Running head: Forecasting with Indices

Week 3: Forecasting with Indices Arian Zaeemi QRB 501 September 26, 2011 Dr. Kelley Bruning

WEEK 3: Forecasting with Indices

Forecasting with Indices

Forecasting is a tool that is very important in day to day business. Forecasting takes good working knowledge of your business, not advanced degrees or complex mathematics. It's much more art than science. Forecasting is a method used by companies to predict current and future trends. Many companies have realized this to be the backbone of the company because it predicts whether or not a company will break even and if a company does not break even decided whether the company will be up and running the following year.

Four years worth of data was provided by the University of Phoenix on the student web page. This data was exported into Microsoft Excel. When working with any type of data or numbers, it is often much easier to perform analysis and functions through this program. Excel allows the user to write formulas and to organize data in many different ways. Once the University of Phoenix material: Summer Historical Inventory Data was placed into Excel; I have a separate table including Index columns for years two, three, and four. Year five was the year to be forecasted for, and by finding the indices for each month, I was able to determine the actual number of units forecasted for each month in year five. The index for each year was found by taking that years data divided by the first, or base years data. Because there are twelve months in the year, and data listed for each month, indices were found for each month. Year twos indices were found by taking the number of units in each month of year two and dividing that number by the base years data. This was the process for year three and four as well.

WEEK 3: Forecasting with Indices

The table below is showing the method of forecasting demand for summer highs with Forecast formula in Excel. By using the Excel formula we can forecast the demand for the year 5th.

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

Year 1 18,000 19,800 15,700 53,600 83,200 72,900 55,200 57,350 15,400 27,700 21,400 17,100

Year 2 45,100 46,530 22,100 41,350 46,000 41,800 39,800 64,100 47,600 43,050 39,300 10,300

Year 3 59,800 30,740 47,800 73,890 60,200 55,200 32,180 38,600 25,020 51,300 31,790 31,100

Year 4 35,500 51,250 34,400 68,000 68,100 61,100 62,300 66,500 31,400 36,500 16,800 18,900

Monthly Average 39,600 37,080 30,000 59,210 64,375 57,750 47,370 56,638 29,855 39,638 27,323 19,350

Year 5 29520 33152 34090 70571 56600 50050 53526 57710 46378 65625 9209 44240

Formula is as follows:

=Forecast (month, 4 years amount, 1 to 4 years) Example: Forecast demand for the month 6th =Forecast (6, B8:E8, B2:E2) = 50050

The table below is showing the method of forecasting using index. The index for each year was calculated by Excel. Index for each year is the units for that year and month, divided by the units for the base year which is year 1 times 100 as a percentage. Index shows that in what

WEEK 3: Forecasting with Indices

amount the next year is increasing or decreasing. By finding all the indices we could forecast the increase or decrease in demand for the 5th year.

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

Year Index 1 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Year Index 2 250.56% 235.00% 140.76% 77.15% 55.29% 57.34% 72.10% 111.77% 309.09% 155.42% 183.64% 60.23%

Year Index 3 132.59% 66.06% 216.29% 178.69% 130.87% 132.06% 80.85% 60.22% 52.56% 119.16% 80.89% 301.94%

Year Index 4 59.36% 166.72% 71.97% 92.03% 113.12% 110.69% 193.60% 172.28% 125.50% 71.15% 52.85% 60.77%

Forecast 5 171.61% 140.39% 131.83% 123.61% 128.56% 137.40% 241.94% 201.98% 29.77% 19.33% -103.24% 248.56%

Working in Excel makes forecasting and finding indices very easy to calculate and understand. Once the data is in Excel, one is able to graph it, run regression analysis on it, rearrange it, and perform many other functions on it; the options are endless.

Forecasting is vitally important to any organizations growth for without it a company has no knowledge of the trends of sales. With proper forecasting a company knows when sales will increase or decrease thereby knowing how to schedule employees, over inventory or decrease the ordering of inventory. If more employees are needed, it means that more management staff and equipment is needed to ensure the company functions appropriately. So forecasting is indeed the basis of any organization.

WEEK 3: Forecasting with Indices

References University of Phoenix. (n.d.). Summer historical inventory data. Retrieved from University of Phoenix, QRB501 - Quantitative Reasoning for Business website.