

Sales
(Units)

1
2
3
4
5
6
17
x  28

100
110
122
130
139
152
164
y  917

x2
1
4
9
16
25
36
149
x 2  140

xy
100
220
366
520
695
912
1,148
xy  3,961

y 917
x 28
y=
=
= 131
=
=4
n
7
n
7
xy nxy 3, 961 (7)( 4 )(131) 293
=
= 10.464
b=
=
28
140 (7)( 4 2 )
x 2 nx 2

x=

a = y bx = 131 10.46( 4 ) = 89.14

Therefore, the least squares trend equation is,
y = a + bx = 89.14 + 10.464 x
To project demand in 2000, we denote the year 2000 as x  8,
Sales in 2000  89.14  10.464(8)  172.85

Year
1
2
3
4
5
6

b=

a=

Renumbered
Year (x)

Capacity
(y)

x2

xy

2.5
1.5
.5
.5
1.5
2.5
X  0

115
120
118
124
123
130
Y  730

6.25
2.25
0.25
0.25
2.25
6.25
X2  17.5

287.5
180
59
62
184.5
325
XY  45

XY
X2

45
= 2.57
17.5

Y 730
=
= 121.67
n
6
y 121.67 2.57X

Year 7 121.67 (2.57)(3.5)

131
Alternative Example 5.7: The forecast demand and actual demand for 10-foot fishing boats are shown below. We compute the
tracking signal and MAD.
Forecast errors 70
MAD =
=
= 11.7
n
6
RSFE 24
Tracking Signal =
=
= 2.1 MADs
MAD 11.7

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Table for Alternate Example 5.7

Year
1
2
3
4
5
6

Forecast
Demand

Actual
Demand

Error

RSFE

Forecast
Error

Cumulative
Error

MAD

Tracking
Signal

78
75
83
84
88
85

71
80
101
84
60
73

7
5
18
0
28
12

7
2
16
16
12
24

7
5
18
0
28
12

7
12
30
30
58
70

7.0
6.0
10.0
7.5
11.6
11.7

1.0
0.3
1.6
2.1
1.0
2.1

SOLUTIONS TO DISCUSSION QUESTIONS

AND PROBLEMS

MAD is important because it can be used to help increase forecasting accuracy.

5-1.
are:

5-9. If a seasonal index equals 1, that season is just an average

season. If the index is less than 1, that season tends to be lower
than average. If the index is greater than 1, that season tends to be
higher than average.

The steps that are used to develop any forecasting system

1. Determine the use of the forecast.
2. Select the items or quantities that are to be forecasted.

5-10.

3. Determine the time horizon of the forecast.

4. Select the forecasting model.
5. Gather the necessary data.

Ft1  Ft  0(At  Ft)  Ft

This means that the forecast never changes.
If the smoothing constant equals 1, then
Ft1  Ft  1(At  Ft)  At

6. Validate the forecasting model.

7. Make the forecast.
8. Implement the results.
5-2. A time-series forecasting model uses historical data to predict future trends.
5-3. The only difference between causal models and timeseries models is that causal models take into account any factors
that may influence the quantity being forecasted. Causal models
use historical data as well. Time-series models use only historical
data.
5-4. Qualitative models incorporate subjective factors into the
forecasting model. Judgmental models are useful when subjective
factors are important. When quantitative data are difficult to obtain, qualitative models are appropriate.
5-5. The disadvantages of the moving average forecasting
model are that the averages always stay within past levels, and the
moving averages do not consider seasonal variations.
5-6. When the smoothing value, , is high, more weight is given
to recent data. When  is low, more weight is given to past data.
5-7. The Delphi technique involves analyzing the predictions
that a group of experts have made, then allowing the experts to review the data again. This process may be repeated several times.
After the final analysis, the forecast is developed. The group of
experts may be geographically dispersed.
5-8. MAD is a technique for determining the accuracy of a
forecasting model by taking the average of the absolute deviations.

If the smoothing constant equals 0, then

This means that the forecast is always equal to the actual value in
the prior period.
5-11. A centered moving average (CMA) should be used if
trend is present in data. If an overall average is used rather than a
CMA, variations due to trend will be interpreted as variations due to
seasonal factors. Thus, the seasonal indices will not be accurate.
5-12.
Month
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.

