International Education

with an
Australian Experience
QUANTITAIVE METHODS
WEEK 10
Dr. Zahra Sadeghinejad
 Time Series
• Time series methods are statistical techniques that make use of
historical data accumulated over a period of time. Time series methods
assume that what has occurred in the past will continue to occur in the
future. As the name time series suggests, these methods relate the
forecast to only one factor--time.
• They include the moving average, exponential smoothing; both are
among the most popular methods for short-range forecasting among
service and manufacturing companies. These methods assume that
identifiable historical patterns or trends for demand over time will repeat
themselves.
 Moving Average

A time series forecast can be as simple as using demand in the current

period to predict demand in the next period. This is sometimes called a
naive or intuitive forecast.
For example, if demand is 100 units this week, the forecast for next
week's demand is 100 units; if demand turns out to be 90 units instead,
then the following week's demand is 90 units, and so on. This type of
forecasting method does not take into account historical demand
behaviour; it relies only on demand in the current period. It reacts
directly to the normal, random movements in demand.
 Moving Average

• The simple moving average method uses several demand values

during the recent past to develop a forecast. This tends to dampen, or
smooth out, the random increases and decreases of a forecast that
uses only one period.
• The simple moving average is useful for forecasting demand that is
stable and does not display any pronounced demand behaviour, such
as a trend or seasonal pattern.
 Moving Average

• Moving averages are computed for specific periods, such as three

months or five months, depending on how much the forecaster desires to
"smooth" the demand data. The longer the moving average period, the
smoother it will be. The formula for computing the simple moving average
is:
 Example
• The Instant Paper Clip Office Supply Company sells and delivers office supplies
to companies, schools, and agencies within a 50-km radius of its warehouse.

• The office supply business is competitive, and the ability to deliver orders
promptly is a factor in getting new customers and keeping old ones. (Offices
typically order not when they run low on supplies, but when they completely run
out. As a result, they need their orders immediately.)
• The manager of the company wants to be certain enough that drivers and
vehicles are available to deliver orders promptly and they have adequate
inventory in stock. Therefore, the manager wants to be able to forecast the
number of orders that will occur during the next month (i.e., to forecast the
demand for deliveries).
• From records of delivery
orders, management has
accumulated the following data
for the past 10 months, from
which it wants to compute 3-
and 5-month moving averages.
• Let us assume that it is the end of October. The forecast resulting
from either the 3- or the 5-month moving average is typically for the
next month in the sequence, which in this case is November. The
moving average is computed from the demand for orders for the prior
3 months in the sequence according to the following formula:
The 5-month moving average is computed from the prior 5 months of
demand data as follows:
• The 3- and 5-month moving average forecasts for all the months
of demand data are shown in the following table.
Three- and Five-Month Averages
 Period (t) Sales (y)
Example: Weekly Department Store Sales 1 5.3
2 4.4
3 5.4
• The weekly sales figures (in 4 5.8
5 5.6
millions of dollars) presented 6 4.8
7 5.6
in the following table are used 8 5.6
9 5.4
by a major department store 10 6.5
11 5.1
to determine the need for 12 5.8
13 5
temporary sales personnel. 14 6.2
15 5.6
16 6.7
17 5.2
18 5.5
19 5.8
20 5.1
21 5.8
22 6.7
23 5.2
24 6
25 5.8
 Example: Weekly Department Store Sales

Use a three-week moving average (k=3) for the department store sales to
forecast for the week 24 and 26.
5.2  6.7  5.8
 5.9
3
The forecast for the week 26 is

5.8  6  5.2
 5.7
3
Period (t) Sales (y) forecast
1 5.3
2 4.4
3 5.4
4 5.8 5.033333
5 5.6 5.2
6 4.8 5.6
7 5.6 5.4
8 5.6 5.333333
9 5.4 5.333333
10 6.5 5.533333
11 5.1 5.833333
12 5.8 5.666667
13 5 5.8
14 6.2 5.3
15 5.6 5.666667
16 6.7 5.6
17 5.2 6.166667
18 5.5 5.833333
19 5.8 5.8
20 5.1 5.5
21 5.8 5.466667
22 6.7 5.566667
23 5.2 5.866667
24 6 5.9
25 5.8 5.966667
5.666667
 Exponential Smoothing Methods

• Exponential smoothing is also an averaging method that weights the

most recent data more strongly. As such, the forecast will react more to
recent changes in demand. This is useful if the recent changes in the
data result from a change such as a seasonal pattern instead of just
random fluctuations.
 Exponential Smoothing Methods

• Exponential smoothing is one of the more popular and frequently used forecasting
techniques, for a variety of reasons.
• Exponential smoothing requires minimal data. Only the forecast for the current
period, the actual demand for the current period, and a weighting factor called a
smoothing constant are necessary. The mathematics of the technique are easy to
understand by management. Virtually all forecasting computer software packages
include modules for exponential smoothing. Most importantly, exponential
smoothing has a good track record of success. It has been employed over the
years by many companies that have found it to be an accurate method of
forecasting.
 The Exponential Smoothing Calculation Is As
Follows:

The most recent period’s demand multiplied by the smoothing factor.

PLUS

The most recent period’s forecast multiplied by (one minus the smoothing factor).

OR
Ei =  ·Yi + (1 - )·Ei-1

Where:

 = the smoothing factor (constant) represented in decimal form (so 35% would be represented as 0.35).
Y = most recent period’s demand
E i-1 = the most recent period’s forecast (the output of the smoothing calculation from the previous period).
Ei = is the smoothed value of the observations (our “best guess” as to the value of the mean)
 Simple Exponential Smoothing Method

• To start the algorithm, we need Ei-1 because:

Ei =  ·Yi + (1 - )·Ei-1

• Since Ei-1 is not known, we can:

• Set the first estimate equal to the first observation.
 Example
You have been asked to predict sales for the year 2000, using exponential
smoothing ( = .20).
Past attendance is:

1995 4
1996 6
1997 5
1998 3
1999 7
 Ei =  ·Yi + (1 - )·Ei-1
Smoothed Value, Ei Forecast
Time Yi
(a = .2)
1995 4 4.0 NA
^
1996 6 (.2)(6) + (1-.2)(4.0) = 4.4 4.0
1997 5 (.2)(5) + (1-.2)(4.4) = 4.5 4.4
1998 3 (.2)(3) + (1-.2)(4.5) = 4.2 4.5
1999 7 (.2)(7) + (1-.2)(4.2) = 4.8 4.2
2000 NA NA 4.8
 Example

PM Computer Services assembles customized personal computers from

generic parts. Formed and operated by part-time University students, the
company has had steady growth since it started.

The company assembles computers mostly at night, using part-time

students. They purchase generic computer parts in volume at a discount
from a variety of sources whenever they see a good deal. Thus, they need
a good forecast of demand for their computers so that they will know how
many computer component parts to purchase and stock.
The company has accumulated
the demand data shown in the
accompanying table for its
computers for the past twelve
months, from which it wants to
consider exponential smoothing
forecasts using smoothing
constants () equal to 0.30
and 0.50.
CALCU