Chapter 13 It is difficult to

Forecasting forecast,
especially in
regards to the
future.

MGS3100
Julie Liggett De Jong

It isn’t difficult Numbers, if

to forecast, tortured
just to forecast enough, will
correctly. confess to
just about
anything.

Government policies & business

Economic Forecasts Influence: decisions

1
Insurance companies’ investment Service industries’ forecasts of
decisions in mortgages and bonds demand as input for revenue
management

Excel Features & Functions

FEATURES
• Regression
• Solver
• Sorting

FUNCTIONS
• SUMPRODUCT( )
• SUMXMY2( )
• YEAR( ) Quantitative vs Qualitative
• MONTH( )
• RIGHT( )
Forecasting Models

Quantitative Forecasting Models Expressed in mathematical notation

2
 Quantitative Forecasting Models

1. Causal (Curve Fitting)

a. Linear
b. Quadratic

2. Moving Averages (Naive)

a. Simple n-Period Moving Average
b. Weighted n-Period Moving Average

3. Exponential Smoothing
a. Basic model
b. Holt’s Model (exponential smoothing with trend)
Based on an amazing quantity of data
4. Seasonality

Important Variables

X Independent variable(s)

Y True value of dependent variable

Predicted or forecasted dependent variable

Yˆ (Y hat)

Causal vs Time Series Models

Y Average value of dependent variable (Y bar)

Causal Forecasting Models Requirements

3
Independent and dependent We must know the values of the
variables must share a relationship independent variables when we
make the forecast

Curve Fitting
Self Service Gas Stations

Oil company wants to expand its We’ll use historical data for five
network of self-service gas stations stations to calculate average traffic
flow and sales

4
 Sales & Traffic Data

Traffic flow: average # of cars / hour Plot the averages in a scatter

plot.

Sales: average dollar sales / hour

Figure 1, p274

Scatter Plot of Sales & Traffic Data Method of Least Squares

300 300

250 250

200 200
y = a + bx
S ales /hour ($)

S ales /hour ($)

150 150

100 100

50 50

- -
0 50 100 150 200 250 0 50 100 150 200 250
Cars/hour Cars/hour
Figure 2, p274 Figure 3, p275

Use Regression to fit a Linear Function Regression computes three types of errors

n
^ –
RSS = Σ
i=1
(Yi – Y )2 Regression

n
^
ESS = Σ
i=1
(Yi – Yi )2 Residual
n
TSS = Σ
i=1
–
(Yi – Y )2 Total

TSS = ESS + RSS

RSS
R2 =
Figure 5, p277 TSS

5
Should we build a gas station at ^
y = a + b * x
Buffalo Grove where traffic is 183 Sales/hour = 57.104 + 0.92997 * 183 cars/hr
cars/hour? = $227.29

How confident are we in this Confidence intervals use the following statistics:
forecast? 1.00 =68% 1.96 = 95.0% 3.00 = 99.7%

n
^
Σ
Yˆ
+ (Yi – Yi )2 ESS
- 2 * Standard Error (Se) Se = i=1 =
n – k -1 n – k -1

6
Excel calculates the Standard Error The 95% confidence interval is:
for us. [227.29 – 2(44.18); 227.29 + 2(44.18)]
[$138.93; $315.65]

Fitting a Quadratic
Function

Other important information:

9T-statistic and its p-value
9Upper & Lower 95%
9F significance
9R2 and Adjusted R2 Figure 5, p277

Fitting a Quadratic Function Use Solver to fit a Quadratic Function

300

250

200
Sales/hour ($)

y = a0 + a1x + a2x2
150

100

50

-
0 50 100 150 200 250
Cars/hour
Figure 10, p283 y = a0 + a1x + a2x2 Figure 7, p281

7
We could create a formula that exactly But, why wouldn’t we want to do that?
passes through every data point…..

Goodness of fit statistics:

Which curve to fit? Sum of Squared Errors (SSE)

n ^ Goodness of fit statistics:

SSE = Σ (Yi – Yi )2 Mean Squared Error (MSE)
i=1

8
 Sum of Squared Errors Regression: SSE = 5854
MSE = Quadratic: SSE = 4954
(# of points – # of parameters)

Causal Forecasting Models

Positive Slope Negative Slope

indicates upward indicates
trend downward trend

140 140

120 120
y = 5x + 5 y = -5x + 135
100 100

Customers
80 80
Profit

Regression: MSE = 5854 / (5 - 2) = 1951.3 60

40
60

40

Quadratic: MSE = 4954 / (5 - 3) = 2477.0 20

0
20

11

13

15

17

19

21

23

25
1

9
11

13

15

17

19

21

23

25
1

Time Time

Time-Series Forecasting Models 1. Curve Fitting:

a) Linear
b) Quadratic
Time is the independent variable

9
2. Moving Averages (Naive) 3. Exponential Smoothing
a) Simple n-Period Moving Avg a) Basic model
b) Weighted n-Period Moving Avg b) Holt’s Model (trend)

Curve Fitting
Seasonality
Plot historical values as function of
time and draw a linear “trend line”.
Use trend line to predict future
value.

Moving Averages (Naïve):

Use previous period’s actual value

to forecast the current period (i.e.,
use 12th value to predict 13th value).
The Bank of Laramie

10
Moving Averages: Simple n-Period Moving Averages:

Use average of past 12 values as Use average of the most recent 6

best forecast for 13th value. values to predict 13th value.

ACTUAL THREE-MONTH FOUR-MONTH SIMPLE

SALES SIMPLE MOVING MOVING AVERAGE
Steco: a MONTH ($000s) AVERAGE FORECAST FORECAST
Jan. 20
simple n- Feb. 24
Mar. 27
period Apr.
May
31
37
(20
(24
+
+
24
27
+
+
27)/3
31)/3
=
=
23.67
27.33 (20 + 24 + 27 + 31)/4 = 25.50
moving June
July
47
53
(27
(31
+
+
31
37
+
+
37)/3
47)/3
=
=
31.67
38.33
(24 +
(27 +
27
31
+
+
31 +
37 +
37)/4
47)/4
=
=
29.75
35.50
averages Aug.
Sep.
62
54
(37
(47
+
+
47
53
+
+
53)/3
62)/3
=
=
45.67
54.00
(31 +
(37 +
37
47
+
+
47 +
53 +
53)/4
62)/4
=
=
42.00
49.75
forecasting Oct.
Nov.
36
32
(53
(62
+
+
62
54
+
+
54)/3
36)/3
=
=
56.33
50.67
(47 +
(53 +
53
62
+
+
62 +
54 +
54)/4
36)/4
=
=
54.00
51.25

model Dec. 29 (54 + 36 + 32)/3 = 40.67 (62 + 54 + 36 + 32)/4 = 46.00

Three- and Four- Month Simple Moving Averages

y + y + y + y
yˆ = 15 14 13 12
16 4 Table 1, p290

Goodness of fit statistics STECO: Simple n-Period Moving Average

THREE-MONTH FOUR-MONTH
ACTUAL SIMPLE MOVING SIMPLE MOVING

∑
SALES AVERAGE ABSOLUTE AVERAGE ABSOLUTE
actual sales − forecast sales MONTH ($000s) FORECAST ERROR FORECAST ERROR
MAD =
all forecasts Jan. 20
Feb. 24
number of forecasts
Mar. 27
Apr. 31 $ 23.67 7.33
May 37 $ 27.33 9.67 $ 25.50 11.50
June 47 $ 31.67 15.33 $ 29.75 17.25
July 53 $ 38.33 14.67 $ 35.50 17.50
actual sales − forecast sales
∑
all forecasts
actual sales
∗ 100 % Aug.
Sep.
62
54
$
$
45.67
54.00
16.33
0.00
$
$
42.00
49.75
20.00
4.25
MAPE = Oct. 36 $ 56.33 20.33 $ 54.00 18.00
number of forecasts Nov. 32 $ 50.67 18.67 $ 51.25 19.25
Dec. 29 $ 40.67 11.67 $ 46.00 17.00

SUM = 114.00 SUM = 124.75

MAD = 12.67 MAD = 15.59

Figure 14, p291

11
Simple n-Period Moving Average
forecasting models have two
shortcomings
Operational Shortcoming
All historical data used to make
forecast must be stored in some
way to calculate the forecast.
Weighted n-Period Moving
Averages:
Use weighted average of previous
values & assign higher weights to
more recent observations
Philosophical Shortcoming
Most recent observations receive no
more weight or importance than
older observations.
Weighted n-Period Moving
Averages:
Resolves philosophical
shortcoming of simple period
moving average forecasting
Recent data is more important
than old data
yˆ = α 0 y6 + α1 y5 + α 2 y4
12
Constraints: Constraints:

The α' s (weights) are positive Smaller weights are assigned to

numbers older data

alpha2 = 0.167 Month Actual Sales (000) 3month WMA Fcst Absolute Error
alpha1 = 0.333 January 20
alpha0 = 0.500 February 24
SUM OF WTS= 1.00 March 27
April 31 24.83 6.17
May 37 28.50 8.50
June 47 33.33 13.67
July 53 41.00 12.00
August 62 48.33 13.67
September 54 56.50 2.50
October 36 56.50 20.50

Constraints: November
December
32
29
46.34
37.01
14.34
8.01

Sum = 99.35
MAD = 11.04

All the weights sum to 1

Use Solver to find the optimal
weights
Figure 16, p293

Weighted n-Period Moving Exponential Smoothing resolves

Averages resolves philosophical operational shortcoming of
shortcoming of simple period simple period moving average
moving average forecasting forecasting

13
 Exponential Smoothing Exponential Smoothing
Forecast for t + 1 Observed in t Forecast for t

ŷ t +1 = αy t + (1 − α )ŷ t

Where α is a user-specified constant

alpha = 0.500 Month Actual Sales (000) Fcst Sales Absolute Error
Resolves operational shortcoming of the January 20 20.00
February 24 20.00 4.00
Moving Averages Model: March 27 22.00 5.00
April 31 24.50 6.50
May 37 27.75 9.25
June 47 32.38 14.63
Number of 8-period Moving Exponential July 53 39.69 13.31
Inventory Items Average Model Smoothing August 62 46.34 15.66
September 54 54.17 0.17
to Forecast Model
October 36 54.09 18.09
5,000 40,000: 10,001: November 32 45.04 13.04
December 29 38.52 9.52
5,000 * 8
5,000 ŷ t Sum = 109.17
5,000 y t MAD = 9.92
1α
Saving alpha and the last forecasts stores all the previous forecasts.
Does exponential smoothing
When t = 1, the expression becomes:
produce a better forecast?
ŷ t +1 = αy t + (1 − α )ŷ t ŷ 2 = αy t + (1 − α )ŷ t

Case 1: Response to Sudden Change

VARIABLE COEFFICIENT α = 0.1 α = 0.3 α = 0.5
yt α 0.1 0.3 0.5
y t-1 α(1-α) 0.09 0.21 0.25 System Change when t = 100

2
y t-2 α(1-α) 0.081 0.147 0.125 2

3
y t-3 α(1-α) 0.07290 0.10290 0.06250 1 Response to a Unit Change in y t
yt 1
4
y t-4 α(1-α) 0.06561 0.07203 0.03125 1.2
1.1
0
5 1
y t-5 α(1-α) 0.05905 0.05042 0.01563 -1
0.9
0.8
6 94 95 96 97 98 99 100 101 102 103
α(1-α)
0.7
y t-6 0.05314 0.03529 0.00781 0.6
0.5
t
7
α(1-α)
0.4
y t-7 0.04783 0.02471 0.00391 0.3
0.2
8
α(1-α)
0.1
y t-8 0.04305 0.01729 0.00195 0
100 105 110 115 120 125
9
y t-9 α(1-α) 0.03874 0.01211 0.00098 t
10
y t-10 α(1-α) 0.03487 0.00847 0.00049
Sum of the Weights 0.68619 0.98023 0.99951

A forecasting system with alpha = 0.5

The value of alpha affects the responds quickly to changes in the data.
performance of the model

14
 Case 2: Response to Steady Change Case 2: Response to Steady Change

Steadily Increasing Values of yt Steadily Increasing Values of yt

(Linear Ramp) (Linear Ramp)

yt 6 yt 6
5 5
4 4
3 3
2 2
1 1
0 0
0 2 4 6 8 10 0 2 4 6 8 10

t t

Exponential smoothing is not a good But the model can be adjusted (Holt’s
forecasting tool in a rapidly growing or a model / exponential smoothing w/trend)
declining market.