Actual
Shed Sales
10
12
13
16
19
23
26
30
28
18
16
14

Four-Month Moving Average

(10  12  13  16)/4  51/4  12.75

(12  13  16  19)/4  60/4  15
(13  16  19  23)/4  70/4  17.75
(16  19  23  26)/4  84/4  21
(19  23  26  30)/4  98/4  24.5
(23  26  30  28)/4  107/4  26.75
(26  30  28  18)/4  102/4  25.5
(30  28  18  16)/4  92/4  23

The MAD  7.78

See solution to 5-13 for calculations.

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5-13.

Month

Actual
Shed Sales

ThreeMonth
Forecast

10
12
13
16
19
23
26
30
28
18
16
14

11.66
13.66
16
19.33
22.66
26.33
28
25.33
20.66

Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.

Three-month MAD =

58.35
= 6.48
9

Four-month MAD =

62.25
= 7.78
8

ThreeMonth
Absolute
Deviation

4.34
5.34
7
6.67
7.34
1.67
10
9.33
56.66
58.35

FourMonth
Forecast

12.75
15
17.75
21
24.5
26.75
25.5
23

FourMonth
Absolute
Deviation

6.25
8
8.25
9
3.5
8.75
9.5
69.25
62.25

The 3-month moving average appears to be more accurate. However, if weighted moving averages had been used, the results
might be different.

5-14.

1
2
3
4
5
6
7
8
9
10
11

Demand
4
6
4
5
10
8
7
9
12
14
15

Three-Year
Moving Averages

(4  6  4)/3
(6  4  5)/3
(4  5  10)/3
(5  10  8)/3
(10  8  7)/3
(8  7  9)/3
(7  9  12)/3
(9  12  14)/3

 423
5
 613
 723
 813
8
 913
 1123

Weighted Three-Year
Moving Averages

sum of the weights

[(2  4)  6  4]/4  412
[(2  5)  4  6]/4  50
[(2  10)  5  4]/4  714
[(2  8)  10  5]/4  734
[(2  7)  8  10]/4  80
[(2  9)  7  8]/4  814
[(2  12)  9  7]/4  10
[(2  14)  12  9]/4  1214
Total absolute deviations:

MAD for 3-year average  2.54

MAD for weighted 3-year average  2.32
The weighted moving average appears to be slightly more accurate
in its annual forecasts.
5-15.

Using Excel or QM for Windows, the trend line is

Y  2.22  1.05X
Where X  time period (1, 2, . . .) Y  demand

Year

Three-Year
Absolute Deviation

0.34
5.55
1.67
0.67
0.67
4.55
4.67
3.34
20.36

Three-Year Weighted
Absolute Deviation

0.55
5.55
0.75
0.75
1.55
3.75
4.55
2.75
18.5

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5-16. Using the forecasts in the previous problems we obtain the

absolute deviations given in the table below.

Year

Demand

3-Yr MA
|deviation|

3-Yr Wt. MA
|deviation|

Trend line
|deviation|

0.33
5.00
1.67
0.67
0.67
4.00
4.67
3.33

0.50
5.00
0.75
0.75
1.00
3.75
4.00
2.75

0.73
1.67
1.38
1.44
2.51
0.55
2.60
1.65
0.29
1.24
1.18

20.33

18.50

15.24

11
14
12
16
13
14
14
15
15
10
16
18
17
17
18
19
19
12
10
14
11
15
Total absolute
deviations

Year
1
2
3
4
5
6
7
8
9
10
11

Demand
4,000
6,000
4,000
5,000
10,000
8,000
7,000
9,000
12,000
14,000
15,000

5,000 (0.3)( 1,000)

4,700
The calculations are:
Year

Demand

New Forecast

2
3
4
5
6
7
8
9
10
11

6,000
4,000
5,000
10,000
8,000
7,000
9,000
12,000
14,000
15,000

4,700  5,000  (0.3)(4,000  5,000)

5,090  4,700  (0.3)(6,000  4,700)
4,763  5,090  (0.3)(4,000  5,090)
4,834  4,763  (0.3)(5,000  4,763)
6,384  4,834  (0.3)(10,000  4,834)
6,869  6,384  (0.3)(8,000  6,384)
6,908  6,869  (0.3)(7,000  6,869)
7,536  6,908  (0.3)(9,000  6,908)
8,875  7,536  (0.3)(12,000  7,536)
10,412  8,875  (0.3)(14,000  8,875)

The mean absolute deviation (MAD) can be used to determine

which forecasting method is more accurate.

