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# Lecture 1:

## Copyright 2011 Pearson Education, Inc. publishing as Prentice Hall 16-1

The Importance of Forecasting
DCOVA
Governments forecast unemployment rates,
interest rates, and expected revenues from income
taxes for policy purposes
Marketing executives forecast demand, sales, and
consumer preferences for strategic planning
College administrators forecast enrollments to plan
for facilities and for faculty recruitment
Retail stores forecast demand to control inventory
levels, hire employees and provide training

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Common Approaches
to Forecasting
DCOVA
Common Approaches
to Forecasting

## Qualitative forecasting Quantitative forecasting

methods methods
Used when historical data
are unavailable Time Series Causal
Considered highly
subjective and judgmental Use past data to predict
future values

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Time-Series Data
DCOVA
Numerical data obtained at regular time
intervals
The time intervals can be annually, quarterly,
monthly, weekly, daily, hourly, etc.
Example:
Year: 2005 2006 2007 2008 2009
Sales: 75.3 74.2 78.5 79.7 80.2

Time-Series Plot
DCOVA

## A time-series plot is a two-dimensional

plot of time series data

## the vertical axis U.S. Inflation Rate

measures the variable 16.00
of interest 14.00
Inflation Rate (%)

12.00
10.00
8.00
the horizontal axis 6.00
corresponds to the 4.00
2.00
time periods 0.00
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
Year

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Time-Series Components
DCOVA
Time Series

## Trend Seasonal Cyclical Irregular

Component Component Component Component

## Overall, Regular periodic Repeating Erratic or

persistent, long- fluctuations, swings or residual
term movement usually within a movements over fluctuations
12-month period more than one
year

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Trend Component
DCOVA
Long-run increase or decrease over time
(overall upward or downward movement)
Data taken over a long period of time

Sales

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Trend Component
(continued)

## Trend can be linear or non-linear

Sales Sales

Time Time
Downward linear trend Upward nonlinear trend

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Seasonal Component

## Short-term regular wave-like patterns DCOVA

Observed within 1 year
Often monthly or quarterly

Sales
Summer
Winter
Summer
Winter Spring Fall

Spring Fall

Time (Quarterly)
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Cyclical Component
Long-term wave-like patterns DCOVA
Regularly occur but may vary in length
Often measured peak to peak or trough to
trough
1 Cycle
Sales

Year
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Irregular Component
DCOVA
Unpredictable, random, residual fluctuations
Due to random variations of
Nature
Accidents or unusual events
Noise in the time series

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Does Your Time Series Have A
Trend Component?
DCOVA
this question.

## Often it helps if you smooth the time series

data to help answer this question.

## Two popular smoothing methods are moving

averages and exponential smoothing.

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There Are Three Popular Methods
For Trend-Based Forecasting
DCOVA
Linear Trend Forecasting

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Linear Trend Forecasting
DCOVA
Estimate a trend line using regression analysis
Time Use time (X) as the
Period Sales independent variable:
Year (Y)
(X)

Y b0 b1X
2004 0 20
2005 1 40
2006 2 30 In least squares linear, non-linear, and
2007 3 50 exponential modeling, time periods are
numbered starting with 0 and increasing
2008 4 70 by 1 for each time period.
2009 5 65
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Linear Trend Forecasting
(continued)
DCOVA
The linear trend forecasting equation is:
Time
Year Period Sales Yi 21.905 9.5714 Xi
(X) (Y)
Sales trend
2004 0 20
80
2005 1 40 70
60
2006 2 30 50
sales

40
2007 3 50 30
20
2008 4 70 10
0
2009 5 65
0 1 2 3 4 5 6

Year
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Linear Trend Forecasting
(continued)
DCOVA
Forecast for time period 6 (2010):
Time
Period
Y 21.905 9.5714 (6)
Year Sales
(X) (y) 79.33
2004 0 20 Sales trend
2005 1 40
80
2006 2 30 70
2007 3 50 60
50
sales

2008 4 70 40
30
2009 5 65 20
2010 6 ?? 10
0
0 1 2 3 4 5 6

Year
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