Case 3: Response to Seasonal Change

Seasonal Pattern in y t

1.5
1.3
1.1
0.9
0.7
yt
0.5
0.3
0.1
-0.1
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Seasonality
Exponential smoothing is not a good
model to use here because it ignores the
seasonal pattern.

Takes into consideration and adjusts 1. Look at original data to see seasonal
for the seasonal patterns in data pattern. Examine the data &
hypothesize an m-period seasonal
pattern.

15
2. Deseasonalize the Data 3. Forecast using deseasonalized data

4. Seasonalize the forecast to account

for the seasonal pattern

Gillett Coal Mine

Coal Receipts Over a Nine-Year Period

Deseasonalized Data
3,000
3,000.0
2,500
2,500.0
Coal (000 Tons)

2,000 2,000.0
Coal (000 Tons)

1,500.0
1,500
1,000.0
1,000
500.0

500 -
1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3- 4- 4- 4- 4- 5- 5- 5- 5- 6- 6- 6- 6- 7- 7- 7- 7- 8- 8- 8- 8- 9- 9- 9- 9-
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
0
Tim e (Year & Qtr)
1-1

1-3

2-1

2-3

3-1

3-3

4-1

4-3

5-1

5-3

6-1

6-3

7-1

7-3

8-1

8-3

9-1

9-3

Tim e (Ye ar and Quarte r)

1. Look at original data to see seasonal 2. Deseasonalize the Data

pattern. Examine the data &
hypothesize an m-period seasonal
pattern. Figure 27, p303 Figure 32, p306

16
2.Deseasonalize the Data Time Coal 4 Period
Year-Qtr Receipts Moving Average
1-1 2,159 -----
1-2 1,203 -----
a) Calculate a series of m-period moving 1-3 1,094 1,613
1-4 1,996 1,594
averages, where m is the length of the 2-1 2,081 1,626
2-2 1,332 1,721
seasonal pattern. 2-3 1,476 1,856
2-4 (2,159+1,203+1,094+1,996)/4
2,533 1,898 = 1,613
b) Center the moving average in the middle of 3-1 2,249 1,948
the data from which it was calculated. 3-2
3-3
1,533
1,935
2,063
2,060
c) Divide the actual data at a given point in the 3-4
4-1
2,523
2,208
2,050
2,066
series by the centered moving average
corresponding to the same point. a) Calculate a series of m-period moving
d) Develop seasonal index averages, where m is the length of the
e) Divide actual data by the seasonal index
seasonal pattern.
Figure 28, p304

Data & Centered Moving Average

Time Coal 4 Period Centered
Year-Qtr Receipts Moving Average Moving Average
1-1 2,159 3,000
1-2 1,203
Receipts
1-3 1,094 1,613 1,603 2,500
1-4 1,996 1,594 1,610
Coal (000 Tons)

2-1 2,081 1,626 1,674 Centered

2,000
2-2 1,332 1,721 1,788 (1613 + 1594)/2 = Moving
Average
2-3 1,476 1,856 1,877
2-4
3-1
2,533
2,249
1,898
1,948
1,923
2,005
1603 1,500

1,000
3-2 1,533 2,063 2,061
3-3 1,935 2,060 2,055
3-4 2,523 2,050 2,058 500
4-1 2,208 2,066 2,064
4-2 1,597 2,061 2,087 0
4-3 1,917 2,112 2,163 1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3- 4- 4- 4- 4- 5- 5- 5- 5- 6- 6- 6- 6- 7- 7- 7- 7- 8- 8- 8- 8- 9- 9- 9- 9-
4-4 2,726 2,213 2,255 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

Time (Ye ar & Qtr)

b) Center the moving average in the b) Center the moving average in the
middle of the data from which it was middle of the data from which it was
calculated. calculated.
Figure 28, p304 Figure 29, p305