Absolute
Deviation

4,500
5,000
7,250
7,750
8,000
8,250
10,000
12,250
Total:
Mean:

new forecast for year 2 5,000 (0.3)(4,000 5,000)

5,000 300

MAD (3-year moving average)  2.54

MAD (3-year weighted moving average)  2.31
MAD (trend line)  1.39
The trend line is best because the MAD is lowest.

Weighted
Moving
Average

5-17.   0.3. New forecast for year 2 is last periods forecast 

(last periods actual demand  last periods forecast):

500
5,000
750
750
1,000
3,750
4,000
12,750
18,500
2,312.5

Exp. Sm.
5,000
4,700
5,090
4,763
4,834
6,384
6,869
6,908
7,536
8,875
10,412

Absolute
Deviation
1,000
1,300
1,090
237
5,166
1,616
131
2,092
4,464
5,125
14,588
26,808
2,437

Thus, the 3-year weighted moving average model appears to be

more accurate.

5-18.

Year

Forecast

410.0

422.0

443.9

466.1

495.2

521.8

5-19.
Year
1
2
3
4
5
6

Sales

Forecast Using  0.6

450
495
518
563
584
?

410  (0.6) (450  410)  434

434  (0.6) (495  434)  470.6
470.6  (0.6)(518  470.6)  499.0
499  (0.6) (563  499)  537.4
537.4  (0.6)(584  537)  565.6

Forecast Using  0.9

410 
(0.9)(450  410)
 446
446 
(0.9)(495  446)
 490.1
490.1  (0.9)(518  490.1)  515.21
515.21  (0.9)(563  515.21)  558.2
558.221  (0.9)(584  558.2)  581.4

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5-20.
Year
1
2
3
4
5
6

Actual
Sales

 0.3
Forecast

Absolute
Deviation

 0.6
Forecast

Absolute
Deviation

 0.9
Forecast

Absolute
Deviation

410.0
434.0
470.6
499.0
537.4
565.8

40.0
61.0
47.4
64.0
46.6

259.0

410.0
446.0
490.1
515.2
558.2
581.4

40.0
49.0
27.9
47.8
25.8

190.5

450
410.0
40.0
495
422.0
73.0
518
443.9
74.1
563
466.1
96.9
584
495.2
88.8
?
521.8

Total absolute deviation 372.8

MAD0.3 372.8/5 74.56

MAD0.6 259/5 51.8
MAD0.9 190.5/5 38.1
Because it has the lowest MAD, the smoothing constant   0.9
gives the most accurate forecast.
5-21.
Year
1
2
3
4
5
6

Sales

Three-Year Moving Average

450
495
518
563
584
?

(450  495  518)/3  487.667

(495  518  563)/3  525.333
(518  563  584)/3  555

5-22.

Year

Time
Period
X

1
2
3
4
5

1
2
3
4
5

Sales
Y

X2

XY

450
495
518
563
2,584
2,610

1
4
9
16
125
55

450
990
1554
2252
2920
8166

b 33.6
a 421.2
Y 421.2 33.6X
Projected sales in year 6,
Y 421.2 (33.6)(6)
622.8
5-23.
Year
1
2
3
4
5
6

Actual Sales

Three-Year Moving
Average Forecast

450

495

518

563
487.7
584
525.3
?
555.0
Total absolute deviation

Absolute Deviation

75.3
58.7

134.0

Time-Series
Forecast
454.8
488.4
522.0
555.6
589.2
622.8

Absolute Deviation
4.8
6.6
4.0
7.4
5.2

28.0

57

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(see Problem 5-20)

MADmoving average 134/2 67

MADregression 28/5 5.6
Regression (trend line) is obviously the preferred method because
of its low MAD.
5-24. To answer the discussion questions, two forecasting models are required: a three-period moving average and a three-period
weighted moving average. Once the actual forecasts have been
made, their accuracy can be compared using the mean average differences (MAD).
a, b.
Period

Month

Demand

Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Jan.
Feb.

10
15
17
11
14
17
12
14
16
11

4
5
6
7
8
9
10
11
12
13
14

Average

Weighted Average

13.67
13.33
13.67
14
14.33
14
14
14.33
14.33
14
13.67

14.5
12.67
13.5
15.17
13.67
13.50
15
14
13.83
14.67
13.17

c. MAD for moving average is 2.2. MAD for weighted average is 2.72. Moving average forecast for February is 13.6667.
Weighted moving average forecast for February is 13.1667.
Because a three-period average forecasting method is used,
forecasts start for period 4. As can be seen, the MAD for the moving average is 2.2, and the MAD for the weighted moving average
is 2.7. Thus, based on this analysis, the moving average appears to
be more accurate. The forecast for February is about 14.
d. There are many other factors to consider, including seasonality and any underlying causal variables such as advertising budget.
5-25.

a.

Week

Actual
Miles

Forecast
(Ft)

Error

RSFE

Sum of
Absolute
Forecast
Errors

1
2
3
4
5
6
7
8
9
10
11
12

17
21
19
23
18
16
20
18
22
20
15
22

17.00
17.00
17.80
18.04
19.03
18.83
18.26
18.61
18.49
19.19
19.35
18.48

4.00
1.20
4.96
1.03
2.83
1.74
0.61
3.51
0.81
4.35
3.52

4.00
5.20
10.16
9.13
6.30
8.04
7.43
10.94
11.75
7.40
10.92

4.00
5.20
10.16
11.19
14.02
15.76
16.37
19.88
20.69
25.04
28.56

MAD

Track Signal

4.00
2.60
3.39
2.80
2.80
2.63
2.34
2.49
2.30
2.50
2.60

1
2
3
3.3
2.25
3.05
3.17
4.21
5.11
2.96
4.20

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b. The total MAD is 2.60.

c. RSFE is consistently positive. Tracking signal exceeds 5
MADs at week 10. This could indicate a problem.
5-26. a, b. See the accompanying table for a comparison of
the calculations for the exponentially smoothed forecasts using
constants of 0.1 and 0.6.
c. Students should note how stable the smoothed values for
the 0.1 smoothing constant are. When compared to actual
week 25 calls of 85, the 0.6 smoothing constant appears to do
a better job. On the basis of the forecast error, the 0.6 constant is better also. However, other smoothing constants need
to be examined.

Week,
t
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

Actual
Value,
At

Smoothed
Value,
Ft (  0.1)

50
35
25
40
45
35
20
30
35
20
15
40
55
35
25
55
55
40
35
60
75
50
40
65

50
50
48
46
45
45
44
42
41
40
38
36
36
38
38
37
38
40
40
40
42
45
45
45
47

Forecast
Error

15
23
6
0
10
24
12
6
20
23
4
19
3
13
18
16
0
5
20
33
5
5
20

Smoothed
Value,
Ft (  0.6)
50
41
31
37
42
38
27
29
32
25
19
32
46
39
31
45
51
44
39
51
66
56
46
58

Forecast
Error

15
16
8
9
7
18
3
6
12
10
21
23
11
14
24
10
12
10
21
23
16
16
18

59

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M05_REND6289_10_IM_C05.QXD

60

5-27.

Week
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

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4:42 PM

CHAPTER 5

Page 60

FORECASTING MODELS

Using data from Problem 5-26, with   0.9

Actual
Value
At

Smoothed
Value
Ft

50
35
25
40
45
35
20
30
35
20
15
40
55
35
25
55
55
40
35
60
75
50
40
65

50
50
36
26
39
44
36
22
29
34
21
16
38
53
37
26
52
55
41
36
58
73
52
41
62

Forecast
Error

15
11
14
6
9
16
8
6
14
6
24
17
18
12
29
3
15
6
24
17
23
12
24

MAD  14.48

Note that in this problem, the initial forecast (for the first period) was
not used in computing the MAD. Either approach is considered valid.
5-28.

Exponential smoothing with   0.1

5-30. Using QM for Windows, we select Forecasting - Time

Series and multiplicative decomposition. Then specify Centered
Moving Average and we have the following results:
a. Quarter 1 index 0.8825; Quarter 2 index 0.9816;
Quarter 3 index 0.9712; Quarter 4 index 1.1569
b. The trendline is Y 237.7478 3.6658X
c. Quarter 1: Y 237.7478 3.6658(17) 300.0662
Quarter 2: Y 237.7478 3.6658(18) 303.7320
Quarter 3: Y 237.7478 3.6658(19) 307.3978
Quarter 4: Y 237.7478 3.6658(20) 311.0636
d. Quarter 1: 300.0662(0.8825) 264.7938
Quarter 2: 303.7320(0.9816) 298.1579
Quarter 3: 307.3978(0.9712) 298.5336
Quarter 4: 311.0636(1.1569) 359.8719
5-31. Letting
t time period (1, 2, 3, . . . , 16)
Q1 1 if quarter 1, 0 otherwise
Q2 1 if quarter 2, 0 otherwise
Q3 1 if quarter 3, 0 otherwise
Note: if Q1 Q2 Q3 0, then it is quarter 4.
Using computer software we get
Y 281.6 3.7t 75.7Q1 48.9Q2 52.1Q3
The forecasts for the next 4 quarters are:
Y 281.6 3.7(17) 75.7(1) 48.9(0) 52.1(0) 268.7
Y 281.6 3.7(18) 75.7(0) 48.9(1) 52.1(0) 299.2
Y 281.6 3.7(19) 75.7(0) 48.9(0) 52.1(1) 299.7
Y 281.6 3.7(20) 75.7(0) 48.9(0) 52.1(0) 355.4
5-32. For a smoothing constant of 0.2, the forecast for year 11
is 6.489.