Ti m e C o al 4 P e ri o d C e n te r ed Ra t i o o f C o al R ec e ip t s t o S e as o n al
Y e ar - Q tr R ec e i pt s Mo v i ng A ve r a ge M o vi n g A v er a g e C e n te r ed M ov i n g A v er a ge I n di c e s
Time Coal 4 Period Centered Ratio of Coal Receipts to
1-1 2,159 1.112
Year-Qtr Receipts Moving Average Moving Average Centered Moving Average 1-2 1,203 0.786
1-1 2,159 1-3 1,094 1,613 1,603 0.682 0.863
1-2 1,203 1-4 1,996 1,594 1,610 1.240 1.238
1-3 1,094 1,613 1,603 0.682 2-1 2,081 1,626 1,674 1.244 1.112
1-4 1,996 1,594 1,610 1.240 2-2 1,332 1,721 1,788 0.745 0.786
2-1 2,081 1,626 1,674 1.244 2-3 1,476 1,856 1,877 0.787 0.863
2-2 1,332 1,721 1,788 0.745 2-4 2,533 1,898 1,923 1.317 1.238
2-3 1,476 1,856 1,877 1,094 / 1,603 = 0.682
0.787 3-1 2,249 1,948 2,005 1.122 1.112
3-2 1,533 2,063 2,061 0.744 0.786
2-4 2,533 1,898 1,923 1.317
3-3 1,935 2,060 2,055 0.942 0.863
3-1 2,249 1,948 2,005 1.122 3-4 2,523 2,050 2,058 1.226 1.238
3-2 1,533 2,063 2,061 0.744
3-3 1,935 2,060 2,055 0.942
3-4 2,523 2,050 2,058 1.226
d) Develop seasonal index for each
quarter
• Group ratios by quarter
c) Divide the actual data at a given point • Average all of the ratios to moving
in the series by the centered moving averages quarter by quarter
average corresponding to the same • Add Seasonal Indices data to table
point. Figure 28, p304 • Normalize the seasonal index

17
 Deseasonalized Data
3,000.0

2,500.0

Coal (000 Tons)

Time Coal 4 Period Centered Ratio of Coal Receipts to Seasonal Deseasonalized
Year-Qtr Receipts Moving Average Moving Average Centered Moving Average Indices Data 2,000.0
1-1 2,159 1.112 1,941.0
1-2 1,203 0.786 1,529.8 1,500.0
1-3 1,094 1,613 1,603 0.682 0.863 1,267.7
1-4 1,996 1,594 1,610 1.240 1.238 1,611.9 Deseasonalized
2-1 2,081 1,626 1,674 1.244 1.112 1,870.9 1,000.0
Data
2-2 1,332 1,721 1,788 0.745 0.786 1,693.8
2-3 1,476 1,856 1,877 0.787 0.863 1,710.3 500.0
2-4 2,533 1,898 1,923 1.317 1.238 2,045.6
3-1 2,249 1,948 2,005 1.122 1.112 2,021.9
-
3-2 1,533 2,063 2,061 0.744 0.786 1,949.4
3-3 1,935 2,060 2,055 0.942 0.863 2,242.2

1
3
1
3

1
3
1

3
1
3
1

3
1
3
1

3
1
3
1-
1-
2-
2-

3-
3-
4-

4-
5-
5-
6-

6-
7-
7-
8-

8-
9-
9-
3-4 2,523 2,050 2,058 1.226 1.238 2,037.5
Tim e (Ye ar & Qtr)

e) Divide actual data by the seasonal e) Divide actual data by the seasonal
index index