Month

Income

Forecast

Error

Year

Rate

Feb.
March
April
May
June
July
Aug.

70.0
68.5
64.8
71.7
71.3
72.8

65.0
65.0  0.1
(70  65)  65.5
65.5  0.1(68.5  65.5)  65.8
65.8  0.1(64.8  65.8)  65.7
65.7  0.1(71.7  65.7)  66.3
66.3  0.1(71.3  66.3)  66.8
66.8  0.1(72.8  66.8)  67.4

3.0
1.0
6.0
5.0
6.0

1
2
3
4
5
6
7
8
9
10
11

7.2
7
6.2
5.5
5.3
5.5
6.7
7.4
6.8
6.1

MAD  4.20

Note that in this problem, the initial forecast (for the first period) was
not used in computing the MAD. Either approach is considered valid.
5-29.

Exponential smoothing with   0.3

Forecast

|Error|

7.2
7.2
7.16
6.968
6.674
6.400
6.220
6.316
6.533
6.586
6.489

0
0.2
0.96
1.468
1.374
0.900
0.480
1.084
0.267
0.486

MAD = 0.722

For a smoothing constant of 0.4, the forecast for year 11 is 6.458.

Month

Income

Forecast

Error

Feb.
March
April
May
June
July
Aug.

70.0
68.5
64.8
71.7
71.3
72.8

65.0
66.5
67.1
66.4
68.0
69.0
70.1

2.0
2.3
5.3
3.3
3.8

MAD  3.34

Based on MAD,   0.3 produces a better forecast than   0.1

(of Problem 5-28).
Note that in this problem, the initial forecast (for the first period) was
not used in computing the MAD. Either approach is considered valid.

Year

Rate

Forecast

|Error|

1
2
3
4
5
6
7
8
9
10
11

7.2
7
6.2
5.5
5.3
5.5
6.7
7.4
6.8
6.1

7.2
7.2
7.12
6.752
6.251
5.871
5.722
6.113
6.628
6.697
6.458

0
0.2
0.92
1.252
0.951
0.371
0.978
1.287
0.172
0.597

MAD = 0.673

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For a smoothing constant of 0.6, the forecast for year 11 is 6.401.

Year

Rate

Forecast

|Error|

1
2
3
4
5
6
7
8
9
10
11

7.2
7
6.2
5.5
5.3
5.5
6.7
7.4
6.8
6.1

7.2
7.2
7.08
6.552
5.921
5.548
5.519
6.228
6.931
6.852
6.401

0
0.2
0.88
1.052
0.621
0.048
1.181
1.172
0.131
0.752

61

FORECASTING MODELS

5-33. To compute a seasonalized or adjusted sales forecast, we

just multiply each seasonal index by the appropriate trend forecast.
Y  seasonal index  Y
trend forecast

Hence for:
Quarter I: YI  (1.30)($100,000)  $130,000
Quarter II: Y  (0.90)($120,000)  $108,000
II

Quarter III: YIII  (0.70)($140,000)  $98,000

Quarter IV: Y  (1.10)($160,000)  $176,000
IV

5-34.
(Average demand (year 1 demand) + (year 2 demand)

for season)
2

MAD = 0.604

For a smoothing constant of 0.8, the forecast for year 11 is 6.256.

Year
1
2
3
4
5
6
7
8
9
10
11

Rate

Forecast

|Error|

7.2
7
6.2
5.5
5.3
5.5
6.7
7.4
6.8
6.1

7.2
7.2
7.04
6.368
5.674
5.375
5.475
6.455
7.211
6.882
6.256

0
0.2
0.84
0.868
0.374
0.125
1.225
0.945
0.411
0.782

Overall average (sum of all values)

=
demand
8
Season index =

(average for season)

overall average demand

new annual demand

4
1, 200
=
season index
4

Year 3 demand =

MAD = 0.577

The lowest MAD is 0.577 for a smoothing constant of 0.8.