Figure 31, p306 Figure 32, p306

Time Coal 4 Period Centered Ratio of Coal Receipts to Seasonal Deseasonalized Seasonalize
Time Coal 4 Period Centered Ratio of Coal Receipts to Seasonal Deseasonalized Year-Qtr Receipts Moving Average Moving Average Centered Moving Average Indices Data Forecast Forecast
Year-Qtr Receipts Moving Average Moving Average Centered Moving Average Indices Data Forecast 1-1 2,159 ----- ----- ----- 1.108 1,948.1 1,948.1 2,159.000
1-1 2,159 1.108 1,948.1 1,948.1 1-2 1,203 ----- ----- ----- 0.784 1,535.4 1,948.1 1,526.409
1-2 1,203 0.784 1,535.4 1,948.1 1-3 1,094 1,613 1,603 0.682 0.860 1,272.3 1,678.5 1,443.212
1-4 1,996 1,594 1,610 1.240 1.234 1,617.8 1,413.1 1,743.439
1-3 1,094 1,613 1,603 0.682 0.860 1,272.3 1,678.5
2-1 2,081 1,626 1,674 1.244 1.108 1,877.8 1,546.8 1,714.276
1-4 1,996 1,594 1,610 1.240 1.234 1,617.8 1,413.1
2-2 1,332 1,721 1,788 0.745 0.784 1,700.0 1,763.0 1,381.390
2-1 2,081 1,626 1,674 1.244 1.108 1,877.8 1,546.8 2-3 1,476 1,856 1,877 0.787 0.860 1,716.6 1,721.9 1,480.540
2-2 1,332 1,721 1,788 0.745 0.784 1,700.0 1,763.0 2-4 2,533 1,898 1,923 1.317 1.234 2,053.1 1,718.4 2,120.128
2-3 1,476 1,856 1,877 0.787 0.860 1,716.6 1,721.9 3-1 2,249 1,948 2,005 1.122 1.108 2,029.3 1,937.1 2,146.723
2-4 2,533 1,898 1,923 1.317 1.234 2,053.1 1,718.4 3-2 1,533 2,063 2,061 0.744 0.784 1,956.5 1,997.4 1,564.974
3-1 2,249 1,948 2,005 1.122 1.108 2,029.3 1,937.1 3-3 1,935 2,060 2,055 0.942 0.860 2,250.4 1,970.7 1,694.495
3-2 1,533 2,063 2,061 0.744 0.784 1,956.5 1,997.4 3-4 2,523 2,050 2,058 1.226 1.234 2,045.0 2,153.4 2,656.854
3-3 1,935 2,060 2,055 0.942 0.860 2,250.4 1,970.7
3-4 2,523 2,050 2,058 1.226 1.234 2,045.0 2,153.4

3. Forecast method in deseasonalized 4. Reseasonalize the forecast to account for

terms the seasonal pattern
• Review the graphed deseasonalized data to • Multiply the deseasonalized forecast by the
reveal pattern seasonal index for the appropriate period.
• Use forecasting method that accounts for • Graph the actual Coal Receipts and
the pattern in the deseasonalized data Seasonalized Forecast
• Use Excel’s Solver to minimize the error
Figure 33, p307

Actual & Forecast 1. Look at original data to see seasonal pattern. Examine the
data & hypothesize an m-period seasonal pattern.
3,500

3,000
2. Deseasonalize the data.
Coal (000 Tons)

2,500

2,000
a) Calculate a series of m-period moving averages, where m
1,500
is the length of the seasonal pattern.
1,000
b) Center the moving average in the middle of the data from
500

0
Coal Receipts which it was calculated.
Seasonalized Forecast
1- 1- 1- 1- 2- 2- 2- 2- 3- 3- 3- 3- 4- 4- 4- 4- 5- 5- 5- 5- 6- 6- 6- 6- 7- 7- 7- 7- 8- 8- 8- 8- 9- 9- 9- 9- 1 1
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 0- 0-
c) Divide the actual data at a given point in the series by the
1 2
centered moving average corresponding to the same point.
Year-Quarter
d) Develop seasonal index
e) Divide actual data by the seasonal index
4. Reseasonalize the forecast to account for
3. Forecast method in deseasonalized terms.
the seasonal pattern
4. Reseasonalize the forecast to account for the seasonal
pattern.

18
 SUMXMY2( ) Measures of Comparison
∑ actual sales − forecast sales
Returns the sum of squares of differences of
MAD =
all forecasts
corresponding values in two arrays. number of forecasts
Syntax: SUMXMY2(array_x,array_y), where
Array_x is the first array or range of values.
actual sales − forecast sales
Array_y is the second array or range of values.
∑ actual sales
∗ 100 %
MAPE =
all forecasts
The equation for the sum of squared differences is: number of forecasts

∑ (x − y )2
n

SUMXMY2 = ∑ ( actual sales − forecast sales ) 2

MSE = t =1
number of forecasts

Model Validation Create experience by simulating the

past.

Create the model with a portion of the Use remaining data to see how well
historical data. the model would have performed.

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 Qualitative Expert
Forecasting Judgment
Models

Consensus Delphi
Panel Method

Coordinator requests forecasts

Coordinator receives
Individual forecasts
Delphi
Method
Coordinator determines
(a) Median response
(b) Range of middle
50% of answers

Coordinator sends to all experts Coordinator requests

(a) Median response
(b) Range of middle 50%
(c) Explanations
explanations from any
expert whose estimate
is not in the middle
Grassroots Forecasting
50%

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Market Research

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