Solution Table for Problem 5-34

Season

Year 1
Demand

Year 2
Demand

(Average Year 1Year 2 Demand)

Average
Season
Demand

Season
Index

Year 3
Demand

Fall
Winter
Spring
Summer

200
350
150
300

250
300
165
285

225.0
325.0
157.5
292.5

250
250
250
250

0.90
1.30
0.63
1.17

270
390
189
351

5-35. Using Excel, the trend equation is Y 1582.61 612.37X.

For 2008, X 19; Y 1582.61 612.37(19) 13217.6
For 2009, X 20; Y 1582.61 612.37(20) 13830.0
For 2010, X 21; Y 1582.61 612.37(21) 14442.4
The MSE from the Excel output is 1654334.7.
5-36. a. With a smoothing constant of 0.3, the forecast for 2008
is 11211.2 with MSE 3246841.
b. Using QM for Windows, the best smoothing constant is
1.0. This gives the lowest MSE of 1443842.
5-37.

Using Excel, the trend equation is Y 1.1940 0.0095X.

For January of 2007, X 13; Y 1.1940 0.0095(13) 1.318.

For February of 2007, X 14; Y 1.1940 0.0095(14) 1.327.
5-38.

The forecast for January 2007 would be 1.286.

The MSE with the trend equation is 0.0003. The MSE with this
exponential smoothing model is 0.0010.

SOLUTIONS TO INTERNET HOMEWORK PROBLEMS

5-39. With a  0.4, forecast for 2004  10,339 and MAD 
837. With a  0.6, forecast for 2004  10,698 and MAD  612.
5-40. Using Excel, the trend line is: GDP  6142.7
441.4(time). For 2004 (time  12) the forecast is GDP  6142.7
441.4(12)  11,439.5.
5-41. The trend line found using Excel is: Patients  29.73
3.28(time). Note these coefficients are rounded. For the next
3 years (time  11, 12, and 13) the forecasts for the number of
patients are:
Patients  29.73 3.28(11)  65.8
Patients  29.73 3.28(12)  69.1
Patients  29.73 3.28(13)  72.4
The coefficient of determination is 0.85, so the model is a fair
model.

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FORECASTING MODELS

5-42. The trend line found using Excel is: Crime Rate  51.98
6.09(time). Note these coefficients are rounded. For the
next 3 years (time  11, 12, and 13) the forecasts for the crime
rates are:
Crime Rate  51.98 6.09(11)  118.97
Crime Rate  51.98 6.09(12)  125.06
Crime Rate  51.98 6.09(13)  131.15
The coefficient of determination is 0.96, so this is a very good
model.
5-43. The regression equation (from Excel) is: Patients  1.23
0.54(crime rate). Note these coefficients are rounded. If the crime
rate is 131.2, the forecast number of patients is:
Patients  1.23 0.54(131.2)  72.1
If the crime rate is 90.6, the forecast number of patients is:
Patients  1.23 0.54(90.6)  50.2
The coefficient of determination is 0.90, so this is a good model.
5-44. With a  0.6, forecast for 2003  86.2 and MAD 
3.42. With a  0.2, forecast for 2003  63.87 and MAD  7.23.
The model with a  0.6 is better since it has a lower MAD.

5-46. The trend line (coefficients from Excel are rounded) for
deposits is:
Deposits  18.968 1.638(time)
For 2003, 2004, and 2005, time  45, 46, and 47 respectively. The
forecasts are:
Deposits  18.968 1.638(45)  54.7
Deposits  18.968 1.638(46)  56.4
Deposits  18.968 1.638(47)  58.0
The trend line (coefficients from Excel are rounded) for GSP is:
GSP  0.090 0.112(time). The forecasts are:
GSP  0.090 0.112(45)  5.1
GSP  0.090 0.112(46)  5.2
GSP  0.090 0.112(47)  5.4
5-47. The regression equation from Excel is
Deposits  17.64 13.59(GSP)
In the scatterplot of this data that follows, the pattern appears to
change around 1985. There are definitely different relationships
before 1985 and after 1985, so perhaps the model should be developed with 1985 as the first year of data.

5-45. With a  0.6, forecast for 2003  4.86 and MAD 

0.23. With a  0.2, forecast for 2003  4.52 and MAD  0.48.
The model with a  0.6 is better since it has a lower MAD.

Deposits and GSP over Time

100
80
60

DEPOSITS

40

GSP

20
0
1950

1960

1970

1980
Time

1990

2000

2010